CASE: E-607

DATE: 11/21/16

ALCHEMIST ACCELERATOR
The question ishow do you preserve the quality of the Alchemist program while also
reacting to the market? We are at a point where we have more high-quality companies
that we want to admit than we have room for. Should we expand the size of our class?
Should we expand geographically? If so, how does that work?
1
Ravi Belani, Managing Director of Alchemist Accelerator

30 seconds until were live, the stage manager shouted. Ravi Belani, the managing director of
Alchemist Accelerator, fiddled with his microphone as he quietly rehearsed his opening lines. It
was June 2016, and he was about to take the stage for Alchemist Accelerators ninth Demo Day.
Belani took a quick glance around the curtain to see how excited the boisterous crowd was for
the days presentations. He could see Alchemists limited partners from Foundation Capital,
Khosla Ventures, and SAP in the crowd. He knew that many others were remotely streaming the
live event to see what the latest innovations in enterprise technology had to offer.

Alchemist Accelerators success depended on a perfectly executed Demo Day. The program sat
in the middle of the enterprise start-up ecosystema hub for venture capitalists, B2B start-ups,
and corporations that were hoping to invest, partner, and potentially acquire start-ups that
showed the most promising futures.

As he was about to take the stage, Belani thought about each of the stakeholders that he would
address in his speech, hoping that he could attract the necessary talent to continue growing the
program. Alchemist had come a long way since its beginnings at the Harvard Club of San
Francisco, and Belani knew he faced several significant challenges on his path to scaling the
program.

1
Interview with Ravi Belani May 9, 2016. Subsequent quotations are from the authors interviews unless otherwise
noted.

Matt Saucedo (MBA 2015) and Professor John Glynn prepared this case as the basis for class discussion rather than
to illustrate either effective or ineffective handling of an administrative situation.

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Alchemist Accelerator E-607 p. 2

BACKGROUND

Ravi Belani

Ravi Belani attended Stanford University to earn both his Bachelor of Science and Master of
Science in Industrial Engineering. Upon graduation in 1998, Belani spent a year at McKinsey &
Company before becoming a product manager at Zaplet, an enterprise start-up. He then spent
two years as an analyst at Draper Fisher Jurvetson (DFJ) before attending Harvard Business
School from 2004 to 2006. Following business school, Belani returned to DFJ, where he worked
until 2010.

Founding of Alchemist Accelerator

While at DFJ, the Harvard Club of San Francisco invited Belani to speak as part of an alumni
event program known as The Alchemist Series, which focused on transforming Harvard
computer science alumni into entrepreneurs. Belani developed a six-week educational program
that included a variety of entrepreneurial topics and speakers. To his surprise, alumni who
worked at large enterprise companies such as Salesforce and Oracle were among those
participants who enjoyed the program the most, as he explained:

We asked these enterprise executives why they partook in our program, and they
said, Well, its because we dont need to raise $5 million, we only need a couple
hundred thousand dollars, but we want to have the formal training that we would
have received had we gone through an accelerator or incubator, yet most of these
programs are focused on consumer applications.

This comment led to a moment of discovery for Belani: This was the light bulb moment where I
realized that there was this orphaned group of enterprise founders who need a program designed
for enterprise start-ups. I thought, If I were to start an accelerator that wasnt encumbered by
history, and if we were to focus on enterprise start-ups, what would that look like? Belani soon
realized that this type of accelerator would help solve several issues that venture capital firms
faced when choosing which companies to support.

Based on these realizations, Belani pitched the idea to Khosla Ventures and DFJ, who gave him
the mandate to build Y Combinator for the enterprise, with the goal of creating a hub for the
top enterprise start-ups, investors, and customers. Belani hoped to emulate Y Combinators
process of selecting top talent who could quickly hack products together, find product/market fit
early, and demonstrate nonlinear growth to capture the attention of investors.

The Conundrum for Venture Capital Firms

Decreasing start-up costs

During his time at DFJ, Belani realized that the cost of starting a company was steadily
decreasing and, as a result, more innovation was occurring at the seed stage than ever before. He
explained:
Alchemist Accelerator E-607 p. 3

When I was at DFJ, I saw more innovation occurring at the seed stage than what
was historically the case. This is because the cost of starting companies has gone
down dramaticallyessentially, Moores Law2 has affected venture. Its 100
times cheaper to build a start-up today$50,000 today is the equivalent of $5
million ten years ago. For example, in 2000, companies would have to spend
$250,000 on an Oracle database license, which was practically a necessity for any
enterprise start-up. So you couldnt have a viable business until you spent
hundreds of thousands of dollars on the database. Today, much of what is
required to start an enterprise company comes in the form of a service.
Additionally, theres less need for direct sales forces, as many products can now
be sold via inside sales or product-driven sales.

At the same time that Belani realized the costs of developing a successful start-up were
rapidly decreasing, he noticed that the revenue trajectories of successful companies were
becoming increasingly steeper. By his estimations, companies were achieving $10
million accounting rates of return (ARR) four times quicker than companies were ten
years earlier. As a result, Belani felt that investors would be well served to back
companies earlier in the company lifecycle than ever before.

Signaling risk

While Belani saw the potential for start-ups to break out earlier in the lifecycle, he believed that
signaling risk created a two-fold issue that prevented venture capital firms from making effective
seed-stage investments. First, Belani argued that the management fees of the average VC firm
were structured such that the general partners were incentivized to raise large funds and write
large checks. Most firms employed a 2-and-20 fee structure, in which a firm kept 2 percent of
the funds total amount as a management fee, which partners used to cover operating expenses
such as salaries. A firm would also keep 20 percent of the profits earned from its investments,
known as carried interest. Belani believed that this incentive structure meant that most VC firms
were less likely to invest in seed-stage start-ups that used less capital to generate non-linear
growth before they raised Series A rounds.

Second, Belani argued that venture capital firms created signaling risk when they tried to invest
in start-ups at the seed stage, as he explained:

If a venture capital firm tries to invest in a company at the seed stage, it creates
signaling risk for the founders. For example, if a founder were to take $250,000
in seed money from a VC firm, but then goes and pitches to another VC for its
series A round, this second VC firm will be less likely to invest.

Lets say that I am Greylock Partners [a VC firm] and I give a founder a seed-
stage check for $250,000. When it comes time to raise the series A, the founder
will pitch to other firms who will see that I have given this company $250,000,
yet I dont have my requisite ownership of say 35 percent. This other firm will

2
Moores Law (in simple terms) states that processor speeds, or overall processing power for computers, will
double every two years.
Alchemist Accelerator E-607 p. 4

ask the founder, Is Greylock participating in your Series A? The founder cannot
provide a satisfactory answer to this questionif Greylock is interested, then this
second firm is going to wonder whether or not they should even spend the time
performing diligence because Greylock has the inside relationship. If Greylock is
not interested in participating in the Series A, then this indicates that there might
be something wrong with the company.

Because even if they give a relatively small investment, say a $250,000 or

$100,000 check, theyre tainting the founder from getting a check from another
fund. The signaling effect dynamic means the VC that wrote the seed check has
an unfair advantage for that next raise, because theyve already basically put their
label on the founder even though founders dont necessarily understand this.

Belani also believed that signaling risk negatively affected venture capital firms. He cited
several examples of large VC firms that had made seed-stage investments in several companies
within a particular industry, only to have the breakout company in the space avoid accepting
their offer during their Series A because the founders felt like the firm had backed a competitor.
Belani hoped that Alchemists unique program structure would prevent this from happening to
other firms.

PROGRAM STRUCTURE

The Alchemist program was a six-month program dedicated to accelerating the growth of the 17
companies in each class. Classes started every four months, which meant that each company
team developed relationships with up to 50 companies during their time in the program.

Source: Alchemist Accelerator

At the beginning of the program, each team submitted a profile snapshot of their company and its
needs. Alchemists managers then syndicated the profiles with a trusted network of customer
prospects (typically Fortune 100 companies), feedback coaches for fundraising (generally partner
venture capitalists), and mentors. Then, Alchemist managers set up one-on-one meetings
between teams and potential customers and VCs that provided feedback on the venture. These
meetings were designed to help teams fine-tune their product offerings and pitches.

As part of the program, companies received several additional benefits, including co-working
space in San Francisco, Palo Alto, and Menlo Park, as well as open office hours with core
Alchemist mentors. Alchemist offered every incoming company a small cash investment in the
form of a note, which teams were not required to take. However, the program had a tuition
charge, which Alchemist offered to cover using additional capital in the note. The average
Alchemist Accelerator E-607 p. 5

Alchemist investment was $36,000, net of the additional cash given to cover the tuition fee.
Alchemist also asked companies for a single-digit portion of common equity (average of 5
percent), with the specific amount varying by company. The accelerator also asked for the right
to invest a minority/non-threatening co-investment in a companys Series A round.

The program culminated in a Demo Day where teams pitched their ideas to venture capitalists
and the broader community.

FUND STRUCTURE AND BENEFITS TO INVESTORS

Alchemist had two different types of limited partners: venture and corporate. The venture
partners were DFJ, Khosla Ventures, the Mayfield Fellowship, Foundation Capital, and U.S.
Venture Partners (USVP). The corporate limited partners were Siemens, Salesforce, Cisco, SAP,
and Tyco.

How did venture firms measure success for Alchemist?

Later series financing

Each type of limited partner measured success for Alchemist in a different way. Belani knew
that Alchemists ability to grow was dependent on his capacity to please the current investors
and attract others to join. He realized that because each firm contributed only a small amount of
capital compared to the relative size of managed funds, success would not be defined by the ROI
of these comparatively small investments. Belani explained:

The bar is much higher than that. The bar is that they need to have an investment
come from Alchemist that has the potential to make a significant impact on their
fund. I think our limited partners are going to measure success based on whether
or not they can find a winner that comes out of the Alchemist ecosystem for a
later-stage investment.

In other words, Belani hoped that VC firms would measure the success of their involvement with
Alchemist not by the ROI of their small sponsorship checks, but rather by their ability to
participate in subsequent rounds of financing for successful companies that came out of the
accelerator. As of October 2016, DFJ and Foundation Capital had participated in subsequent
financing rounds of companies that went through the Alchemist program.

Belani provided insight into how he believed Alchemist best served its venture partners: For our
VC partners, were solving this problem of, How do I systematically look at all the innovation
that is happening at the enterprise seed stage? Alchemist accepted about five percent of the
applicants, and aimed to systematically capture all of the most promising innovation that was
happening at the enterprise seed level. This helped VC partners expand the scope of their deal
pipelines to include Alchemist companies. As Belani explained, The overriding mission of the
accelerator is to be the magnet for the top founders to come. Our VC partners are invited to
become mentors in the accelerator, and while the founders are not required to meet with them,
starting that relationship helps our VC partners get an early look at these companies.
Alchemist Accelerator E-607 p. 6

Brand awareness

Beyond providing deal flow to investors for later-stage financing, Belani hoped to position
Alchemist as a platform for venture firms to promote their brands. He commented:

There are so many influencers in our network of both the companies that we have
funded and our mentors. Our top mentors have built businesses worth $100
million or more. Many of those get exposed to the ecosystem of our VC partners
through events that we do at their offices. There is a lot of intangible brand value
ROI that comes along with participating in Alchemist.

Belani highlighted the challenges faced by many VCs, who only participated in a handful of
companies every year but had to maintain brand awareness within the start-up community.
Some Alchemist LPs, such as USVP and the Mayfield fellowship, had yet to invest in an
Alchemist company. However, Belani believed that the program continued to create value for
these partners through increased brand awareness.

Enterprise relationships

Alchemist also had a duty to create value for its enterprise limited partners. Belani hoped to
position Alchemist as an agonistic supporter of enterprise start-ups: We have a bunch of
corporations that come to us to help find start-ups that they should procure products from. If we
dont have a fit within the Alchemist portfolio, we recommend the portfolios of our backer
funds. Belani considered this centrality within the enterprise start-up ecosystem to be an
incredible asset, and a defensibility that only improved as Alchemist continued to scale. In
Belanis mind, the ability to recommend not just Alchemist companies, but also the companies
from the portfolios of venture capital LPs meant that Alchemist could develop deeper
relationships with corporations that could potentially serve as customers or eventual acquirers of
Alchemist companies. (See Exhibit 1 for Alchemist acquisition data.) According to Belani,
many of the programs corporate partners invested in Alchemist companies in Series B rounds or
later. These corporate partners could use this continuity to track Alchemist companies and
invest, partner, or acquire with them at later stages. Robert Locke, senior vice-president of
corporate development at Tyco (an Alchemist limited partner), explained his perspective on
Alchemists value proposition: Alchemist provides its strategic investors with early access to a
pre-qualified pipeline of strong enterprise-focused early-stage start-ups, the opportunity to
participate in an ecosystem which includes the best VCs and strategic investors, and the
opportunity to invest in some of the best companies in the valley.3

ALCHEMIST COMPETITIVE ADVANTAGES

The Alchemist management team likened its strategy to a four-legged stool, with each leg
consisting of the following:

Founders
Mentors

3
Interview with Robert Locke, October 25, 2016.
Alchemist Accelerator E-607 p. 7

Fundraising
Customers

Belani firmly believed that Alchemists origins at the Harvard Club initially helped it attract the
top technical talent interested in tackling enterprise challenges. We started with the Harvard
Club list-serve of top technical alumni, and this was part of our original differentiation.

Pairing these founders with the mentors was the second component of Alchemists strategy.
Belani and his team developed an extensive network of mentors to join on as advisers to
portfolio companies. We think we have the highest concentration of the top, most successful
advisers in the enterprise space of any program, explained Belani. (See Exhibit 2 for
information on Alchemists key metrics.)

Alchemist employed two types of mentors: coaches and experts. Coaches were matched to
individual companies and typically worked with a single company for the duration of the
program. Experts were shared resources that worked with multiple companies during the
program. As of November 2016, there were over 800 Alchemist mentors.

In general, Alchemist assigned two main coaches to every companya CEO coach that focused
on strategy and direction, and a sales coach that focused on customers, revenue, and distribution.
Companies met with these coaches once every two weeks. There was a third Goal Coach who
checked in with a cohort of five companies every two weeks to ensure that companies were
prioritizing goals correctly. These check-in sessions also afforded companies a group-learning
opportunity to learn from the cohort.

The amount of time mentors contributed varied depending on their type of role, expertise,
availability, and demand. Belani estimated that on average, active mentors spent anywhere
between one and eight hours per month with companies, with an average of four hours per
month. However, the frequency of coaches involvement could vary widely depending on the
point in the programs lifecycle. For example, pitch experts became heavily involved with
multiple companies during the final weeks of the program as Demo Day drew close, but
generally had little involvement at the onset of the program.

The third leg of the stool was fundraising. Early on, Belanis relationships with Silicon Valley
VC firms helped jumpstart interest in Alchemist portfolio companies. Over time, Alchemists
focus on enterprise technology helped the accelerator develop a reputation among VC firms as a
source for top early-stage enterprise technology. Belani commented, Many of the top venture
funds will come to Alchemist because they know the companies that we select are aligned with
what they are looking for. I think when VCs go to a lot of the other accelerators, they find that
they arent as effective at writing a thesis around interested companies that they would want to
fund.

The fourth leg of the stool consisted of Alchemists connections to corporations through its
limited partners and sponsors. Belani proclaimed, We pride ourselves on having a very rich and
deep network of CIOs at Fortune 500 companies that will do procurement with our start-ups.
Thats very hard to find with any accelerator, especially getting access to those CIOs.
Alchemist Accelerator E-607 p. 8

CHALLENGES

Does This Model Scale?

Belani believed that investors saw Alchemist as a highly curated selection of enterprise start-ups.
One of the major concerns with attempting to scale the program was the potential to dilute the
quality of the companies that it supported. However, Belani also recognized that since many of
Alchemists competitors were scaling by either expanding to new regions or admitting new
companies, he and his team had to at least consider how they might scale the program.

Belani wondered whether he could (or should) scale the Alchemist model. In its current state,
Alchemist differentiated itself from other accelerators based on the quality of interactions
between founders and mentors. Belani cited the intentional cap on just 17 companies per class as
a method of maintaining a high ratio of resources to founders in the program. He wondered how
scaling might negatively impact this critical ratio.

Extensive operational costs

Operating costs had to be kept in check if Alchemist were to scale successfully. Belani
explained, Its a huge operational undertaking to run an accelerator and very few people
understand that. Alchemist is an operational nightmare in the sense that you have 50 companies
that are going through the program every year and they are at their most needy stagethe first
six months. They all need a ton of attention. (See Exhibit 3 for information on Alchemist
Operations.)

There was no clear choice on how the team could scale the model. Some of Alchemists
competitorssuch as 500 Start-ups and Y Combinatorwere steadily admitting more
companies with each batch. Others focused on expanding their virtual offerings while reducing
the amount of co-working space and in-person benefits. Other programs, such as Techstars,
focused on expanding local regional programs to capture talent across the United States.

Belani explained his perspective on scaling:

We have certain philosophies on how we want to do it. I think were very, very
sensitive about not wanting to compromise the brand so were paying very careful
attention to ratios: Whats the ratio of mentors to founders in the program?
Whats the ratio of alums to founders? Whats the ratio of investors to founders?

Right now weve done very well with funding, with mentorship, and with
procurement events. We could take on more companies and were trying to
decide how best to do it.

Long-Term Vision for Alchemist

As Belani took the stage to kick off the Alchemist Demo Day, he thought back to his overarching
goal of building an ecosystem for enterprise start-ups where start-ups, investors, and customers
all benefited from participating in the program. He was well on his way to achieving this goal,
Alchemist Accelerator E-607 p. 9

but knew that successfully scaling Alchemist beyond 17 companies per batch would require
making difficult decisions that could potentially change the direction of the program.
Alchemist Accelerator E-607 p. 10

Exhibit 1: Notable Alchemist Acquisitions

Company Acquirers
Xendo AppDirect Inc.
CirroSecure Palo Alto Networks
Assemblage Cisco
Frontleaf Zuora
Appslingr OTOY
Synata Cisco
Airpost Box
wise.io General Electric
Selligy Veeva Systems
MobileSpan Dropbox

Source: Alchemist Accelerator

Alchemist Accelerator E-607 p. 11

Exhibit 2: Alchemist Accelerator Key Metrics

Alumni companies at least 6 121

months post-Demo Day
Acquisitions 14
Fundraising: Companies that have 66
raised institutional rounds or
significant seeds*
# Direct investments in Alchemist 13
companies made by Alchemist
LPs
Mean raise of companies that $2.6 million
raised capital
Median raise of companies that $2.0 million
raised capital
Notable acquirers of Alchemist Box, Cisco, Dropbox, Palo Alto Networks, Veeva, Workday
companies
Notable institutional investors Andreessen Horowitz, Greylock, Redpoint, Social Capital
besides Alchemist backers in Partnership, Data Collective, Alsop Louis Partners, Felicis
Alchemist companies Ventures, Founders Fund, K9 Ventures, Menlo Ventures,
Bessemer, Bloomberg Beta, Citrix, Voyager, XSeed
* A significant seed is defined as
>$500K

Source: Ravi Belani

Alchemist Accelerator E-607 p. 12

Exhibit 3: Alchemist Operations

OPERATING STAFF (10 total)

Ravi Belani Managing Director

Operations
Danielle DAgostaro COO
Krista Stinson Program Manager
Mia Scott Administration
Corporate Customers
Nick OConnor Customer Development
Rochelle Alejo Customer Lead Generator
Product
Zach Pritchard Product Manager
Kristian Liibert Software Engineer
Gabriel Poussif Software Engineer
Umar Shahid Software Engineer

MENTORS/PARTNERS
Venture Partners / Faculty Mentors 50 total
Mentors 450 total
Network of Contacts Available to Founders ~ 11,000

Sample Venture Partners / Faculty Mentors

Co-Founder, Yammer (acquired by Microsoft for
Adam Pisoni $1.2 billion)
Ethan Praeter CPO, Castlight Health
Gary Swart CEO, oDesk (now Upwork)
Mike Olson Founder, Cloudera Inc.
Founder, Netopia (acquired by Motorola for
Reese Jones $200 million)
Steve King CEO, DocuSign Inc.
Tim Chou Former President, Oracle-on-Demand

Source: Ravi Belani, Alchemist Accelerator.