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At the very early stage of entrepreneurship there is a real gap between the first time entrepreneur, who lacks the experience to steer their business in what will be choppy waters – and the usually inexperienced friends and family who offer 90% of the initial funds to get ventures off the ground. Likewise for all the people who hang around startups, as investors or mentors, many lack the ability to gauge the viability of a business.
This gap has been filled by startup accelerators and incubators. There are over 7,000 business accelerators and incubators around the world. However, many of them fail to achieve the results they set.
The Batavia Industrial Center, is commonly known as the first U.S. business incubator, opened in Batavia, New York in 1959. Eisenhower was US president and Grace Hopper was a key promoter of the computer language COBOL.
In the past decade we have seen an explosion in the accelerator business. Pioneered by YCombinator Silicon Valley’s flagship led by Paul Graham, incubators have come back with a vengeance. YCombinator has seen some significant successes, including Airbnb (which it turned down twice), Dropbox, and Heroku. Accelerators are now a global phenomenon, and there isn’t a major city in the world where an accelerator isn’t cropping up. If your city hasn’t got an accelerator, it must be time to move!
For incubators to meet their full economic potential, they need to overcome two mistakes.
1. They need to provide real value to the startups, not just office space, and, 2. They need to measure success in more than just outside funding provided.
Adding Real Value
Incredibly, during the dot-com era, in the US many law and accounting firms decided they were going to become incubators (and we’re guessing they were planning to clean up on professional fees). Many of those efforts failed.
When you look at why accelerators fail it is because many assume that cheap office space, second hand furniture, a phone and quick broadband equals with good business incubation. Not quite that’s imply mistaking cheap space for meaningful program content. Neither are discounted legal services, accounting, or other kinds of commodity services.
What determines whether a business can get off the ground successfully and become sustainable? There must be a validated market opportunity with customers willing to pay for a product or a service, and combining this with the development of a product or service that addresses such an opportunity. Simple, yet time after time, this is missed.
Success Depends on Leadership
Accelerators must evaluate the management capability of the startup leadership team and play a part in developing their skills. Especially when the entrepreneur is a techie lacking business skills. Engineers have historically been very good at picking up business skills with the right mentoring. Some of the best companies we see are lead by people with technical competency, not an MBA. Getting to the next level is well within their capacity, and the role of an accelerator should to play is to guide them in that process.
The next level for a start-up is a validated business idea that has the endorsement of reference customers, and a product that caters to their needs. The rest – an office, legal documents, staff, new laptops, social media accounts, motivational posters, beer in the fridge – do not equal valuation.
The benchmark accelerators should be measuring themselves against is their success in helping startups validate their businesses, gain early stage paying customers (or at best users who are adding value), a leadership team in place and a plan. Forget awards, acclaims, photos in the press and state support. They all count, yet they are meaningless without the former.
Success is More Than Funding
Many accelerators use their funding numbers as a success metric. Successful companies usually operate as organically grown, self-sustaining, without external financing. For them the goal is to achieve customer validation, not an accelerators financing statement. Yet as accelerators often use funding as its success metric, often it will force inexperienced entrepreneurs into an unnecessary financing round. Cue disaster waiting to happen.
Accelerators if done right can develop the best value firstly for the startup, and also, for any potential funder or investor looking to work with early stage companies.
Of course, where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is an important aspect. Equally important is to provide education on what is and isn’t fundable. Upfront funding (usually someone else’s money) is not the right approach to attract the right startups in the first place – nor is it the best method to develop companies.
If you are looking to design and manage an accelerator program, then get in touch today.