Wharton on ‘Whither Accelerators’

Accelerators: Wharton on emerging avenues

While the established Accelerators evolve, the field grows and segments: some are now corporate based, some property based, some employment based, some area based, some sector based, some market based; all of them chipping away at Silicon Valley’s market share.

 “Accelerators are a very expensive source of capital,” “If you’ve never launched your own startup before it’s great validation, and maybe you need that leg up. If you need a stronger network and you definitely need advisers – those are the key things accelerators provide you that is worth that 7%.” However, “If you’re a vetted entrepreneur or you’ve been at Google as an engineer and you’ve been at a fast-moving pace, an accelerator might even be a negative signal for a venture capitalist knowing that you’ve already committed 7%,”

What is it that is of value and to whom? Is it the interview process, the validation created by being selected, the mentoring, your fellow startups, the pitching process, the investment – or what?

Incubators Grow Up

Incubators provide space and resources for collections of young businesses, together with occasional mentorship. Accelerators are intensive development programmes for cohorts of around a dozen young ventures, working in close company, for around 12 weeks, with intimate help from mentors and advisers, in return for 6-10% of equity – with the objective of enabling them to raise seed capital from investors.

About half raise capital – good odds considering about one in 100 startups overall get funded, according to George Deeb, managing partner of Red Rocket of Chicago.

“The best programs have a substantial impact,” says Dave McClure, the founder of Silicon Valley accelerator 500 Startups. “The worst programs can probably cause damage.”

Techstars – an evolving archetype

Over nine years, Techstars has become one of the world’s leading accelerators, with programs in Berlin, London, New York, Cape Town in South Africa, and Tel Aviv, among other locations.

Those who enter the program give up 6% of common stock for the loan. They also receive lifetime access to Techstars’ resources, hands-on mentorship in a three-month program with office space, $20,000 in living expenses and connections to more than 5,000 experts.

Techstars reportedly now automatically offers a $100,000 convertible note to all startups upon acceptance. The note converts at a pre-money valuation [the valuation before outside funds or the latest rounds of funding are accounted for] of $3 million to $5 million, the company says.

In 2015, Techstars initiated an equity back guarantee program to address the shifting paradigm. With the preponderance of competing accelerators and other avenues to reach investors, Techstars officials now offer their startups a chance to lower or eliminate how much equity they give up. Startups have three business days after the program ends to reject the standard plan if they aren’t satisfied with what Techstars offers.

Deeb, a founding Techstars mentor, is a staunch proponent of the model that vets startups before investors hear about them. Techstars Chicago picks 10 companies out of 1,000 applicants, says Deeb. This way investors hear pitches from only the most promising startups as determined by the accelerator.

Corporates too are into startups

Another tentacle in the ecosystem can be found in Techstars’ collaboration with major corporations. Since 2015, Techstars had partnered with such heavyweights as Barclays, Disney and Sprint to create accelerator programs for each company.

Disney did not renew its contract with Techstars in early 2016 but continues to operate a startup accelerator. Kevin Mayer, Disney’s executive vice president of corporate development, has said the company isn’t investing in startups in order to make a quick profit like a typical venture capitalist…it is more interested in creating cutting-edge products it can use, as well as revitalizing its leadership by staying at the forefront of innovation.

Corporate leaders figure they can train and support aspiring entrepreneurs to be part of innovative projects in-house instead of having to pay millions later on to acquire them. “Opening an accelerator is a strategic decision that allows big corporates to stay relevant and competitive in a rapidly changing economy,” Microsoft’s general manager of accelerators Zack Weisfeld wrote this year in an opinion piece for Forbes.

 Incentives and objectives are of various kinds

Charles Bonello, a New York entrepreneur, investor and startup tinkerer, is co-founder and managing director of Grand Central Tech, a New York City startup hub that offers companies a year long program without charging rent or taking equity. The catch is that companies that complete the program agree to rent office space for four years in the accelerator’s extensive 1.1-million square foot building overlooking Grand Central Station, a building owned by the accelerator’s billionaire backers.

Many of the startups entering Grand Central Tech aren’t looking for seed money. They are attracted to the program’s impressive list of corporate partners that include Google, IBM, L’Oreal USA, Microsoft, Pepsico North America and JPMorgan Chase.

 Bonello and partner Matt Harrigan have a long-term goal of finding emerging companies trying to solve problems. “Our goal is to create a single point of density of the best technology companies in New York.” One of their first startups was Nagare Membranes, a developer of water filtration technology. By keeping like-minded entrepreneurs in the same office the men hope for cross-pollination in problem solving.

Employment as another objective of accelerators

“Looking at emerging markets, many see entrepreneurship as solving unemployment issues,” says one Wharton expert; but many don’t. “And many jobs are outsourced to other countries like India for IT.” Community and political leaders have many motivations for accelerating business in their region, but “it’s not clear it is working”, even though the Obama Administration’s Startup America Initiative has used many of the fundamental accelerator ideas to promote small businesses nationally.

In 2011, the Chilean government decided the best way to promote homegrown entrepreneurship was to create its own accelerator. The country’s economic development agency hatched the idea with Stanford University experts to create Start-Up Chile. Government officials offered entrepreneurs from around the world $40,000 of equity-free capital, infrastructure and work visas for one year to develop their companies over six months. The program also gave selected startups access to Chile’s financial network. The idea was that the recruited entrepreneurs would serve as role models for Chile’s budding startup culture, but it is uncertain how many stayed in Chile.

Muhammed Mekki, a founding partner of AstroLabs, has extended a corporate connection to Dubai in the United Arab Emirates. It has strong government backing for its partnership with Google to build a startup hub and training academy to promote online and mobile business throughout the Arab world.

“It becomes part of the culture, and when it becomes part of the culture, it becomes part of the government – to integrate this idea of startup mentality,” says Bambi Francisco, whose company Vator is one of the largest social network platforms dedicated to entrepreneurs.

Specialisation

The first accelerators recruited all types of companies instead of focusing on specific industries. But as these programmes proliferated they became more nuanced in targeting companies to accelerate.

Blue Builder is an accelerator in southwest France that caters to ocean and other outdoor sports in the picturesque fishing village of Saint-Jean-de-Luz, located in the heart of the surf alley in the Basque country. It also lies beneath the Pyrenees Mountains, providing a testing ground for all kinds of adventure sports products.

It offers a campus with prototype studios, workshops and a safe environment to experiment with materials such as polymers and resins used for building surfboards and snowboards, where those involved can maintain their lifestyle, and which is close to its market rather than close to coders or to sources of finance.

It works with entrepreneurs on specific projects to get them launched when they are ready to be presented to investors. It surrounds these creative trailblazers with brand designers, user experience designers, business developers and finance and legal experts to increase the likelihood of success during a year long assignment to build a product, such as one involving a sensor that measures surfboard movements in real time.

Moreover, it determines how much equity it gets based on the valuation of each company instead of taking a uniform percentage at the entry point.

Instead of looking for companies, Entrepreneur First in the UK recruits graduates, and then partners with the talent to build a company from scratch. This is one way to attract a variety of experts to work on a specific issue.

 Hybrid Approaches

The University of Pennsylvania is pioneering a new approach to entrepreneurship by combining academic applications with practical experience. Some argue that college is the best time to launch a business because of the proximity to so many people to test the product and gather feedback.

Penn’s Graduate School of Education (GSE) has created the country’s first executive master’s degree programme in education entrepreneurship. The school also helped create an Education Design Studio, a hybrid incubator and seed fund for education startups. Entrepreneurs who chose the incubator route have access to GSE’s professors to get the latest research on what is working in their areas of interest. But they do not earn degrees.

The model of offering two routes to launching businesses with academic support — in school while pursuing a master’s degree part-time or through an incubator program — is not limited to education startups.

A short form process

Started in 2007, Vator holds entrepreneur conferences in Los Angeles, London and Oakland, California, that can lead to investment deals. It has promoted about 175 companies through its startup competitions in the past five years. The winners get to pitch to investors at the end of their Splash events just like they would at an accelerator “demo-day.” Its startups have raised $700 million in capital without releasing any equity to the facilitator.

The future of the Valley

“People say nobody’s going to duplicate Silicon Valley. In many ways, it is part of the natural evolution that turned the San Francisco Bay Area into a global economic powerhouse with Apple, Facebook, Google and Twitter among the current stars.” “It has gotten easier in other places, but there is no doubt by every stat that it is the hub of entrepreneurial activity, especially in the web software services space. The big brands keep the Bay Area at the heart of American innovation. But the environment has changed.”

The mean distance between a venture capitalist and a company they invest in, says one old hand, is only 80 miles. “So, if you’re not in San Francisco or New York or a few other places, you’re unlikely to get access to funding.” He is sceptical of some accelerators that advertise a new approach with more access. Yet “There are reasons to have accelerators in cities Europe-wide because these people are cut off from the funding system and support system that exists for the lucky few in the U.S. But you can’t just copy Y Combinator and expect it to work.”

With investors more dispersed these days, entrepreneurs can create companies closer to their homes, which, in turn, can lead to organically grown startup communities that include accelerator programmess and localised funding – the type of industry plays a big role in where a community develops. McClure says it requires the “minimum critical mass” of startups and investment in entrepreneurs to develop a thriving hub. As many as 100 metropolitan areas worldwide have the potential to reach that threshold.

See: http://knowledge.wharton.upenn.edu/article/why-startup-accelerators-are-feeling-pressure-to-evolve/ July 2016

John Whatmore, September 2016

 

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