Prologue, a company backed by some of Silicon Valley’s largest venture capital firms, wants to build a big business out of small stakes in dozens of start-ups. First, it needs to navigate a tech crash.
Andreessen Horowitz and Sequoia Capital have invested $23mn in Prologue, making it one of the most well-funded new challengers to famed start-up accelerator Y Combinator. Prologue’s investment arm, Hyper, recently began soliciting applicants for its third “season”, a four-week training programme that comes with $300,000 in funding.
But the road ahead suddenly looks treacherous. A sharp sell-off in the shares of fast-growing, cash-burning, public tech companies has prompted venture capital firms to warn companies of an impending slowdown. Another start-up accelerator, On Deck, laid off a quarter of its staff this month. Y Combinator sent a note to company founders last week warning that the “safe move” now is to “plan for the worst” by cutting costs and raising additional funding.
Hyper’s employees holed up for a retreat in New York last week, their first since the team expanded to nine people. They emerged optimistic.
“Founders are now valuing the mentorship that comes from an accelerator and the doors that it opens,” said Shahed Khan, chief executive of Hyper. The new environment would be a “net positive” for similar programmes, he added.
While many others have tried to compete with YC, Silicon Valley’s oldest and largest accelerator, Prologue represents one of the most auspicious attempts to dislodge its reputation as the Harvard of start-up formation.
Prologue also owns the popular website Product Hunt and plans to funnel profits from Hyper into the media business, which it hopes will help start-ups in the programme find new customers. Executives want to purchase and create other businesses under the same umbrella.
Eventually, Prologue could list its shares on public exchanges — a step no major venture capital firm has taken.
“Our goal is to really build effectively an index fund of the best performing early stage start-ups,” said Khan. Prologue could become a “lifestyle brand” like the $280bn French luxury conglomerate LVMH, he said.
Prologue’s ambitions point to the battles being fought between venture capital firms and other wealthy backers to find and invest in start-ups at the earliest stages, when significant stakes can be purchased for pennies per share.
Hyper’s first $60mn fund received backing from partners at both Andreessen and Sequoia. The firms also get to look at the top 1 per cent of companies Hyper rejects each quarter.
Both Andreessen and Sequoia separately started making investments of up to $1mn this year in companies reviewed through open application systems.
Their entry into the market contributed to a decision by On Deck earlier this month to lay off more than 70 employees, or one-quarter of the company’s staff, according to a person familiar with the company’s thinking. Executives blamed the cuts on a shift in market conditions since the company opened its accelerator in October last year.
On Deck plans to combine its accelerator with a separate programme that offers mentorship to people thinking about starting their own company, the person said.
Accelerators like YC have made some of the biggest profits in venture capital, said people familiar with the businesses.
In 2007, a fledgling file sharing service called Dropbox entered YC, which at the time invested up to $20,000 for a roughly 7 per cent stake in companies it accepted.
Five years later, YC sold half of its stake in the company for about $100mn, according to people familiar with the transaction. YC used the proceeds to fund new batches of companies through 2018, one of the people said.
YC has continued to score hits. Fifteen companies backed by YC have gone public, including Airbnb and Coinbase. At least five dozen have been valued by investors at more than $1bn. In January, YC announced that it would begin investing $500,000 in each new company, a fourfold increase from the previous amount.
However, accelerators have faced persistent questions about the value they provide in exchange for investment, which can be difficult to measure. YC’s most recent programme admitted 414 companies spread across 42 countries.
“Even if they experience great success, it’s not necessarily because they’ve done anything to the founders,” said Susan Cohen, an assistant professor at the University of Georgia’s business school, who has studied accelerators. “It could just be that they found great teams.”
Hyper promises to help founders gain awareness for their businesses through Product Hunt, which has millions of monthly users. Executives maintain a list of companies, such as software start-up Airtable, that debuted their products on the website and later went on to raise billions of dollars in venture capital.
“It’s really hard to build a start-up that goes and grabs people’s attention,” said Sriram Krishnan, a partner at Andreessen who sits on Prologue’s board. “The playbooks we had seven years ago, they’re not the same playbook today.”
The accelerator also promises introductions to top venture capitalists. Investors in Prologue are “probably going to look at you a little bit more favourably because they have that relationship”, said Akshaya Dinesh, whose email marketing start-up Spellbound was part of Hyper’s first programme.
Hyper typically invests $300,000 for 5 per cent of a company’s stock, but not all companies have received the same deal. One founder, who asked to not be named discussing private terms, received $500,000 in funding at a $9mn valuation. Hyper said it makes “very rare exceptions” to its standard deal.
In the firm’s early days, it leaned on trusted networks to find new companies. Out of roughly 1,500 applicants for its second season, it accepted only two. The other 13 companies entered through relationships to employees and other connections in the start-up world.
Khan said the downturn would present an opportunity to work with companies that have “sustainable growth and real numbers”. Dropbox entered YC on the verge of the last financial crisis, he added. “I see that no differently than where we are today.”