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Changing policy, Y Combinator cuts its pro rata stake and makes investments case-by-case

By Jonathan Shieber

In a message posted to its internal communications channel earlier this week, the massive startup accelerator Y Combinator said it will change the terms of its own PPP (the YC pro rata investment program) and investing in companies raising seed and Series A rounds on a case-by-case basis.

The company began a policy of investing in every seed and Series A round for its portfolio companies back in 2015.

Since then, it has taken a 7% stake in every company that raised a priced seed and Series A round, investing in more than 300 Y Combinator companies over nearly 500 rounds.

Under its new policy, the accelerator is reducing its investment size from 7% to 4% and is only investing on a case-by-case basis going forward.

The reason for the change is that the number of companies in its portfolio has gotten too large for it to invest and some of the limited partners who back the accelerator’s operations are balking at making commitments to the pro rata investment program.

“We have significantly exceeded the funds we raised for pro ratas, and the investors who support YC do not have the appetite to fund the pro rata program at the same scale,” the accelerator wrote in a post seen by TechCrunch. “In addition, processing hundreds of follow-on rounds per year has created significant operational complexities for YC that we did not anticipate. Said simply, investing in every round for every YC company requires more capital than we want to raise and manage. We always tell startups to stay small and manage their budgets carefully. In this instance, we failed to follow our own advice.”

For entrepreneurs who take investments from the accelerator, the change is pretty significant. On the accelerator’s internal messaging board they worried about the potential optics of having the accelerator not make a follow-on commitment.

YC addressed those concerns by saying it would not make an investment decision until a company had already received an initial term sheet from a lead investor.

The changes will take effect on May 8, 2020, the investor said.

“In the future, we will no longer invest automatically in every priced seed and Series A/B round. Instead, we will exercise pro rata rights on a case-by-case basis, like other investors on your cap table,” the accelerator wrote. “We’ve heard your feedback that YC’s pro rata allocation is bigger than what some of you would prefer. So for those investments we do make, we will reduce the size of our pro rata and simplify its calculation to be a flat 4% participation right in each priced round. To calculate the size of YC’s pro rata investment in your round, simply multiply the amount of capital you are raising by 4%. If our ownership right before the round is less than 4%, we will cap our investment in the round at our then-current ownership. Our intention is not to have a super pro-rata right.”

Even with the reduced investment size, YC said it would only make investments in roughly one-third of its portfolio.

“The YC Continuity team will manage these investment decisions and will work very hard to inform you within a day or two of receiving your materials,” the accelerator wrote. “We will honor any pending pro rata investments for term sheets signed before May 8. But we wanted to communicate this message broadly so that founders can plan accordingly.”

500 Startups moves to rolling admissions instead of cohorts

By Jonathan Shieber

500 Startups is scrapping its cohort model for accelerating companies and moving to a rolling admissions process, the accelerator said during its latest demo day.

One of the progenitors of the accelerator model in the US along with Techstars and Y Combinator, 500 has been a cornerstone of the early-stage company building platform. The move to a rolling admissions mirrors an approach taken by other accelerator programs including MuckerLab, the wildly successful Los Angeles-based early stage program.

“Demo is changing the way it runs its accelerator to be rolling recruitment,” said Aaron Blumenthal, a 500 Startups venture partner. “It will be making investment decisions year round instead of twice a year. Demo Days will still happen twice a year, founders can pick which Demo Day they want to be a part of.”

Given the profusion of accelerator programs globally, the move to a rolling admissions schedule likely makes sense, giving entrepreneurs more flexibility around when and how they join.

The decision from 500 follows other significant changes from Y Combinator, which is moving to a virtual model for its own accelerator program — a decision influenced by the global response to the COVID-19 epidemic which has disrupted economies and threatened lives globally.

Blumenthal explained the switch in a blog post. Writing:

In a business where timing is everything, I realized the current accelerator model was serving an injustice to founders. That’s why shortly after I was put in charge of our flagship accelerator, I knew it was time to do exactly what we tell our founders to do every day—to innovate. So, after shepherding 26 batches of thousands of founders over the past 10 years, 500 is shaking things up.

We’re proud to announce that we’ve designed an entirely new platform that’s flexible and tailored to our founders’ timing and needs—not our own. Our goal is to move away from the one-size-fits-all approach of the past, and towards delivering relevant content, based on each founders’ growth stage and needs, precisely when they’re ready for it.

This new flexible approach reinforces our continued commitment to invest in founders from all over the world. We realize it’s not always feasible for every founder to move to San Francisco for four months at the drop of a hat, and we want to accommodate for that.

You can expect to see our new model in action in the near future. After we wrap up Batch 26’s Demo Day on March 26th, our accelerator applications will open indefinitely. We’ll begin accepting founders to our program on a continuous rolling basis, with more flexibility on start and end dates. That means no more application deadlines, and no more missing out on companies because the timing isn’t right. There will still be two demo days per year and plenty of opportunities to take advantage of the expertise the entire 500 community has to offer — all that changes is our flexibility to invest in companies and founders we believe in and their ability to join our programming when it’s the right time for them.

TechCrunch has covered 500’s current batch of startups here, and will have a post up shortly about our favorites from its demo day.

Applications are open for the latest Disney accelerator program

By Jonathan Shieber

The Walt Disney Company is now accepting applications for its 2020 Disney Accelerator, the company said today.

The accelerator accepts ten growth-stage startups for a three-month mentorship program that provides access to the creativity, imagination and expertise of Disney — including unique access to Disney’s leadership team.

“We created the Disney Accelerator six years ago to explore the incredible innovation that could occur between The Walt Disney Company and companies working on the forefront of technology,” said David Min, Vice President, Corporate Innovation, The Walt Disney Company, in a statement. “Not only has the Disney Accelerator become the premier and longest-running media and entertainment accelerator in the industry, but the program has also launched a number of products, experiences, and cutting-edge technologies. We look forward to discovering new companies and technologies through this year’s program that will continue to position Disney as a leader in today’s dynamic media environment.”

Companies in the accelerator get space in Disney’s Glendale, Calif. campus and a small amount of investment capital.

Some previous graduates from the company’s accelerator include Epic Games, the maker of Unreal Engine and the creator of Fortnite, joined the Disney Accelerator in 2017 (the same year that Fortnite launched).

Epic has worked with Disney’s Industrial Light & Magic team on technology used in the Disney+ series, “The Mandalorian”. the company also worked on tech for rides like Millennium Falcon: Smugglers Run.

Other graduates from the accelerator include programmable robot manufacturer, SpheroStatMuse, a voice and text-based search for sports stats and information; and the game-based learning platform, Kahoot!

“Our participation in and ongoing relationship with the Disney Accelerator has brought creative inspiration and larger business perspective to Kahoot!, contributing to our growth and development,” said Eilert Hanoa, CEO, Kahoot!, in a statement “By combining the strength and reach of our platform with the magic and mentorship of Disney, we’ve been able to make learning even more awesome. The Disney Accelerator has been key to unlocking many opportunities for us as a company.”

 

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