Business Accelerators Do they pave the path for startup success?
Executive Summary
Are business accelerators the key to success for early-stage businesses and startups? Many entrepreneurs think so. Since the first accelerator, Y Combinator, was founded in the United States in 2005, the number of accelerators has increased dramatically. More than 180 accelerator programs worldwide have helped some 6,000 companies attract in excess of $22 billion in funding from all sources. Yet, not everyone agrees that participating in an accelerator guarantees that a startup will succeed. Among the key takeaways:- Not all accelerators are equal: Startups should research their options before committing to an accelerator and, once accepted, be clear about what they want to gain from their experience.
- Accelerators involve trade-offs: Entrepreneurs give up equity in return for seed money and a chance to pitch potential investors.
- Joining an accelerator isn’t the only way to grow a new business. There are a number of free resources available to entrepreneurs.
Alexis Ohanian, of Reddit and Y Combinator, and TechCrunch co-editor Alexia Tsotsis at TechCrunch Disrupt NY 2015, where startups pitched investors. Y Combinator was the original accelerator. (Noam Galai/Getty Images for TechCrunch)
When the financial technology startup Factom Inc. was accepted by Plug and Play, a business accelerator, in 2015, a colleague told Factom CEO Peter Kirby that he might as well take his seed money and flush it down the toilet because accelerators are completely useless. Kirby says his colleague told him that accelerators – programs that seek to expand the size and value of a startup company as quickly as possible – “are very, very distracting, and while you think you’re getting connections from the accelerator, you are really just in a tournament with other startups.” Kirby’s experience didn’t bear out the warning. Through Plug and Play, he says, he got a meeting with the U.S. Department of Homeland Security that led to a $199,000 award from the agency.1 “We had a wonderful experience with Plug and Play,” says Kirby, whose Austin, Texas-based company builds software for blockchain, a data structure that creates a digital ledger of transactions for things such as bitcoin. And yet, Kirby says, in some respects his colleague’s caution might be right. An accelerator can indeed be a distraction if the startup’s creators fail to focus on what they want to achieve during their limited time in the program. And, to some extent, participants are competing with other startups for the accelerator’s time and resources, Kirby says. An accelerator doesn’t ensure success. Accelerators differ from other programs to aid startups, such as incubators or “angel” investors, in that they compress development time to increase the size and value of the company as quickly as possible and culminate in a demonstration day when entrepreneurs pitch their business to investors. The emergence and popularity of accelerators reflect the growing reliance of the U.S. economy on startups to generate growth. Accelerators focus solely on businesses in their initial stages of development, which typically means the startup is seeking capital, is still building an employee team and hasn’t settled on a strategy for attracting customers.2 To achieve rapid growth, most accelerators require the business owner to move into a shared workspace for three months to get daily mentoring and advice from the accelerator’s founders. Often, startups receive seed money to spend however they would like, typically $15,000 to $20,000. In exchange, most accelerators require the entrepreneur to give them an equity stake in the company, usually 6 to 9 percent.3 Since the first accelerator, Y Combinator, was created in 2005, the more than 6,000 companies worldwide that have gone through accelerator programs have received in excess of $22 billion in funding from all sources to support their businesses, according to the database Seed-DB.com.4 The bulk of these accelerators are in the United States; between 2005 and 2015, 172 U.S.-based accelerators invested their own money in more than 5,000 U.S. startups with a median investment of $100,000.5Most U.S. accelerators are in Silicon Valley, Washington, New York City or Boston.6 The concept has been replicated in Europe and Russia.7 Accelerators get their funding from three sources, according to Scott Robinson, Plug and Play’s vice president for fintech: state and federal agencies, private entities such as banks, and corporate sponsors seeking access to the startups and events associated with the accelerator. The U.S. Small Business Administration supports accelerators through its Growth Accelerator Fund Program, which in 2015 offered $4.4 million to 80 recipients.8Do Accelerators Guarantee Success?
The odds are low that accelerator participants will become as successful as the online labor market TaskRabbit or cloud storage site Dropbox, startups that partnered with accelerators during their early development. And there are countless startups – think Facebook – that achieved spectacular success without going anywhere near an accelerator. For all of that, many entrepreneurs still see accelerators as the key to early success.9 “The myths of accelerators get written up by the success stories,” Kirby says. “We’re talking about one-in-a-million startups, not the bulk of them. You can’t look at what happens with the one-in-a-million and expect that to happen to your company.” It is unclear whether accelerators improve startups’ survival rates. No entity regulates accelerators, and research into the question is insufficient, although one study found that partnering with an accelerator enhances a business’ ability to attract investment. The research that does exist shows that the impact of accelerators varies widely, perhaps because accelerators differ so much in terms of size, founders, amount of seed money provided and level of equity required to join.10 Each accelerator has unique qualities, and the key is to find the right match for a particular startup, Kirby says. He equates finding the right accelerator to applying to the right college. “There are an awful lot of college students who entered the wrong college for them, and it’s an expensive mistake,” he says. “If they took the time to interview students and graduates, and think upfront about what they need to get out of the experience, they would spend their money and time more wisely.” The same principle applies to accelerators, Kirby says. Each offers different resources, and most come with a price tag for joining – an investment of time or money in terms of an equity stake in the company, or both. Unless entrepreneurs do their homework before joining an accelerator, they will probably make the wrong choice, he says.U.S. Accelerators More Than Tripled Since 2010
Growth in programs surged after 2008
Source: Ian Hathaway, “Accelerating growth: Startup accelerator programs in the United States,” Brookings Institution, Feb. 17, 2016, http://tinyurl.com/
U.S.-based accelerators have surged in growth since 2008, when there were just 19 programs. The number of accelerator programs steadily increased to 172 in 2015, more than three times the number that existed in 2010.
Long Description Robinson agrees. “Just because you’re in an accelerator program, it doesn’t mean anything will happen,” he says. “Nothing has changed with your company except the opportunities are better.” The value of an accelerator is to put participants and their company in front of key decision makers, says Steve Kirsch, CEO of Token Inc., a banking software startup, who also participated in Plug and Play. “We were given an opportunity to pitch people we wouldn’t have otherwise known about without the accelerator,” he says. Yet even though Token found an investor through Plug and Play, Kirsch says he’s not sure the accelerator made a huge difference in getting his business off the ground. Kirsch says he and his team could have pitched investors without Plug and Play’s support. “You have to be clear what your goals are and what you need,” says Amy Millman, president of Springboard Enterprises, an accelerator for female-led, tech-oriented companies. “If you’re in it for the journey or to learn or you have an app and you need a community around you to learn this stuff, you can be less picky about the program you go into,” she says. “But if this is your life’s work, then you need to be really cautious about who you tie in with.” The more participants assert themselves, the more they will get out of the program, Robinson says. His advice is to define objectives, make a people-to-meet list and figure out how to leverage the relationship with the accelerator, because three months is a make-or-break time for any startup.Be Careful About Giving Up Equity
For a startup, giving up an equity stake is a big deal, Robinson says. “Make sure your accelerator isn’t just doing a horse-and-pony show, but that they are introducing you to strategic partners,” he says. Millman advises startups to think twice before giving up equity. “Right off the bat, you are giving away a percentage of your company, which will have an impact on its growth,” she says. “That might come back to haunt you as you grow, and for people in the earliest stages of development, that is often not something they think about at all.” Unlike most accelerators, Springboard Enterprises, a non-profit, doesn’t ask for an equity stake. “Ours is not a transaction,” Millman says. “Ours is a community.” Some startups will go from accelerator to accelerator because they need money, but every time entrepreneurs give up equity, they could be hurting their company, Millman says. Kirby agrees: “Your chances of getting funded go down the more equity you give away.” So before a startup goes to another accelerator and gives up more equity, the founders need to know why they are doing it. For instance, Kirby says, investors won’t be impressed if entrepreneurs have a consumer app that they launched unsuccessfully in Y Combinator, so they decided to give 500startups, another accelerator, a try. But, he says, investors will appreciate the story if there is a sound reason for the experience: for example, the first accelerator experience revealed that the venture would be more successful as a business-to-business product, so the entrepreneurs joined a business-to-business accelerator. “Failure is a big part of success,” Kirby says. “Investors love to hear that you are flexible enough to pivot and not just insist on being right.”Alternative to Accelerators: Free Resources
Diana Goodwin, founder and CEO of the successful startup AquaMobile Swim School, which offers private swimming lessons, never applied to an accelerator. “I decided I would leverage other resources to make my company grow,” she says. Goodwin started AquaMobile five years ago and, she says, the business brings in around $1 million in gross profits annually without the help of an accelerator or venture capital funds. “To me, it didn’t make sense to give up a portion of my company,” she says. Instead, Goodwin says she used free resources available through the state of Florida’s Small Business Development Center.
Diana Goodwin says she was able to launch her startup without the help of an accelerator.
Different Types of Accelerators
Most accelerators focus on companies that have a technology component to their business model, such as fintech, tech education, medical technology or fashion tech. While most accelerators require the business owner to move into a shared workspace for three months, not all do. Several virtual accelerators, including Circular Board and StartupPlays, offer a collaborative remote workspace. There are also accelerators that will work solely with female-owned startups, including Springboard Enterprises, Women’s Startup Lab and MergeLane, as well as accelerators focused on minority-owned startups, including DreamIt Access, a partnership between DreamIt Ventures and Comcast Ventures; NewME; and PowerMoves. Critics say accelerators are not diverse enough. A recent survey of eight high-tech U.S. accelerators by the Boston-based nonprofit Institute for a Competitive Inner City found that only 20 percent of the businesses supported by accelerators were owned by women and only 23 percent were owned by minorities.14 The research also found different levels of engagement: Female- and minority-owned businesses did not participate in the programming and resources offered by accelerators to the same degree as their white, male counterparts.15 Carolyn Rodz founded Circular Board, a virtual 90-day accelerator, in 2015 to support women who didn’t want to give up an equity stake in their business. It also provides support to female entrepreneurs whose business models aren’t technology-intensive along the lines of startups such as Uber or TaskRabbit, but are focused instead on retail, energy or health care.How Startups Apply to Accelerators
Be prepared for unfavorable odds: Most competitive accelerators have an acceptance rate of less than 5 percent.16 And have no illusions about motivation. Accelerators “are not your friends,” Springboard’s Millman says. “They like what you’re doing, they’ve done the math and they look at this as a way to make money.” Experts recommend that startups apply to 15 to 20 accelerators to increase their likelihood of being accepted. For example, an entrepreneur should consider applying to Techstars in Utah, where it is less competitive than in Chicago, New York City or Boston, Vendedy’s Souffrant Ntim says. The application process generally includes questions about the business idea, market and competitors as well as current successes and potential challenges.17 The typical applicant is in the early stages of business development and may not even have a finished product to sell yet. “If you don’t have a product, if you have nothing to accelerate, you could be wasting your time,” Souffrant Ntim says.
Amy Millman is president of Springboard Enterprises, an accelerator for female-led companies.
