Business Accelerators Do they pave the path for startup success?
Executive SummaryAre 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.8
Do 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/