A newbie’s guide to accelerators and incubators: are they right for you?
Accelerators are a booming business. The phenomenon is generally seen as a blessing for the growing number of start-ups. Who is behind these initiatives, what do accelerators do exactly and do you, as a start-up, really need them?
The terms ‘incubator’ and ‘accelerator’ are often seen as interchangeable, but they are not synonyms. An incubator is associated with a large company or university and can ‘hatch’ a product for years, while an accelerator is the ‘fast food version’, offering a programme aimed at transitioning from idea to product in a relatively short-term.
A university incubator often benefits from grants and does not participate in the capital of a start-up, but does ask for a (small) financial compensation for using infrastructure and services. For a university, incubation is a monetising strategy for its own research. An accelerator, however, invests time and money in exchange for part of the company’s shares. In addition, an acceleration programme generally takes several entrepreneurs under its wing at the same time, ‘in batches’ so to speak.
Accelerators can also ‘accelerate’ one or more aspects of a start-up, but within the scope of this article, we will only address those offering a one-stop-shopping programme.
Quite paradoxically, accelerators exist because launching business models based on software requires little time or money. The wide availability of new technologies and their constantly declining cost create a favourable climate for start-ups. A proof-of-concept, which induces a very short time-to-market, actually requires little or no external resources (capital), which is reflected in the very popular ‘Lean Startup’ trend.
In the case of an accelerator, coaching time is limited, normally 90 days. And a non-negligible factor is that mentors provided by the accelerator are entrepreneurs or former entrepreneurs themselves.
For the accelerator, it is about an investment strategy allowing them to estimate in a cost-efficient way whether a business model has scaling potential and therefore build up a profitable investment portfolio. Accelerators are looking for start-ups offering a ‘hockey stick’ growth model, which requires little capital in the pre-scaling phase, but is able to generate exponential growth. Typically, these are start-ups that are active in web-based products, applications or mobile technology. The continuously growing demand for web products and services is also a favourable factor.
Accelerators can take many shapes and forms, but essentially, all of them ‘hatch’ start-ups and help them survive during the first months when they are vulnerable. Paradoxically, there are few accelerators helping in the scaling of proved business models. In other words, when ‘acceleration’ really counts, accelerators are, quite ironically, absent.
No two accelerators are alike, but their work methods are roughly the same: in exchange for shares, the start-up is given a workplace, start-up capital (‘pizza money’) and a certain number of mentors or coaches for the duration of the programme. The final step is the ‘demo-day’, during which the start-up presents its Minimum Viable Product (MVP) and tries to convince venture capitalists (VCs) and ‘angel investors’ to open their wallets generously.
Accelerators follow a process that consists of the following steps: selection, infrastructure, support, matchmaking and ‘graduation’. In other words, an accelerator imposes entry and exit conditions and offers services and support activities that should lead to a market-ready business.
Of course, there are different quality levels of accelerators. Some want to take on as many start-ups as possible (the ‘deal flow’) in the shortest throughput time possible, in order to maximise their success, which is obviously not always profitable for the start-ups concerned.
The accelerator offers coaching in two fields. The first is the more general part, with which all entrepreneurs are confronted financially and legally and in matters of recruitment. The other is more specific to start-ups. It is mainly about marketing, sales, pricing strategy, etc. However, accelerators can also help start-ups come into contact with top notch designers, technical experts and other entrepreneurs who can serve as a role model. In the final phase, accelerators are in charge of finding potential investors who will provide start-ups with the means of instituting the much desired traction.
Many would-be entrepreneurs feel compelled to participate in an acceleration programme. Unfortunately, very few of them are accepted. The accelerator market is currently dictated by demand, with an acceptance rate of a few per cent and with the big boys, it is even less than one per cent. This is because the latter receive tens of thousands of requests a year!
The chance of being accepted by an accelerator is rather determined by the profile and motivation of the candidate entrepreneurs (a single founder has no chance at all) than by the product to be launched. Accelerators bet on the jockey and not on the horse, simply because a good jockey will by definition opt for a good horse (i.e. idea). Moreover, it is quite probable that the initial idea will be pivoted several times before the final product can be marketed.
Selecting good entrepreneurs is very important for the accelerator, but for the entrepreneur, choosing the right accelerator is simply vital. The key question is to know what added value an accelerator can give to the start-up and at what price. The results obtained by the accelerator with similar companies are a good indication. A good accelerator significantly increases the survival chances of the start-up at an acceptable price.
As a rule of thumb, a good accelerator can solve two key problems that could otherwise bring about the premature end of a start-up:
- A thorough lack of knowledge and experience in the targeted market and industry
- Insufficient means available, specifically capital.
Accelerators as an industry
With an estimated 7,500 incubators and accelerators throughout the world, a figure that is growing rapidly, we can speak of an industry. However, when hearing of accelerators, everyone probably thinks of the best-known one, Y Combinator, founded by the godfather of start-ups, Paul Graham. It is the only accelerator to this day that has produced start-ups, each worth more than one billion USD: Airbnb and Dropbox. They have also given birth to a constellation of ‘lesser stars’ of a few hundreds of millions of USD, such as reddit and Heroku. There are more than 600 start-ups, ‘graduated’ from Y Combinator since 2005.
TechStars managed to implement a solid community of start-ups in Boulder, Colorado. Despite strong competition from Silicon Valley, Boulder has become the example for the creation of a local start-up ecosystem. This successful approach is known as the Boulder Thesis. Unlike Y Combinator, TechStars offers a co-working space to 10 starters, enjoying intensive supervision, lavished by 6 to 8 mentors, exclusively hired for every start-up! Another difference: Y Combinator is limited to a single campus, while TechStars (surprisingly absent from Silicon Valley) has chosen to implement a large national network of accelerators. Since 2013, the closest TechStars campus for ambitious Belgians has been in London, the very first one outside the domestic American market. Moreover, this start-up accelerator has implemented an open-source type global network, in order to share their knowledge: the ‘Global Accelerator Network’, to which the Walloon start-up Nest’up belongs. TechStars also supports corporate acceleration programmes such as Nike+ under the brand powered by TechStar.
500 Startups has an impressive list of mentors from the ranks of PayPal, Google, YouTube, Twitter and Yahoo. To find start-ups, 500 Startups uses the AngelList platform, which separates the wheat from the chaff through the use of algorithms and curators. Moreover, 500 Startups (living up its name) has its focus on the expanding markets of China and South-East Asia, while its presence is very well established in India, Japan and Latin America through local partners acting as a gateway. In the meantime, 500 Startups has become a global player with 70 per cent of non-American participants.
Accelerators can be based on private equity, as well as government money. In the latter case, it concerns a tool authorities use to stimulate innovation, economic development and employment. Accelerators can also be regionally oriented, such as Start-up Chile and AlphaLab, or vertically oriented, as is the case with Microsoft Kinect and BBC Worldwide Labs.
A variation on the theme of accelerators are the ‘company builders’, which base their approach on the model of film studios. Based in New York, Betaworks is a pioneer in the matter. The company has a complete internal team, including hackers-in-residence, with all the expertise needed to create companies. It launches a company and once that company is taking off, it moves on to the next one. The process is therefore comparable to a production line, or the way for example Walt Disney Studios works, cranking out blockbusters and thereby managing every detail of the distribution as well.
The studio model shows the value proposition of the accelerator very clearly. The fact that it is gaining in popularity is shown by Andreessen Horowitz, the best-known technology VC who recently recruited no less than 45 experts to accelerate the growth of his investments. In the studio formula, startups are even more redeemed from the actual creation of the company than in the case of a ‘traditional’ accelerator. But it comes at a high price: they have to give up a significant part, up to 30 per cent of their precious shares.
Y Combinator versus Harvard
The success and popularity of accelerators has also provoked a shock wave in academic circles. While traditional business schools prepare their MBA students for a career as executives by combining theory and business cases, accelerators have become the place where drop-outs realise the American dream. The MBA circle is, so to speak, perfectly tailored to work in an in vitro environment, but flounders in the disruptive in vivo world of a start-up. Where the MBA network relies on alumni, accelerators provide access to an instant, highly pertinent network that is immediately useful as a lever. And if startups need something to be able to grow, it is levers.
In the meantime, a select circle of accelerators has itself become an elitist Ivy League. It is therefore not surprising that the alma mater of startups, Stanford University, recently launched its own accelerator, StartX.
It’s all about the money
Accelerators play a fundamental role in the tech ecosystem, acting as a quality filter for the enormous volume of start-ups, which helps investors in search for opportunities.
Even though accelerators are typically launched by ‘business angels’, they are backed financially stronger parties. At Y Combinator, this would be the VC Sequoia fund. However, an accelerator should be neutral and give everyone a chance to invest. Otherwise there is a risk that startups who do not receive follow-up funding (the ‘Series A round’) from their own VC have little chance of finding another source of financing.
Almost all acceleration programmes invest 15,000 to 2,000 USD for 5-10 per cent of shares. Some invest 50,000 USD, like the successful English Seedcamp. Others work without funding or offer a mere ‘room and board’ arrangement.
It is exiting for a startup business to be given an initial valuation of some 200,000 USD, but unfortunately it is just on paper and it is quickly gone, unless the company makes it to the next phase: that of rapid growth.
One last word of advice
What young entrepreneurs are looking for in an accelerator are elements that increase their chances of long-term success: knowledge of the market and industry, product/business development support and contacts with investors. On the one hand, success depends in part on the profile of the people behind the accelerator and on the other hand, on the specific focus of the programme.
Do not underestimate the period of post-acceleration, as that is when the real work begins: scaling and traction. To do so, capital is an essential condition, whether it comes from investors or clients (‘bootstrapping’). And this is exactly the critical point where start-ups can use acceleration support.[Photo: Paul Miller, Flickr]
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