The business accelerator model was first introduced 10 years ago, when Y Combinator was launched in the U.S. Since then the model has been widely replicated and accelerators have proliferated throughout the world. As of 2015, there are approximately 416 accelerators in U.S. and 100 in Europe. At its core, accelerators aim to support firms in early stages of development generally via the provision of funding and support services. What has been astounding is the growth of a number of firms that have worked with certain accelerators. For example, the total valuation of all the firms that were working with Y Combinator in April 2012 was $7.78 billion.
Indeed, there is a strong general belief amongst the public and startup community that accelerators are able to help firms grow and improve their sustainability. This has been somewhat supported by research findings, that have discovered that accelerators: “increased the level of company survivorship by 10% to 15% by the 5th year following the exit from such a programme. Furthermore…the rate at which companies get acquired after completing top tier US programmes is significantly higher than the average rate for US VC backed companies.” In order to assess the extent to which accelerators help growing ventures overcome the funding challenges and contribute to their needs more effectively, we must gain a better understanding of how accelerators operate.
In essence, accelerators operate programmes that are catered to new and growing ventures. Although there are many different accelerator programmes in existence, they normally share similar characteristics. Accordingly, there are 5 specific common characteristics that come to define accelerators in general:
- Accelerators offer time-limited support comprising of programmed events and intensive mentoring. This is often realized through the provision of office space, coaching, mentoring and even educational courses to early ventures. At the end of which, ventures will usually pitch at an organized demonstration day that is attended by investors and the media.
- Accelerators also provide a small investment, in exchange for a small equity stake. Although the amount varies from programme to programme, it is on average between $20,000 to $50,000 for a 5 to 7% equity stake during the first 3 months of acceleration.
- Distinct from business coaching with its focus on individual businesses, accelerators programmes are characterized by the simultaneous presence and participation of other ventures during the length of its programmes. These ventures form the cohorts of the programmes and have been a recognizable defining trait of many accelerators.
- Most programmes feature an application process that is open to all; yet the admission process is generally very selective and also highly competitive often with each accelerator possessing its own exacting criteria for admitting participants.
- Accelerators focus on admitting and working with founding teams rather than mere individuals, which is reflected in their admission criteria as well as the nature of their programmes.
Accelerators & Funding Gap
Bearing in mind the aforementioned characteristics, it may initially appear that accelerators do not effectively alleviate the funding issues already encountered by growing ventures. Particularly, when many accelerator programmes have very strict and competitive admission criteria. In fact, it is widely known that many notable accelerators generally carry high rejection rates. For example, annually Y Combinator only accepts 2% of received applications, whilst Techstars only accepts less than 1% of its applicants. In addition, it may seem that even when admitted, the funding amount provided by accelerator programmes at the outset is miniscule in comparison to other financing options that may be available.
However, these assumptions may be challenged when one carefully examines the nature of such programmes. It can be argued that although accelerator programmes are highly competitive; once admitted, growing ventures have a comparatively higher chance of receiving further investments and funding for several reasons.
Firstly, it has been recognised that the selective nature of the admission process has been utilized as a filter and vetting exercise by investors to focus on more viable, talented and higher quality ventures. Although this is not to imply that admission necessarily translates into successful subsequent funding, it suggests that gaining admission may actually bring a greater degree of validation that external investors are generally looking for in investment decisions; particularly, when the accelerator is very well known.
Secondly, accelerators provide ventures with the opportunity to network and connect with a wide network of investors through organized networking, pitching and demonstration events. Unless led by an experienced entrepreneur with prior industry contacts, many early ventures would not ordinarily possess such networking opportunities with potential financiers. These opportunities are important in allowing growing ventures a chance to develop strong ties and relations with potential investors.
With that said, the remediation of the funding issues faced by early ventures is also secured by the additional value-added benefits that are tied to the nature of accelerator programmes.
Accelerators’ Benefits for Growing Ventures
When carefully examined accelerators offer a range of unique benefits that not only contribute towards helping early ventures overcome the funding gap but also go directly to contribute to their growth:
i. Growth Facilitative Ecosystem from Shared Space
The acceptance of numerous teams as well as the provision and imposed requirement of having these teams work within a shared office space creates an ecosystem that is facilitative of further venture growth. From this environment, growing ventures have the opportunity to meet, network and interact with their cohort which consists of other individuals from the industry, some of which may stem from more experienced ventures. These cohorts may provide feedback, advice or even ideas for one in informal and formal interactions creating a unique learning experience for ventures within the programme that is hard to replicate in other models. The effects of this has been duly recognised by certain researchers, who uncovered that accelerators provided many effective learning opportunities via “co-created” knowledge which arises from the mixed interaction between human actors facilitated by the shared physical spaces. At the same time, the peer support opportunities that may arise from such environments cannot be discounted, especially when it is understood that many founders face the stresses and challenges involved with developing a venture.
Most accelerators possess and offer capable mentors that provide valuable feedback and advice assisting ventures in achieving their growth potential. The insights and acumen they can offer to early ventures cannot be overlooked as many are entrepreneurs have developed successful ventures from scratch whilst others “have seen the 10,000 horrible things that can happen to startups.”vii Mentors can draw on different experiences and expertise to offer guidance and knowledge on anything from venture management to product development and market execution strategy. Indeed, many accelerators have prided themselves in being able to create immense and impressive networks of mentors that are drawn from various industries with different expertise. Notable accelerators such as Axel Springer P&P Accelerator provides its cohorts access to over 90 mentors. This is an important value that many ventures can reap from accelerators especially when they are in early stages of growth and development or have a lack of commercial experience. The mentorship can contribute in allowing such ventures to become efficient, advance and develop stronger propositions that may result in higher growth and stronger chances of funding from other external financiers.
Drawbacks of Accelerators for Growing Ventures
Although our examination highlights that accelerators can serve to provide a more effective way for growing ventures to raise funds, considering the value-added effects it possess, there are certain innate drawbacks that growing ventures should take into account:
i. Lack of Uniformity in Acceleration
One of the fundamental issues that plague accelerators is that many programmes differ and vary from one another. There is thus a lack of uniformity and consistency which means that the benefits and value addressed above are not necessarily available to all programmes; they would be dependent on the nature of each accelerator and features of each programme offered. This lack of uniformity means that growing ventures must spend a considerable amount of time conducting research into various programmes in assessing whether to apply for acceleration.
ii. Competitive & Selective
As identified earlier in its characteristics, many accelerators operate a competitive and selective application process, especially those that are notable and reputable such as TechStars, Y Combinator and Seedcamp which often see high rejection rates. This may effectively mean that many early ventures may find it difficult to access business acceleration even if they desire to do so.
iii. Geographical Limitations
With physical offices as a core characteristic of accelerators, one should also take into account the geographical requirements of accelerators when considering this option. Specifically, many accelerators are only available in certain locations which require geographical relocation if the programme is pursued by ventures. This may now doubt translate to high costs or even opportunity costs that may be tied to certain geographical locations. The issue is further heightened for certain geographies where accelerators do not have a presence such as Asia.