Special report:Tech startups
Accelerators
Getting up to speed
Jan 18th 2014 | From the print edition
IT FEELS LIKE some prayer meeting. Two middle-aged men start by telling the audience how important it is to pitch in. A booming voice announces the acts, greeted by loud cheers; then some enthusiastic young people jump onto the stage and start talking about their missions. One wants to help women sell their unused clothes and shoes; another to teach children to manage money more responsibly; a third to bring the reinsurance market online at last.
TechStars, a chain of accelerators (in essence, schools for startups), is known for putting on a good show, as it did in London in late September. But such graduation ceremonies can now be watched almost anywhere: everyday is “demo day” somewhere around the world. Accelerators’ champions already see them as the new business schools. “I’d rather get $100,000 and be a case study than pay $100,000 to read case studies,” says Dave McClure, the founder of 500 Startups, an accelerator based in Silicon Valley.
The exact number is unknown, but f6s.com, a website that provides services to accelerators and similar startup programmes, lists more than 2,000 worldwide. Some have already become big brands, such as Y Combinator, the first accelerator, founded in 2005. Others have set up international networks, such as TechStars and Startupbootcamp. Yet others are sponsored by governments (Startup Chile, Startup Wise Guys in Estonia and Oasis500 in Jordan) or big companies. Telefónica, a telecoms giant, operates a chain of 14 “academies” worldwide. Microsoft, too, is building a chain.
Predictably, many observers talk about an “accelerator bubble”. Yet if it is a bubble, it is unlikely ever to deflate completely. Accelerators are too useful for that. Not only do they bring startups up to speed, provide access to a network of contacts and give them a stamp of approval. They also perform a crucial function in the startup supply chain: picking the teams and ideas that are most likely to succeed and serving them up to investors.
Business schools emerged in the second half of the 19th century to meet an educational need not provided for by other institutions. Accelerators are trying to fill a similar gap today. But they also call to mind another sort of educational institution that became popular during the dotcom boom: incubators. The idea was to give startups a home and offer them technical, legal and other services. Yet many of the fledglings did not fly. The incubators often felt too cosy, and their operators had no interest in pushing out their tenants as long as they were paying rent.
Applicants are rigorously screened. For the most recent course 74 were selected from a field of more than 2,600 and paid between $14,000 and $20,000 to attend
The mixed success of incubators was one reason why Paul Graham, a former software entrepreneur and angel investor, chose a different set-up for Y Combinator, which went on to nurture such successes as Dropbox and Airbnb. Founders who take part in its programme have to move to Silicon Valley for the duration, but Y Combinator itself is not much more than an assembly hall in the heart of the region where participants meet for weekly dinners, listen to guest speakers and talk to Mr Graham and his partners.
It started as a summer programme and the roots still show, with courses running for three months, about the length of an academic summer break. Teams all join at the same time, in batches. Applicants are rigorously screened and the best invited for interview. For the latest batch 74 (including six not-for-profits) were selected from a field of more than 2,600. Those lucky few get paid between $14,000 and $20,000 to attend. In return they have to hand over about 7% of their firm’s equity.
Y Combinator is still the most successful startup school. Its boss maintains a steely control reminiscent of Apple’s late Steve Jobs, but others adopt a more open approach. TechStars, the model for most accelerators, has even created a Global Accelerator Network for startup schools. This is not an entirely disinterested move: it aims to create a platform for like-minded organisations in which its programmes will have Ivy League status.
Founded in Boulder, Colorado, by David Cohen and Brad Feld, two angel investors, TechStars is also highly selective and takes an equity stake in the companies it accepts, and it, too, admits new startups in batches for three months at a time. But it feels more like a real school than does Y Combinator: founders toil together in classes of a dozen people, and they have teachers-cum-mentors who serve as sounding boards. The company has replicated its model in five American cities and in London.
The chain’s classroom in Britain’s capital is a floor in Warner Yard, a co-working space in the district of Clerkenwell. Teams share tables, but banter is kept to a minimum. “Get shit done,” reads one scribble on a blackboard. “Wasting two out of seven days is not an option,” proclaims another. Dominating the room is a big digital clock counting down to demo day when they all have to present their projects.
Three months in purgatory
“That clock is basically your life,” says Laurence Aderemi, chief executive of Moni, a mobile service designed to make it easy to send money abroad. He initially sat right in front of the clock, but moved his seat after it appeared in a nightmare. Twelve-hour working days are at the lower end of the scale. If necessary, founders dispense with sleep altogether and work non-stop. Some sever all contact with friends and family during the programme.
Most accelerators do not have much in the way of a fixed curriculum. Managers of startup schools regularly meet up with the founders and organise a few classes on such matters as taxes and payroll. They also make extensive use of mentors, mostly experienced entrepreneurs, investors or other experts who have seen it all before.
For mentoring to work, founders and mentors have to be well matched, so TechStars programmes start with a mentoring marathon: over ten days founders meet more than 100 people for half an hour each. SeedCamp, another accelerator based in London, regularly brings together two dozen invited startups with nearly 400 experts over the course of week.
This can be both useful and confusing. At a recent SeedCamp session the four mentors quizzing the founder of LegalTender, a marketplace for legal services, soon home in on the central problem of such a business: reaching a point where demand and supply feed on each other. But they offer different kinds of remedies: one suggests starting off with recruiting legal firms, another specialising in certain kinds of legal work, and a third working with a professional organisation.
Mentors usually do not get paid, but they seem to enjoy the experience. “It’s rejuvenating my brain,” says Kevin Dykes, a serial entrepreneur who is a regular at Startupbootcamp in Berlin, “but I also want to give back to the community.” Some mentors become paid advisers or even investors. At TechStars they are often the first people to put money into a startup after demo day.
Cynics say that mentoring is just a form of due diligence and a way of creating a “proprietary deal flow”—meaning privileged access to good deals. Some accelerators themselves have funds for additional investments in alumni’s businesses, or work with venture-capital funds that put money in all the startups in a batch, sight unseen. They see it as a bet on an index fund, hoping that among the startups will be a few big winners—an approach to venture investing known as “spray and pray”.
But demo day remains all-important for attracting investors. Startups are told to think about their pitches from the day they enter the programme. The last few weeks are often dominated by rehearsals. The presentations themselves are usually only a few minutes long, but they have to do far more than provide information about what the firm does, the pedigree of the founders and the size of the market. To persuade an investor to ask for a follow-on meeting, they must be masterpieces of storytelling about the startup’s chances of success.
“You have to pull them into your reality-distortion field,” says Paul Murphy, the founder OP3Nvoice, another TechStars London startup that sells technology to search audio and video recordings. The competition is not so much the other firms presenting but the investor’s smartphone, where another message is always demanding attention.
When you add it all up, accelerators are quite different from business schools. “One helps you with that startup, the other provides you with a framework for 20 years,” says Jon Eckhardt, who heads the entrepreneurship centre at the University of Wisconsin-Madison and has co-founded an accelerator. Still, he thinks, for most founders, startup schools are probably worthwhile. Much of the learning takes place among the founders themselves, says Susan Cohen of the University of Richmond, Virginia, who has written a dissertation on the subject. Teams are keen to help each other: the better the batch, the bigger the chances that all its members will attract investors.
But founders may lose a slice of equity and time, which is at a premium in the fast-moving tech world. “You know what I’m tired of? Rich guys launching ‘startup accelerators’ so they can rip off new startup founders,” said Ryan Carson, a British entrepreneur, on his blog. Others worry that startup schools drain scarce talent from fast-growing companies and accelerate too many ideas that struggle to find funding.
More fundamentally, it remains to be seen whether accelerators are good business. For many, making money is not the goal: big companies often launch them to tap into the startup community or as a marketing exercise; governments subsidise them to foster their entrepreneurial ecosystem; and many angels see their investment in them as a way of giving back. But most accelerators that take equity in their startups hope that at least some will return a respectable multiple of the investment.
It will take time to find out whether those hopes are fulfilled. Most accelerators were established after 2010, and most startups that have gone through them are still works in progress. Research about accelerators is in its infancy and there are no generally agreed ways to evaluate their performance.
Still, a financial picture of the industry is starting to emerge. Jed Christiansen, who works for Google in London, tracks 182 accelerators which have nurtured more than 3,000 startups. Between them, those have raised $3.2 billion in follow-on funding and generated “exits” worth $1.8 billion. This landscape is dominated by American firms, with Y Combinator and TechStars franchises leading the pack (see chart 3).
This suggests that accelerators are a winners-take-most market. Founders are highly mobile, and the best will try to get into the leading startup schools, making it harder for the rest to turn a profit. “There will be a washing out,” predicts Alex Farcet, the founder of Startupbootcamp.
But accelerators alone will not ensure success. It takes a much broader ecosystem for a startup to thrive.
From the print edition: Special report
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