This Will Make you Think Again about Accelerators
From Paul Graham’s garage to the board rooms of corporations: here’s how the game has changed, and what you need to know to pick the right program.
It’s been a while since we touched on the topic of the accelerator’s role in the tech and early-stage startup ecosystems, both in CEE where we live, and in the rest of the world. Having just taken a couple of trips to CEE capitals in search of promising startup talent, I wanted to circle back to this topic and talk about how things are changing, for the better, the worse, or sometimes the unknown.
Paul Graham founded Y-Combinator, what is now considered the prototypical Tech Accelerator, as a summer project way back in 2006. For years, at least until the founding of StartupYard in 2011 and for some time after, the definition of such an organization was broadly agreed: A cohort-based program of mentorship for startup founders, who received seed funding, important contacts in business, investments, and the tech industry, and other forms of support (such as office space), in exchange for equity in their young company.
This arrangement worked especially well for the first many years of accelerators because, as Graham himself would note, the key barrier to “starting up” was in those days a lack of access to the right investors and the right network, and the technical difficulty and expense of launching online software products and services.
By the time StartupYard was investing in companies like DameJidlo, and other more regionally focused service and marketplace platforms, these barriers had come down, but were still significant enough to block the advance of new ideas onto the market in many places, including in CEE. Startups lacked for both an activated customer base, and a community of smart-money investors they could rely on to understand the importance of something as simple as using a smartphone app to order a pizza. Anything now passe was, at one time or another, still a novelty.
When I joined StartupYard in 2013 shortly after our CEO Cedric Maloux, we shifted our focus to more global startups, focusing more on high-tech, preferably B2B startups with strongly defensible IP. Many of those startup barriers had come down enough that service and marketplace startups didn’t see the advantages of acceleration in the same way. Funding that had been difficult to find became abundant, and ideas no one would have supported a few years before were finding backing through crowdfunding, and through friends and family eager for a bite of the shiny digital apple.
Today the technical hurdles to starting up are pretty much all gone. That means that the key differentiators are no longer an ability to make a great website or an app, or master “growth hacking” (all of which do still help a lot), but in understanding deep, difficult business and consumer problems that it still takes quite a bit of clever engineering to solve.
Low hanging fruit have plenty of would-be pickers, which means the smartest and the most ambitious startups need more than speed and a clever idea. They need unique talents as well.
In our view, these changes have increased the value of StartupYard for member startups. A deeper list of tougher problems demands ever better mentorship and ever wider and stronger connections with a group of mentors who are plugged-in and can act as gatekeepers for the best talent with the best ideas.
At the same time however, they have also made the business of starting an accelerator easier. You can do an online business from anywhere, so you can also run an accelerator anywhere.
The numbers support that story as well. In their 2016 accelerator report, fundraising management platform Gust identified over 10,000 accelerated startups globally. Today we have accelerators coming out of our ears, particularly in Europe and America, where there are at least 7,000 self-identifying accelerators now operating. For some perspective, just 5 years ago, Get2Growth placed the total number of accelerated startups ever at just around 3000 from less than 200 accelerators.
Important to note here is that statistics have shown that the rate of actual entrepreneurship in advanced economies has not risen much in that time. The Kauffman Foundation’s analysis of entrepreneurship activity in the US (on page 13), shows that entrepreneurship rates rose after 2008, but dropped again back to historic levels by 2012. They have only just recently returned to the 2008 high. This means that while accelerators have proliferated in the past 5 years, advanced economies have not produced significantly more startups than before.
So what are all these new accelerators doing? Whatever they are, not all or even most are much like what Y-Combinator pioneered in the 2000s. Corporate accelerators. VC accelerators. University accelerators. Incubators. Equity free, on-site, off-site, remote, fixed-duration, long-term, tech, non-tech, and every flavor of almost every industry now has an accelerator attached to it somehow.
That on the whole is a mixed bag. It means that many more startups can gain access to local resources and a good environment to grow, but it also means that there is a broad menu of options that make it increasingly hard to see the trees for the forest. There is a lot of undergrowth in our startup forest, and a lot of potential distractions as well. Startups that need classic accelerator programs like StartupYard often don’t know it (or are not particularly motivated to make a change), and many who need the newer models think they need us instead.
This has all been driven too by a glut of public money available, particularly in Europe, for startups and accelerators. We have written about that trend and the attendant dangers in recent years as well. Still the diversity of options means that many more people can at least take the first steps in starting up without too much thought.
Now more young people want to run startups and want to join accelerators, but what was ambitious a decade ago is now commonplace. A different “type” of entrepreneur has emerged, raised on the promise that starting up is easy, and that there are few long-term risks to failure. So we are left with a generation who want to “do startups,” but mostly want to do them the safe and proven way, which is a bit of a contradiction. Yesterday’s innovation is today’s copycat.
I hesitate to call that “bad,” as it is really just different. In the face of that changing landscape, classic accelerators like StartupYard have skewed older, focusing on those startups who are ambitious and skilled enough to rise above the noise.
Starting up may be easier, but the problems the best startups are choosing to tackle have definitely gotten harder – or at least more complicated. When StartupYard was founded in 2011, tech startups could depend on a rapidly growing consumer mobile market that was ripe for innovation across the board. Apps, games, services, conveniences, and more were unexplored territory. Today a lot of that territory is explored, and the consumer software market has gotten a lot more crowded. There are fewer obvious problems left, and so non-obvious or previously impossible to solve problems have become the new focus.
Something else that has happened because of this lowering of the barriers is that tech startups have been getting older. The average age of tech founders in Silicon Valley has always been higher than most people expect. Between 2007 and 2014, it was 41 years old. In their Startup Activity Report of 2016 mentioned earlier, the Kauffman Index reported that only 25% of new startup founders in 2016 were under 34 years old. In 1996, that was 34.3%.
This was far from the case in CEE when StartupYard was founded. At the time, typical ages for founders in most accelerator programs was mid to late 20s. Even now, European founders are younger than their counterparts in Silicon Valley. A report in 2015 on the demographics of startups from the European Union placed the average age of startup founders at 34. That’s at least 7 years younger than American founders.
This has been changing recently, from our perspective. Today, the typical StartupYard founder is over 30, and many are in their 40s or beyond. I recently heard a great pitch from a founder who is 76 years old, and wants to join StartupYard. Of course the upper range for those who came of age with the internet and with a thriving IT economy has gone up over time. Europe was behind the technology curve earlier on, so it’s to be expected that founders are a few years younger on average.
That American advantage has been eroding however, and more significantly, we increasingly see more founders coming to the table in the middle of their careers, with significant business and corporate experience behind them. The startup life has become more attractive not only as a career starter, but also as a mid-life transition.
Whereas there was previously more activity among startups importing exciting ideas from the US or Asia into Europe, today European founders are a bit wiser, and maybe even a bit more original. Tech ideas increasingly are born of experience rather than of excitement for new technologies.
For a long time, the only business model for accelerators was an equity based approach. Accelerators offered hard-to-find funding and other perks in exchange for equity. Accelerators wanted hyper-growth startups that could scale quickly and hopefully globally as well. Today that equation has become more complicated. Not only is the market truly global, meaning there is more competition for less low-hanging fruit, but also startup costs have also gotten lower, while funding has become more available.
7 years ago the Angel Investor was a rarer species, and the ICO was nothing but a glimmer in the eye of early cryptocurrency innovators.
This could not have happened even as the number of startup founders continued to rise, without the extra money and resources coming from somewhere. Of course the potential market for tech products has grown, but it hasn’t exactly grown as fast as the startup ecosystem itself. For an answer to this, we have to look at how accelerators have changed with the market.
Today, many European startups can look forward to generous support from grant programs, availability of a multitude of sponsored incubators and other free stuff. The startup circuit is an endless buffet of free pizza and Amazon Web Services credits to make starting up almost risk-free. The biggest shift in this direction has been the rise of non-equity accelerators all over Europe.
First of all, I believe it’s important to note that we don’t view non-equity programs as “wrong,” or as inherently inferior. There are a number of equity-free programs that do a lot of good, and are very positive influences on the market. At the same time, there are plenty of equity-based programs that do very little good for their startups, and end up being harmful or at least a waste of time to many of the startup founders who join them.
That being said, it’s become more important than ever for startups to really understand how their interests align with individual programs and those who run them. Here are some of the questions that increasingly need to be asked by founders:
The mission of an accelerator, whether it offers investment for equity or not, has to closely align with the interests of founders who would join it. That cuts both ways too: if a founder is interested in building a lifestyle business, then he or she should pick an accelerator that is accepting of that level of ambition. Probably an equity free program in that case. On the other side, if a startup’s ambition is to scale rapidly and globally, then it should pick a program that is focused on helping startups to do that, and whose business model is also geared toward that end, ie: a for-equity program that benefits only when startups grow large and scale.
A corporate accelerator’s stated mission can be to promote and grow startups in a certain industry or with a certain focus. However, the mandate from the corporate backer could be just to generate positive PR. Plenty of corporate backed accelerators have folded because of this lack of alignment: corporate backers don’t have a lot of buy-in on the program, and so the startups end up not getting the support they expect, nor the open doors they were promised.
Such programs, having never generated anything the backers can’t live without, are easily put on the chopping block when a reorginazion happens.
Likewise, the stated mission of a for-equity program could be to “have a positive social impact,” when in fact its mandate from investors may be to generate a high return on investment. As we say, in all things, Follow The Money. However the accelerator makes money, it needs to compliment the startups it works with.
An unclear or contradictory mandate can be a problem, because it may mean that the decisions the accelerator management make are not necessarily motivated by your shared interests, but by the interests of the backers or sponsors.
This also extends to the accelerator’s selection process. Founders need to be aware of who is driving the selection decisions, and on what basis the decisions are being made. It’s not automatically wrong if a sponsor is driving the decisions, but what does that mean, in turn, for your relationship with the management? This must be considered too.
The previous point touches on this, but it deserves specific mention. Any accelerator program should have some form of vested interest in the success of portfolio companies. This does not necessarily have to be through equity, although equity is the simplest mechanism for creating such an interest.
At StartupYard, our interests are quite clear, because our future is fully dependent on the performance of portfolio companies. We don’t make a cent before an exit, meaning either the startup buys its equity back from us, a larger investor buys our equity as part of an investment in the startup, or the company is sold outright. In order to do things this way, we must be prepared to support our portfolio companies for 5 or more years before realizing any profit at all.
StartupYard’s eventual profitability depends on long-term relationships with our companies, and our ability to fundraise for new investments depends on how those companies are performing, even years after our program. That gives us a powerful incentive to offer support and to push our invested companies to grow and accell.
Think hard about what will motivate the accelerator to give you its support down the road. If all the monetary incentives are covered by sponsors who have already paid by the time you’ve launched, then why does the accelerator expend effort and resources supporting your growth and network later on? There are can be a range of incentives, such as success metrics from the sponsors with a strong focus on the performance of portfolio companies. Maybe accelerators depend on your performance for future sponsors. These are valid incentives as well. Making sure the motivation for your accelerator is there needs to be a focus when choosing the right program.
An accelerator’s ability to support its portfolio companies during and after the program is also determined by its existing footprint in the industries where they focus.
Every accelerator has some kind of footprint, even with its first batch. That is the network of mentors, sponsors, partners, and investors that are part of the launch. With accelerators that have many batches behind them (StartupYard is now taking applications for our 10th Batch), the footprint should also include a healthy range of alumni who are already doing business in fields that are relevant to your startup.
If you’re a B2C/B2B2C security startup with a hardware component, like Steel Mountain from StartupYard Batch 8, you want to see if the accelerator has a) a portfolio of security focused companies and partners, b) a portfolio of B2C companies and c) a portfolio of hardware companies and relevant partners. The match can never be 100% perfect (or else you’d just be a carbon copy of an existing portfolio company), but it should match broadly over a number of categories.
This match with the portfolio offers you a “beaten path,” to the doors of advisors, customers, investors, and partners who have proven their ability to work with startups, and who have existing relationships with your fellow portfolio companies.
Plus, the quality of previous startups and their relationships can open doors for you, because the network trusts the accelerator’s proven judgement and track record. Our startups get meetings they would not get if they weren’t our companies, and that is not just because of us, but because of their fellow alumni as well.
If the accelerator has done its job and kept its relationships with portfolio companies, then you can essentially skip many of the steps that your predecessors had to work out the hard way, and jump directly to working with the right people. As the portfolio grows, so should the value of the network for you, if you pick the right program.
I believe it should be taken as positive that the accelerator model, or at least the idea of acceleration and formal mentorship based programs, have become so mainstream. We are just beginning to see their influence extend beyond the core tech community to universities and to other industries too. Non-tech startups or other teams and groups now have increased access to the resources of established ecosystems like food service, entertainment, manufacturing, retail, and even the space industry.
The accelerator format gives a name and a sense of purpose to those efforts, bringing down the barriers to ownership of small businesses and increasing healthy competition in more than just tech.
While this is going on, established tech accelerators like StartupYard have to continue to reposition themselves as important gateways for specific kinds of companies. The more open large corporations and governments are to tech startups, the more we have to refine our focus to maintain a clear set of benefits for member companies. That’s what we’ve done continuously for 7 years, and there is no sign that this pace of change will slow down anytime soon.
What is old inevitably becomes new again. The 20th century was the age of the corporation and big government. The 21st century, we think, will be the age of ownership and self-direction; the return of so-called apprenticeships and non-standard, personalized education. That is why accelerators have evolved into their present role: it is becoming clear that lifelong employment is no longer any guarantee; the future belongs to startups.
There may yet come a day when almost anyone can attend an accelerator, for almost any kind of career path. Maybe future generations will see this as the beginning of a bigger shift in the economy and society. We do hope so, because though we aren’t ready just yet for everything to be a startup, we are building a future where almost anything can be one.