Disrupting The Disruptors: Startup Accelerators Feel Pressure To Evolve

A decade ago, eager entrepreneurs with little business acuity and in need of funding turned to startup accelerators for help. From the outside, these programs had an air of exclusivity with the source code to build successful businesses.

Now that image seems passé.

“New models are emerging on how to create ventures and scale them,” says Martin Ihrig, an adjunct professor of entrepreneurship at Wharton and practice professor at Penn’s Graduate School of Education.

The global explosion of interest in entrepreneurship has spurred the growth of tailor-made accelerator programs to service a startup culture no longer tethered just to Silicon Valley. The evolution of accelerators — business immersion boot camps that usually take a percentage of equity to help launch companies — can be found in scores of new programs offering budding entrepreneurs all sorts of incentives to join.

The original startup accelerators — Y Combinator and Techstars — have spawned a cottage industry with estimates ranging from 300 to more than 2,000 worldwide, according to business professors Susan Cohen of the University of Richmond and Yael Hochberg of the Massachusetts Institute of Technology.

The reduction of entry-level costs has played a primary role in the growth of the startup ecosystem, says Wharton management professor Ethan Mollick. He adds that the cost of launching a web-based startup has fallen by three orders of magnitude since the late 1990s by some estimates. “What used to cost $3 million to do now costs $300.”

The easy access not only has led more people to launch businesses, it also has affected the way to fund entrepreneurs, leading to questions about the value of early stage seed-fund programs.

“It used to be that VC investors were very important,” says Mollick, whose research includes early-stage entrepreneurship and crowdfunding. “When you needed $2 million to launch your website there weren’t many people to give you $2 million. You had to go to a venture capitalist.”

“The best [accelerator] programs have a substantial impact. The worst programs can probably cause damage.”–Dave McClure

Mollick says the new equation has led to competition among venture capitalists. It started with the rise of super angel investors in the mid-2000s who spent $100,000 to $200,000 on Silicon Valley pet projects before venture capitalists got involved. “They were starting to take more value of the startup because they got a big chunk of the startup early.”

Then the landscape changed again in 2005 when computer scientist and essayist Paul Graham co-founded Y Combinator, which has since graduated such companies as Dropbox, Airbnb and Disqus. Investors realized accelerator programs could get them in on the ground floor with promising companies while they could shape their progress from the start.

Incubators Grow Up

Accelerators were born out of the incubator concept that began in the late 1950s. Although many entrepreneurs use the words interchangeably, incubators generally are collectives where infant businesses share working space and resources, and get occasional mentorship. Accelerators are fixed-term programs generally lasting from three months to six months that target projects showing promise.

Accelerators help entrepreneurs develop operations and strategies with guidance from advisors and mentors, as well as providing rent-free office space and other infrastructure benefits. The programs usually culminate with graduates pitching their ideas to potential investors. About half raise capital, which are good odds considering about one in 100 startups overall get funded, according to George Deeb, managing partner of Red Rocket of Chicago and author of 101 Startup Lessons — An Entrepreneur’s Handbook.

However, entree into accelerators can cost a startup from 2% to 10% equity. Dave McClure, the founder of Silicon Valley accelerator 500 Startups, cautions entrepreneurs to choose wisely when considering a program. “The best programs have a substantial impact,” he says. “The worst programs can probably cause damage.”

Techstars of Boulder, Colorado, followed Y Combinator in 2007. Over nine years, Techstars has become one of the world’s leading accelerators, with programs in Berlin, London, New York, Cape Town in South Africa, and Tel Aviv, among other locations. “Ten years ago, you would have been forced to relocate to Silicon Valley before they would have cut that check,” says Deeb.

Silicon Valley accelerators “overwhelmingly tend to fund men, they overwhelmingly tend to fund white men, they overwhelmingly tend to fund white men from top schools.”–Ethan Mollick.

According to Techstars, a $100,000 convertible note is automatically offered to all startups upon acceptance. The note converts at a pre-money valuation [the valuation before outside funds or the latest rounds of funding are accounted for] of $3 million to $5 million, the company says.

Those who enter the program give up 6% of common stock for the loan. They also receive lifetime access to Techstars’ resources, hands-on mentorship in a three-month program with office space, $20,000 in living expenses and connections to more than 5,000 experts.

Deeb, a founding Techstars mentor, is a staunch proponent of the model that vets startups before investors hear about them. Techstars Chicago picks 10 companies out of 1,000 applicants, says Deeb. This way investors hear pitches from only the most promising startups as determined by the accelerator.

But of course, well-known accelerator programs are not the lone path to funding and support. Another tentacle in the ecosystem can be found in Techstars’ collaboration with major corporations. Since 2015, Techstars had partnered with such heavyweights as Barclays, Disney and Sprint to create accelerator programs for each company.

Disney did not renew its contract with Techstars in early 2016 but continues to operate a startup accelerator. Kevin Mayer, Disney’s executive vice president of corporate development, has said the company isn’t investing in startups in order to make a quick profit like a typical venture capitalist. The entertainment company is more interested in creating cutting-edge products it can use, as well as revitalizing its leadership by staying at the forefront of innovation.

Corporate leaders figure they can train and support aspiring entrepreneurs to be part of innovative projects in-house instead of having to pay millions later on to acquire them. “Opening an accelerator is a strategic decision that allows big corporates to stay relevant and competitive in a rapidly changing economy,” Microsoft’s general manager of accelerators Zack Weisfeld wrote this year in an opinion piece for Forbes.

Many Tracks

Charles Bonello, a New York entrepreneur, investor and startup tinkerer, is playing the classic role of disrupter as co-founder and managing director of Grand Central Tech.

His New York City startup hub offers companies a yearlong program without charging rent or taking equity. The catch is companies that complete the program agree to rent office space for four years in the accelerator’s extensive 1.1-million square foot building overlooking Grand Central Station. The building is owned by the accelerator’s billionaire backers, New York real estate investors Milstein Properties.

Bonello has made a career out of partnering with companies and entrepreneurs to support their growth. With Grand Central Tech, he and his team want to promote startups across a broad spectrum in one communal setting. “Our goal is to create a single point of density of the best technology companies in New York,” he says.

Many of the startups entering Grand Central Tech aren’t looking for seed money. They are attracted to the program’s impressive list of corporate partners that include Google, IBM, L’Oreal USA, Microsoft, Pepsico North America and JPMorgan Chase.

Bonello and partner Matt

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