Prologue, a company backed by some of Silicon Valley’s biggest venture capitalists, wants to build a big business out of small stakes in dozens of start-ups. First, he must navigate a technological crash.
Andreessen Horowitz and Sequoia Capital have invested $23 million in Prologue, making it one of the best-funded new challengers to popular startup accelerator Y Combinator. Prologue’s investment arm, Hyper, recently began soliciting applicants for its third “season,” a four-week training program with $300,000 in funding.
But the road ahead suddenly seems strewn with pitfalls. A sell-off in shares of fast-growing, cash-intensive public tech companies prompted venture capitalists to warn companies of an impending downturn. Another start-up accelerator, On Deck, laid off a quarter of its staff this month. Y Combinator last week sent a memo to the company’s founders warning that the “safe measure” now is to “plan for the worst” by cutting costs and raising additional funds.
Hyper employees locked down for a retreat in New York last week, their first since the team grew to nine people. They came away optimistic.
“Founders now appreciate the mentorship that comes from an accelerator and the doors it opens,” said Shahed Khan, CEO of Hyper. The new environment would be a “net positive” for similar programs, he added.
While many others have attempted to rival YC, Silicon Valley’s oldest and largest accelerator, Prologue represents one of the most promising attempts to dislodge its Harvard reputation from start-up formation.
Prologue also owns the popular Product Hunt website and plans to funnel Hyper profits into the media business, which it hopes will help the program’s start-ups find new customers. Leaders want to buy and create other businesses under the same umbrella.
Eventually, Prologue could list its shares on public stock exchanges – a step no major venture capital firm has taken.
“Our goal is to really effectively build an index fund of top performing startups,” Khan said. Prologue could become a “lifestyle brand” like the $280 billion French luxury conglomerate LVMH, he said.
Prologue’s ambitions underscore the battles between venture capitalists and other wealthy backers to find and invest in early-stage start-ups, when large stakes can be bought for pennies a share. .
Hyper’s first $60 million fund has received support from partners at Andreessen and Sequoia. Businesses can also review the top 1% of businesses rejected by Hyper each quarter.
Andreessen and Sequoia both began investing up to $1 million separately this year in companies vetted through open application systems.
Their market entry contributed to On Deck’s decision earlier this month to lay off more than 70 employees, or a quarter of the company’s staff, according to a person familiar with the company’s thinking. Executives blamed the cuts on a change in market conditions since the company opened its accelerator in October last year.
On Deck plans to combine its accelerator with a separate program that offers mentorship to people considering starting their own business, the person said.
Accelerators like YC have made some of the biggest profits from venture capital, people familiar with the business have said.
In 2007, a fledgling file-sharing service called Dropbox entered YC, which at the time invested up to $20,000 for a roughly 7% stake in companies it took on.
Five years later, YC sold half of its stake in the company for around $100 million, according to people familiar with the deal. YC used the proceeds to fund new batches of businesses through 2018, one of the people said.
YC continued to score hits. Fifteen YC-backed companies have gone public, including Airbnb and Coinbase. At least five dozen have been valued by investors at over $1 billion. In January, YC announced that it would start investing $500,000 in each new venture, four times the previous amount.
However, accelerators have faced lingering questions about the value they provide in return for investment, which can be difficult to measure. YC’s most recent program admitted 414 companies from 42 countries.
“Even if they’re very successful, it’s not necessarily because they did anything to the founders,” said Susan Cohen, assistant professor at the University of Georgia School of Business, who studied accelerators. “It could just be that they found great teams.”
Hyper promises to help founders raise awareness of their business through Product Hunt, which has millions of monthly users. The executives maintain a list of companies, such as software startup Airtable, that have launched their products on the website and subsequently raised billions of dollars in venture capital.
“It’s really hard to create a startup that gets people’s attention,” said Sriram Krishnan, partner at Andreessen, who sits on the board of Prologue. “The playbooks we had seven years ago aren’t the same playbooks today.”
The accelerator also promises introductions to top venture capitalists. Prologue investors are “probably going to look at you a little more favorably because they have this relationship,” said Akshaya Dinesh, whose email marketing startup Spellbound was part of Hyper’s first program.
Hyper typically invests $300,000 for 5% of a company’s stock, but not all companies have received the same deal. A founder, who asked not to be named while discussing private terms, received $500,000 in funding at a $9 million valuation. Hyper said it makes “very rare exceptions” to its standard deal.
In its early days, the company relied on trusted networks to find new business. Of approximately 1,500 applicants for its second season, it only accepted two. The other 13 companies entered through employee relations and other connections in the startup world.
Khan said the downturn would provide an opportunity to work with companies that have “sustainable growth and hard numbers.” Dropbox entered YC on the brink of the latest financial crisis, he added. “I don’t see it any differently than where we are today.”
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