Are Accelerators Misunderstood?

I was having dinner with a friend a week ago or so, and we were talking about (“shocking”) the startup ecosystem.

As some point, I don’t really remember when, he said “You know, I just don’t know if accelerators are helping the ecosystem.”

My gut reaction, being such a huge supporter of Techstars, 500startups, Y-Combinator, UpWest Labs and the like, was “Whaaaaaaat you talkin’ about Willis?”

For our younger readers, that is a reference to the seminal television show Diff'rent Strokes, staring Todd Bridges as Willis, Gary Coleman as Arnold, and Dana Plato as Kimberly. The catch phrase, as shown above, was usually uttered by an exasperated Arnold to his older brother Willis. As a side note, Todd Bridges ended up in jail, Dana Plato in porn, and Gary Coleman is dead. Oh the wonderful ‘80s.

Are accelerators really harmful? No, but I do believe they are mis-understood. The larger ones, Techstars and Y-C, are clearly catalysts for job and company creation, and the local entrepreneurial communities (with Boulder, CO being the standard bearer) are greatly improved by the existence of the accelerator.

But what about beyond that? The exploration of that has to start with the basic premise of the accelerator itself.

It exists to make money.

Whether its has a venture fund or angel money attached, the accelerator is looking to return value to investors, and while it doesn’t operate as a standard fund (make an investment in a set of companies and then periodically check in at board meetings, etc.) it is truly no different in expected outcome, other than scale.

Think about it. If I were an angel investor that normally invested between $10 - $30,000 in a company, how much more awesome would it be to take a group of companies that I am interested in investing in, give them a bit of capital, put them all together, and watch them work for a set period of time? Add in some mentorship, access to companies they couldn’t get to on their own, and see if they can truly accelerate their businesses.

At the conclusion of that time, I can decide to invest more, or see them continue to increase in value via additional investors, traction, etc.

This is different than the standard incubator model, which provided office space, some joint resources and discounts in return for equity. Often there was little to no mentorship, a set incubation period, or a “demo day.”

Now I have 10, 20, 40, 50, how ever many companies, with small angel-type investments. I put them in a room for three months, give them some resource and mentorship. Of that group, about a third truly accelerate and will receive additional funding. A third fall into the middle, and a third end up at the bottom, of which many will fail. Solid hit rate, and the companies that fail? Well, many of them will probably go work for the companies that succeed. A win-win.

But somewhere along the way, accelerators started to up their game by offering guaranteed funding. Back in January, I wrote that overall this was a bad thing. It would drive people to start companies with a lower potential for break out success. The top accelerators would now have the extra burden of becoming filters and should start failing companies out of the program as soon as it was clear they had no chance of success.

The opposite happened. Y-C has some of its biggest classes ever. Techstars launched two new programs, and dozens of accelerators exploded on the scene. Was this because of the guaranteed funding? No, it was because companies started to see accelerators as a way to guarantee getting funded, and VCs started to direct more companies to accelerators for the same reason they started in the first place – to watch them closely over a short period of time to determine if they warranted a larger investment.

Somewhere in all of this, the basic value of the accelerator for the company got switched from company acceleration to guaranteed financing. For mentors it shifted from giving back to the ecosystem to getting free equity in a hot startup and we saw an advisor explosion. And, for the top accelerators it became so much more about competition around numbers, and those numbers are one of three things: exits, job creation and money raised.

Now this post is becoming MG Siegler-eque in length, so I apologize, but we need to discuss a unique “perfect storm” that occurred just as accelerators were taking off, the acqui-hire. Love them or hate them they are part of the ying to the yang of the accelerator. Yes, they all want to see big companies built and grow out of their programs, but like a traditional venture fund, the reality of an AirBnb or SendGrid is pretty small, and its a numbers game.

I’m not that great at math, but lets say an accelerator gives its companies $25,000 for 8%. Company gets acqui-hired for $5,000,000, the accelerator gets ~$350,000. Not a bad return for an angel(ish) type fund. Do that 10-15 times a year, and you have a solid returning investment vehicle. Push out a Dropbox, and life is grand.

Which leaves us at a point where, for all intents and purposes, its beneficial for an accelerator to bring companies on that have a low “big company” potential and a short acquisition horizon. Make it a volume game. Until the acqui-hire market dries up, and there seems to be some indication that seems to be happening.

What does that leave us with? A bunch of companies that have gotten seed investment that have unrealistic valuations based on the energy the accelerator afforded them that have little to no chance of getting a solid Series A, and no place to put them, as big companies slow down their acqui-hire activities. Creates an opportunity for the tech press (which is made up of almost no entrepreneurs, investors or the like. Its like a sports reporter who has never thrown a ball…) to scream about Series A crunches, and whatnot, and it creates a net positive effect on the ecosystem (after what might be a bad rush of companies failing) by putting talented people who have now had startup experience back into the talent pool to help the companies that are succeeding, or start another company just a little bit wiser.

Will there be an accelerator collapse? Probably. There are only so many fundable entrepreneurs with solid ideas, and running an accelerator effectively is really, really hard. (Not to mention the expectations it creates).

In my best double rainbow voice, “What does it all mean???”

And, most importantly, it is up to everyone to make the startup ecosystem better, and not rely on accelerators and investors to do it for us.

Accelerators are misunderstood. It’s our fault as much as theirs, and we have to drive entrepreneurs and accelerators back to basics.

Build something awesome. Support the entrepreneur changing the world.

What else is there?

 
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