This article was first published in the September 2016 issue of Global Corporate Venturing.
Y Combinator, was the first accelerator program to open it's doors in the USA in 2005, followed by TechStars in 2007, Startupbootcamp in 2009 and Dave McClure's 500 Startups in 2010.
Due to the phenomenal success of these early programs, startup accelerators have grown like mushrooms. Today there are several hundred accelerators in the USA alone and more than 1 000 worldwide.
As a natural consequence of this rapid growth, several mediocre programs have been launched. A refocus on quality before quantity has become increasingly important. But before we take a look at what we can learn from the most successful programs, let's start by laying out the most common elements of a startup accelerator:
- an application process that's open to all, yet extremely competitive. (YC accepts <3% of applicants, compared to about 6% for the Harvard Business School).
- selecting small and young but extraordinary teams (usually 2-3 founders per team, 20-30 years of age and with an ivy league background and/or strong technical and business skills).
- investing in highly scalable startups in exchange for equity (average around 6% equity for USD 20K for startups seeking product-market fit).
- cohorts or 'batches' of startups (normally around 5-10 teams per batch. YC with it's current 60+ batches is an outlier, but the trend amongst the top programs is towards larger batches).
- intensive mentoring and coaching supported by experienced entrepreneurs and investors (normally 3-4 months, 50+ mentors and aiming for 3-4 dedicated mentors per team).
- program that culminates in a 'Demo Day' when startups pitch to a large investor network to raise follow-on funding. (Normally 100+ active investors).
- rapid data-driven experimentation, validated learnings, and 'getting out of the building', all underpinned by a sense of urgency driven by weekly or bi-weekly sprints.
Now that we've gotten that out of the way, let's have a look at some of the core elements that the top programs all share, and which to varying degrees are absent in failed programs. With "failed" I mean not being able to attract startups that go on to raise follow-on funding and build scalable and repeatable business models.
Here are 9 reasons why most startup accelerators fail
1. THEY ARE UNABLE TO ATTRACT THE BEST STARTUP TEAMS
With so many accelerator programs to choose from (anyone can Google a current list in a heart beat), it becomes increasingly difficult for tier 2 and 3 programs to attract the best teams.
Perhaps the strongest card they can play is simply to happen to be in the geographic vicinity of where great teams reside. The probability for this increases exponentially if the program is located in a buzzling city, e.g. Berlin, New York or London.
But besides location, what can be done to attract the best teams? Since I have already written about what to look for when picking great startup teams I will not go into that here. Instead let's take a bird's eye view of the selection process.
2. THEY LACK A STRICT & STREAMLINED SELECTION PROCESS
How you structure your deal flow funnel makes a huge difference in how successful you will be in identifying the best teams. All successful accelerator programs have a funnel that's both effective in selecting great teams and efficient in streamlining the process, without doing lengthy due diligence on each and every startup.
Programs that fail usually have quite relaxed selection processes where they end up accepting:
- teams because they happen to be their friends
- teams because they happen to be local
- single founders
- consultant outfits
3. IF YOU CAN'T LEAD, FOCUS ON A VERTICAL
At the beginning of the accelerator craze it was ok to do a program on "web/mobile". Today, given the large number of programs, it has become more common to focus on a specific vertical, e.g. HAX for hardware. A vertical focus and greater specialization makes sense for three main reasons:
1. Venture investors that focus on a particular industry tend to outperform their more diversified peers.
2. Mentors and accelerator teams with deep domain expertise are better able to provide their startups with relevant advice and networks.
3. A well-known accelerator program focusing on a vertical can more easily help to connect the startups with the industry they need to break into. A curated network builds trust.
Programs that fail often have not defined a clear vertical or have chosen a vertical that is out of touch with the local investor and mentor networks.
4. THEY FAIL TO ATTRACT TOP ENTREPRENEURS AS DEDICATED MENTORS
"Many of the mentors in TechStars are experienced entrepreneurs."
Brad Feld, Managing Director at Foundry Group and co-founder of TechStars
Without a great mentor network it becomes difficult to attract the best startups. The best programs go to great length to attract the top entrepreneurs and investors to become mentors, before scouting for the startups.
Although 'rock-star' mentors definitely help to attract great teams, name-brand mentors that don't give their time to engage with the teams, are not going to produce long-term success for the program. Attracting highly motivated mentors and keeping them engaged throughout the program is key to running a successful program.
Programs that fail usually attract experienced people with specific domain expertise, or theoretical academic knowledge, but who lack the entrepreneurial experience, wisdom and network that can only be gained by having been in the trenches.
5. THEY FAIL TO BUILD A LARGE ACTIVE INVESTOR NETWORK
Although attracting 100+ active investors to show up for Demo Day at the end of the program is essential, the investor perspective must permeate the program from day one.
Programs that fail usually only manage to attract a small group of investors to Demo Day. Sometimes the people of this group call themselves "business angels" but mostly show up for networking, cookies and coffee. Just as vetting the startups and mentors is crucial to the success of the program, it's equally important to make sure that only active investors are invited to Demo Day. If they haven't made an investment in the past 12-18 months, they hardly can count as active.
6. THEY FAIL TO RECRUIT A COMPETENT ACCELERATOR TEAM
Accelerator programs that are run by well meaning young students usually fail since they lack the necessary experience to guide the teams. A top notch accelerator team excels at marketing the accelerator program while coaching and advising the founders on how to:
- Engage the mentors
- Apply the Lean Startup methodology
- Leverage technology
- Negotiate with Angels, Super Angels and VCs
7. THEY FAIL TO ATTRACT EXCELLENT DEAL FLOW
To increase your chances of finding the top teams, it helps if you have plenty of applicants to choose from. Although it's difficult to compete with YC, with it's thousands of applicants desperately wanting to join each batch. To have a decent pool to choose from, a newly established accelerator program should aim to get at least 100 - 200 applicants per batch.
Not starting early enough to scout for the best teams usually results in too few teams applying. When the deadline for launching the program quickly approaches, the pressure is on to select the teams. In poorly run programs, sticking with the launch date often takes precedence over selecting quality teams. If the selection process is too relaxed, the take-up area too small, and the time frame too short, ending up with a great batch becomes nearly impossible.
Top accelerator programs are elite institutions geared to one thing alone - to accelerate and leverage the best teams. This mind set is at odds with cultures that premier equal treatment, e.g. the Nordics or Government funded accelerator programs where a balanced gender and ethnic perspective, or inclusion of underserved groups and individuals is prioritized.
Those programs that force arbitrary rules and external micro management tend to fail. You can't expect to win the gold medal with one hand tied behind your back.
8. THEY FAIL TO NURTURE A LOYAL AND GENEROUS ALUMNI NETWORK
The more successful each batch is, the more valuable the alumni network will become. To the founders of current batches, it's invaluable to have access to successful founders who can open doors and secure meetings with key industry people. This aspect is often overlooked by many programs.
9. THEY LACK A CLEAR AND MEASURABLE STRATEGY
"If you can't measure it, you can't manage it."
It's common to measure the success of accelerators on the following parameters:
- The average amount of funding raised per startup.
- How many of the startups are still around 2 to 5 years later.
- The number of exits and at what valuations.
- How satisfied the alumni are with the program.
If you don't know what your strategic goals are, you can't optimize operations to achieve the desired output. Simply focusing on performing a set of activities without connecting them to a clear and measurable strategy is a waste of time, money and goodwill. This may seem basic, but surprisingly many programs fail at this.
Although accelerator programs differ on many aspects such as batch sizes, how "hands-on" the program is, if they offer office space or not, and the amount of funding vs. equity asked, they all have the following eight key ingredients in common:
1. A highly competent accelerator team to support and guide the startups.
2. A streamlined application process that's open to all, yet extremely competitive.
3. Able to attract outstanding deal flow, often with an ivy league background and/or strong technical and business skills.
4. A large network of highly successful mentors and professional investors.
5. A loyal and active alumni willing and able to open doors and provide advise.
6. A diversified portfolio of several hundred startups.
7. A lean startup approach.
8. The financial muscle to be in it for the long haul.
The great majority of startup accelerator programs around the globe do not live up to these points. As such it should come as no surprise when most programs fail.
In the white paper "BEST PRACTICES FOR DESIGNING & RUNNING STARTUP ACCELERATORS" I go into more depth on the above points and also present 10 key points to consider before launching a program.