A while back, like many others, I wrote about the explosion of accelerators in Southern California and, in fact, around the globe. Accelerators have gone from a cottage industry to a feeding frenzy. But some interesting stats have come out that paint a pretty sobering picture for the entrepreneurs who pin their hopes on them and for the investors who invest in them.
First a quick recap. After the dot com bust in 2000, we saw the rise in incubators designed to provide start-ups with the office space and mentoring they needed to transition from the garage to the real world. Typically, the entrepreneurs were charged a below-market rate of rent and they got access to shared resources like conference rooms and business services. But incubators are an expensive proposition for their owners and most are simply a sink hole producing no net income. Accelerators were a response to the problems with incubators and a way for investors to get a first look for a relatively small amount of money (e.g. $50,000) at a portfolio of start-ups, most often in the digital/mobile space.
However, recent research
on the accelerator movement by Jared Konczal at the Kauffman Foundation
has called into question the claims by sources such as seed-db.com
that accelerators are good investments and even significant job creators. Konczal studied seed-deb.com's data in depth and it turns out that since 2007, accelerators haven’t produced the results that are being tauted, with the notable exception of one: Y Combinator
, a complete outlier from a statistical perspective and actually the accelerator that started it all.
The results might surprise you. Konczal looked at 119 accelerators that came after Y Combinator was founded and discovered that out of 1,439 start-ups funded by accelerators (as reporded by seed-db.com), 404 of them were funded by the big gorilla in the room. In fact, Y Combinator produced 11% of all the successful accelerator exits, while the total for all other accelerators was a paltry 2%. Even the total exit value on those 404 Y Combinator companies was staggeringly higher than all the other accelerators combined: $915Mfor Y Combinator versus $64M for all others. Moreover, Y Combinator has been profitable while the rest have averaged negative returns to their investors. And when you address the issue of jobs generated by all accelerators without Y-Combinator, it turns out that each job cost about $130,000 to create.
I applaud Konczal for not taking the findings of the seed-db.com study at face value, and I encourage you to read his full post
to see how he went through the data. He cautions that the data itself has flaws due in part to the fact that it was self reported.
What I want to deal with is why accelerators in general don’t produce the kinds of outcomes that Y Combinator has. Let me start by saying that no one knows for sure but there's a lot of conjecture including
- Accelerators attract struggling ventures, so the potential for failure is high.
- Even good businesses have failed after participating in an accelerator, so being able to pick winners is a critical but pretty impossible task for VCs.
- There is so much hype around accelerators and in any region they compete with each other for the best businesses; consequently, the potential to make mistakes in investment is very high (remember dot com and all the VCs that followed each other over the cliff).
All of these things contribute to the problem, but I believe one of the biggest and most overlooked factors in this accelerator frenzy is the fact that accelerators generate a ton of me-too businesses that don't create any new value. Really! If you think about it, most are in the Internet/social arena. How many photo sharing sites can actually make money? What user out there is going to manage multiple "group" sites like LinkedIn, Google Groups, and all the other odd groups that people seem to join and then invite you to join?
And here’s the biggest question of all…
Will accelerators produce the big vision, disruptive types of businesses that create platforms for lots of entrepreneurs to launch their niche ideas?
I actually think that the accelerator methodology is best suited to niche businesses in the digital/mobile space that can launch cheaply and quickly and that have the potential to scale. I’m not convinced that most businesses fit the accelerator model. And that’s OK. What I do hope is that VCs do not go over the cliff on accelerator businesses and miss the opportunity to fund the next mode of transportation or fund the solution to any number of huge problems we face as a society.
Accelerators are great, they’re fun, they generate excitement and they’re a quick fix for getting into business. But hurray for the big vision entrepreneurs who are tackling the hard problems like saving lives, making sure everyone has clean water, and coming up with the technologies and processes that advance our standard of living. I hope you stay the course and not get sucked into the excitement that is the accelerator frenzy.
Accelerators will go the path of so many waves before them. To be the next whatever, you have to get in front of the next wave so you can catch it.