Startup Accelerators
Startup Accelerators seem to be all the rage these days. Highly visible programs like YCombinator, Techstars and Launchbox Digital have really shone a spotlight on this space. I recently came across a series of interesting posts on accelerators (see bottom of this post for links).
In some respects, these accelerator programs are just incubators under a different name. If you were around 10 years ago, you’ll remember that incubators like Idealab were all the rage but failed to really deliver or prove the model. The term “incubator” quickly became a bad word.
As a concept, I think accelerators or whatever you want to call them are good – especially for web and mobile web startups that don’t need lots of capital. Startups need lots of love to succeed, and these programs deliver that in the form of strong mentorship and preparation for follow-on funding.
Ultimately, these programs will be judged by the success of their investments – i.e. the returns they deliver. There have been some big exits out of these programs already, the most notable being Reddit which exited for $ 12M. Most of the exits are too small to be publicly reported so its hard to really measure returns.
The fact that these exits are small is not a bad thing. By their very nature, accelerators cannot afford to produce companies that then feed into the normal VC ecosystem. These programs take 6 – 10% of your startup and most do not make additional investments. So, their ownership can only go down.
For these accelerators to work many of their startups need to avoid raising lots of capital and settling in for a long ride, and instead work towards a near term early exit.
For young, unproven web entrepreneurs these programs are probably one of your best paths to funding. Getting in validates you. And you will emerge better and more prepared to make a go of your startup and get in front of investors. However, with VCs and Angels being more conservative and looking for more traction before they invest their will still be a big gap between what accelerators provide and what they’re looking for. How do we fill that gap? That’s a post for another time…
New VC Business Models – the rise of Business Accelerator Seed Funds
Hey Mike, Very interesting. I like what you're doing. I know of a few people that trade services for equity. The question I have is: does this accurately reflect value creation over the lifecycle? i.e. if I give away 20% of my company to an accelerator that creates V1 for me, has that accelerator really generated 20% of the value that I will create at exit or have I given away more than if I had raised $ and built it in house? Anyway, there's room for new thinking and I like some of the points you have raised – especially re: generating revenues earlier and not depending on VC
You're right that the gap between what most accelerators provide and what you need to be a viable company is still pretty big. How far can 15K take you? Maybe with a lot of sweat equity you'll get a prototype. But a prototype a valuable business does not make. Most accelerator programs are designed to do exactly what you're saying they cant afford to do: feed into the normal VC ecosystem. Connecting you to financing is one of an accelerators biggest selling points. Typically you don't leave without raising more money– at least a $500K round. I think there is still a lot of innovation to happen in funding. At SproutBox, we are trying something new . We use a much deeper service based investment model where we invest $200-250K worth of services in a company on a fixed cycle. We take a company all the way to revenue stage with the first iteration of their product. Companies exiting SproutBox can survive on their own. They haven't ramped up expenses with a bunch of hires, but they have created a stable revenue stream. This approach aims to send companies out the door 'right side up'. Traditional VC models ramp up expenses and de-emphasizing revenue at the early stages in order to maximize chances for IPO sized returns on a tiny percentage of companies. Raising additional funds is a requirement by design and gives VCs more total leverage. I'm not saying that the SproutBox approach is incompatible with VC dollars. We have a long list of investors excited to see revenue stage businesses. But the money raised is optional and is for growth (not survival).
I did see that and was extremely excited (pun fully intended). Sounds like a great program. Good luck with it!
I think that the success rate as measured in the % of startups that exit positively will be higher than traditional VC for the simple reason that its much easier to create smaller amounts of value. The 1st $10M in value creation for example is relatively easy compared with shooting for $50M – $100M. With the sheer number of companies these programs produce though, I don't know how they help to systematically exit them. Also, its not clear how many of them will go on to raise future funding. I am personally spending time with some early stage web companies to help bridge that funding gap and when the time is right to generate the exits.
Great post (agree with the idea of "but what's the return?"). Not sure if you saw this, but we're launching a new program as well: ” target=”_blank”>http://bit.ly/8cnkR
Great post (agree with the idea of "but what's the return?"). Not sure if you saw this, but we're launching a new program as well: ” target=”_blank”>http://bit.ly/8cnkR
Hey Mark, I've talked about Accelerators a fair bit in the past couple of months ” target=”_blank”>http://www.startupnorth.ca/2009/04/13/incubators-... and you've hit the biggest open question for me. What are the success rates/statistics of these early-stage programs? Are they more or less successful than other models of deploying early stage capital? I think there are investors like Austin, and John Stokes, Chris Arsenault that use their investment and board seats to help actively guide startups and mentor founders. Time will tell.
Hey Mark, I've talked about Accelerators a fair bit in the past couple of months ” target=”_blank”>http://www.startupnorth.ca/2009/04/13/incubators-... and you've hit the biggest open question for me. What are the success rates/statistics of these early-stage programs? Are they more or less successful than other models of deploying early stage capital? I think there are investors like Austin, and John Stokes, Chris Arsenault that use their investment and board seats to help actively guide startups and mentor founders. Time will tell.