Wednesday, July 4, 2012

Startup accelerators: do they work? Does MtB work?

Dismal statistics

A recent article on ReadWriteStart raised the issue of whether startup accelerators actually accelerate the path to success or not. All over the world nowadays there are more than 200 of these programs, large and small, known and unknown, all working toward the same goal of helping startups become successful companies.

The article questions whether most of these programs actually work. As supporting evidence, the authors cite a study released last year by Aziz Gilani, a director at Houston-based venture capital firm DFJ Mercury. In a nutshell, Gilani’s study looked at 29 North American accelerators and found that:
  • 45% of the accelerators did not graduate any company able to raise additional funds
  • Only 2 accelerators (Y Combinator and TechStars) graduated companies that went on to have meaningful exits (the full study is not available, so we are unsure what “meaningful” exactly meant in the scope of the study)
  • Many of the accelerators were not at all known by the VC community that should be funding their graduates
Are these accelerators a total debacle? Gilani mostly focuses on what he sees as a quality gap: a few quality accelerators at the top, and then dozens of mostly unknown programs below them.

Given that only a handful of startups are able to get into a top-tier program, the question for entrepreneurs becomes whether second-tier programs are worth a look, and which ones should be on the list. What are the variables to look at to make a decision? Gilani says those startups should ask themselves three main questions:
  1. Will the program help me get additional funding?
  2. Will it help me develop partnership that can promote growth?
  3. Will it connect me with mentors that can truly increase my chances of success?

How do you measure success?

The topic – which is part of a larger discussion on whether or not we’re in the midst of a “startup bubble” – is a hot one and triggered an animated debate in the comments following the article. Many of the readers mentioned some of the limitations that the study seems to suffer from:
  • Exits can take time. Did the study focus on a timeframe that is too short?
  • Exits are not the only parameter for success. A startup that goes on to establish a profitable revenue stream cannot be counted as a failure for the accelerator and its founders.
  • Even if the startup eventually fails, the people involved might have gained experience and skills that will lead to future successes. For-profit investors in the accelerator will certainly not count this as a success, but did the program really fail? An institution like the Kauffman Foundation - which commissioned Gilani’s study and is one of the main MTB supporters- might take a different, broader perspective and see the positive, long-term outcome as a success.
  • Even if the startup eventually fails, without the support of the accelerator the entrepreneurs involved would not have been able to give their idea a try. Here too, for-profit investors in the accelerator will rightfully see the outcome as unsuccessful, but some of the entrepreneurs involved might see it differently, and the overall contribution to society as a whole is hard to gauge (e.g. will those entrepreneurs be more likely to “give back” down the road, if successful?).
All in all, it seems that the perspective of the report was that of an investor in the accelerator. It’s clear, however, that overall success or failure goes beyond short-term financial gains. For some investors in startup accelerators, in fact, a short-term financial return is not the primary driver of the investment. Good reasons can be access to talent and to a relevant deal flow.

Tips to selecting the right accelerator

Dimensions of success aside, there’s no question that startup entrepreneurs need to be careful when evaluating different acceleration programs. Here are some things to keep in mind in the selection process.
  1. Size of the seed funding: are you given enough money to quit your side job and give your idea a full try, at least for several months? The size of the seed also tells you a lot about how serious the accelerator really is about its program. Look for $50,000 in financing or above.
  2. Conditions attached to the seed funding: how much equity are you asked to give up, or what are the conditions attached to the convertible note? Seed funding with too many strings attached might substantially reduce your ability to obtain additional funding. Look for expert advice.
  3. Reputation and references: what’s the word on the street? And what do the alumni say? There’ll always be supporters and detractors, but a substantially negative “sentiment” (or complete lack of it) are a definite red flag. Do your research, from Facebook to alumni interviews.
  4. Mentoring community: can you recognize any of the mentors? Do you see people that have a skill set or industry experience that might be a good match for you? Can you talk to anyone to find out? Contact the accelerator to get a sense of how approachable the mentors really are.
  5. Success stories: in the end, we certainly agree with Mr. Gilani that a complete lack of success stories is a big red flag. What does the accelerator have to show for all the effort and work that it does (or doesn’t do)?

Is Mind The Bridge a successful program?

We certainly can’t write an article about startup accelerators without putting our own efforts at Mind The Bridge under the microscope.

Truthfully, what we’ve done in the first 4 years of the program wasn’t a “fully baked” accelerator program (e.g. no major seed funding), but rather an education initiative with a mentoring program attached to it.
That said, a tremendous amount of time and money has been spent making this program a reality, and – even more importantly – helping create unique success stories.

Our business plan competition is indeed becoming a full-blown accelerator program (see the Seed Quest 2012 announcement).

So, let’s look back at what we’ve done so far, glance at what’s head, and come up with a preliminary score card, based on the 5 points mentioned above.
  1. Size of the seed funding: only a few small investments here and there up to this point, but up to $65,000 of seed funding for the startups selected into the final phase of the 2012-2013 program. Now we’re talking!
  2. Conditions attached to the seed funding: the seed investment will follow the standard terms from the top notch programs in the world (either a convertible note with minimal terms and conditions or a minimum equity take).
  3. Reputation and references: our strong reputation in Italy has definitely helped many of the companies that went through the program raise their profile and obtain additional funding. Outside of Italy there’s certainly work to do, and we’re working on it.
  4. Mentoring community: we’ve got some great mentors, with a wide spectrum of areas of expertise and industry experience. Critics say that we need more non-Italians. Although some of these Italians have been outside of the old country for decades, it’s a fair criticism, and we’re working on that too.
  5. Success stories: well... here actually the track record is not bad at all. Especially considering point (1) above, the fact that many companies that passed through the MtB program went on to receive additional funding is certainly a success. Looking at the data, of the 15 companies we selected last year for the Venture Camp, 12 were able to get fund raising (1 in US and 11 in Italy) Some of the success cases include Timbuktu (admitted into the 500 Startups accelerator program after winning the 2011-12 MtB business plan competition), NextStyler, RisparmioSuper, StereoMood, Beintoo, Agroils Technologies, Mopapp, Arkimedial, Risparmio Super, Spreaker, and many others. 
We look forward to playing a role in the success of many other companies in 2012 and beyond!

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