Home > Uncategorized > A few thoughts on accelerators

A few thoughts on accelerators

Depending on who you ask, we might be in an accelerator bubble. That, of course, depends on how you define "accelerator" and "bubble". While I don't feel qualified to assess the latter, I do know a few things about accelerators. My company, BuildingLayer, participated in Betaspring over the summer, I have several friends who have gone through other accelerator programs, and have a few mentors who almost started one back in 2008. This may not make me the world's foremost expert, but as the model is not yet a decade old, I feel qualified enough to provide some useful, high-level information.

Because I have been running a startup in the Midwest (where it's rare that someone reads the latest Techcrunch posts over breakfast) I frequently get asked about how accelerators work. It's an intriguing proposition, as many people would love to help create the next Dropbox, AirBnB, Occipital, or Sendgrid. But there are a few intricacies that make this model a bit unfamiliar. Often, the people asking are experienced entrepreneurs (but usually not from a software background), investors (usually not in technology companies), and economic development officials (from both government and academic perspectives). I've recently realized that my somewhat coherent picture of a modern accelerator can greatly differ from the more well-known business incubators of the past. For clarity, here's my definition of a typical seed-stage accelerator program:
  • Finite time (typically 3 months)
  • Mentor-driven (it's not about the money, it's about the people)
  • Batches of multiple early-stage companies (typically 10)
  • Equity investment in companies (the accelerator's economic driver)
The important note here is to differentiate the accelerator program from "business incubators", which often don't have a finite time period (at least not as short), don't rely as heavily on a formal mentoring process, accept companies as they come rather than in batches, and may not take an equity stake in companies in exchange for these services. Both fulfill a need, but they are not the same thing.

While I discuss accelerators frequently, a recent question sparked this particular post:

"It seems as if every accelerator program is focused exclusively on technology/internet based companies.  I know that being "capital light" is reason for this, but I am trying to understand why other types of businesses aren't typically included?  There are certainly plenty of great ideas and foundations for successful businesses that don't fit the typical accelerator company model that could really benefit from a similar program."

This question is very important, as it relates to the core reason that a group of people choose to start an accelerator. If the goal of a program is for benefit of the community and of the entrepreneur, there are certainly companies that could benefit from a program similar to an accelerator. If the goal of the accelerator program is to improve the likelihood of success for high-risk, high-reward investments, and to make money for the investors and entrepreneurs, then I see a few reasons why we have seen the emergence of accelerators that focus on a particular type of company.

I think the low initial capital requirement of web/application companies is only one of the reasons that they fit well into the accelerator model. I think there are 3 other reasons that are more important:

1. New Technology -> Disproportionate value creation
Founding (and funding) startups is a high-risk, high-reward endeavor. The entrepreneurs and investors involved are not typically looking for a small return, even if it is guaranteed. To justify the high risk, and accomplish a much larger return, startups need to either use or create technology that is dramatically better than what currently exists, or that enables them to access a previously inaccessible market. Software companies (the majority of modern technology startups) also have the advantage of having a near-zero cost-of-goods-sold, so when sales volume increases, revenue often increases disproportionally to costs (ie low variable costs).

2. Web = broader, cheaper, more targeted distribution
The web provides a significant advantage as a distribution channel, even for businesses that are selling traditional products/services (such as retail). The web enables any business to reach almost any consumer in the world. It does this for a far lower cost than was previously possible. Part of the reason that this cost-of-customer-acquisition is significantly less expensive is the ability to target the right customers, instead of using spray-and-pray mass-marketing techniques. This and other waste reductions has allowed online retailers to quickly become viable competitors to brick-and-mortar retailers in a much shorter period of time. Additionally, this rides a trend of increased business and consumer internet usage, and an increase in online purchasing habits.

3. Risk profile: fewer types and faster mitigation
For most technology/internet (read: software) startups, there are often fewer regulatory risks than other types of businesses (no FDA trials, no restaurant health department inspections, no OSHA requirements). Financial risks are lower, as the primary costs are keeping the founders alive. The primary risks are technology and market. On the technology side, many startups make use of an assemblage of open-source software components (such as Linux & Apache to power servers). By building on top of proven software (that someone else maintains for free), this reduces the number of technology failure points. On the market side, the challenge is determining product/market fit. Based on the advantages of the web as a distribution channel (and the near-zero COGS), technology companies can more quickly iterate toward product/market fit. Based on this risk profile, it's reasonable to expect that a web/software startup could significantly mitigate key risks during a 3-month period, while other companies (such as medical device companies) could take several years. This risk reduction makes the startup more attractive to investors, and as getting a startup to a "fundable" state is one of the primary measurable goals of an accelerator, this is important.

I do think that other types of companies with low capital requirements would benefit from three months of mentoring and focused work on their business. A non-profit that does this (such as the SBA) could provide great value to a community. However, small businesses and startups are different, and I don't think that small businesses can provide the potential return to the investors who fund a for-profit accelerator. In order to make enough progress in 3 months to achieve the effect that accelerators are designed to foster, an accelerator company needs to take advantage of the technology, distribution, and risk profile advantages that typical startups embody.

One disclaimer: I live and breathe this world of early-stage software companies. It is entirely likely that I am overlooking some opportunities. If you have insight into another type of company that would fit into this model, and provide the desired return to investors, I would love to learn more about that.

Finally, my business partner Brian is at a Techstars Network conference this weekend. I'm really excited to see what comes out of this meeting of the partners and alumni of the leading incubators from around the world.

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