Betabeat’s curiosity was peaked when we heard this weekend that that five gen-u-ine New York start-ups had spent their Saturday pitching fake VCs. It turned out to be an exercise at the inaugural New York class of Startup Leadership Program, a mentoring program for start-up founders from across disciplines. The start-ups pitched fake VCs, negotiated fake term sheets, and then the fake VCs presented the fake term sheets to fake limited partners, which included one real VC. Got it?
This exercise is a staple of SLP, director Kanchan Koya told Betabeat, which is active in six cities. Five pre-seed start-ups participated: Beansprout, Quartzy, Rethink Impact, Biomotion Suite and WingTipIt. “These guys came in and they pitched to our fellows who were playing mock VCs,” she said. “Each VC simulation fund met with start-ups for ten minutes for due diligence questions and discussion, then there was a free-for-all to negotiate the best term sheet. Every start-up ended up getting a term sheet.”
“They just flipped it as a learning tool,” Charlie O’Donnell told Betabeat as we tried to figure this out. “The fake VCs signed deals with real companies and then they came in and told us why they did the deal, what they thought were the pros, cons, etc. I was the only ‘real’ investor there.” (And as such, the only one in a position to capitalize on any promising pitches.)
Shai Goldman of Silicon Valley Bank and J. Peyton Worley of sponsoring law firm Cooley LLP played the other two “limited partners,” who evaluated the program fellows by the deals they had negotiated.
“The mission was to get an insider glimpse into mind of an investor but also to give start-ups an inside view into why VC funds make the decisions they make,” Ms. Koya said.
The exercise produce a problem common in the real world: There was one company that everyone wanted to invest in. That company was Quartzy, which provides software that helps life scientists manage inventory in their labs.
“Most of the VCs tended to gravitate toward Quartzy, which ended up being very exp deal,” Ms. Koya said. “They had a premoney that was really, really high… A mock VC fund invested $2 million or $1 million on a pre-money of like $7.5 million, but clearly the company needed more than just a million to actually make it.”
Mr. O’Donnell seized on this in his feedback. Who is going to put in the subsequent cash? he asked the “VCs,” pointing out that the company would have to make miracles with its first million in order to justify an even higher valuation in a later round–posing the danger of a “down round.”
“We’ve run this particular simulation in every city and it’s always a huge hit,” Ms. Koya said. SLP, a non-profit, will be recruiting for its next class of fellows soon.