Business accelerators: a phenomenon that is now widely recognized within the startup scene. Since Y Combinator launched in 2005, business accelerators have sprouted all over the globe. Besides an increase in the amount of business accelerators, we have seen an increase in different types of business accelerators (verticals) as well. The rise of the clean tech, health and education accelerators are good examples of verticals that have been derived from the “standard” business accelerators that focus on Internet startups in general.
In 2011 I conducted a research on the relationship between business incubators and its influence on Internet startups. Business incubation is a well-studied phenomenon, however the business accelerator phenomenon (in essence a derivative of business incubation) is still underdeveloped in academic research. For this reason I travelled to the Silicon Valley and Silicon Alley area in order to find out more about business accelerators.
As a starting point, I used the criteria that are used to measure the success of business incubators. However, it turned out that applying these criteria on business accelerators is problematic. The main reason for why this occurs is that business incubators focus to a larger extent on companies that already have been established (executing on a business plan), whereas business accelerators focus on developing a business model for its participants. For this reason, business incubation measures like growth of enterprise, profitability, employment and sales turnover have no relevance (yet) to business accelerators.
I Input criteria
The input criteria (selection criteria for potential participants) play an important role (influence) on the success of the business accelerators. After conducting the interviews I found that business accelerators assess its potential participants on the following criteria:
1. Entrepreneurial team
For the business accelerators, the composition of the entrepreneurial team is considered to be the most important criterion on which potential participants are being assessed. All the business accelerators acknowledged this as the most important criterion. When competition becomes strong in the market in which the Internet startup is operating, the Internet startup must be able to address this competition.
When the entrepreneurial team possesses diversified skills, it is expected that the Internet startup will be able to counter successfully. The business accelerators assess the entrepreneurial team based on:
- Skill set of each individual (Software Development skills, Business Development skills
- Track record (Previously founded startups, noticeable projects within the Internet industry)
2. Market opportunity
The market size/opportunity that the Internet startup is after is according to the business accelerators the second most important criterion. The reason for these business accelerators to focus on this criterion is that they aim to establish “billion dollar companies”, or in other words: building the next “Dropbox”. These business accelerators do believe that companies can become billion dollar companies even if they only would be able to get a small portion of the market. In order to assess this opportunity, business accelerators focus on the customer segments that are approached by the Internet startup and how customer segments are distributed.
Even if the market in which the Internet startup is operating has a lot of competition, some business accelerators believe that “success” is still possible if the product of the Internet startup will “disrupt” the market.
The idea/product that is built by the startup is an important criterion as well. Some business accelerators focus on ideas/products that are related to a specific industry/market. In order to assess the idea of the applicant, a few questions are used to assess the idea:
- Which problem(s) are you solving with this idea/product?
- If this idea offers a solution to such a compelling problem, why doesn’t it exist?
- If it does exist, what is so “different/disruptive” about this idea that you will be able to succeed?
These questions are designed to let the applicants elaborate on their way of thinking and to assess creativity and flexibility. It also provides an indication of the “hierarchy” within the team and how roles and skills are divided. To assess the product of the applicant, some business accelerators request a Minimum Viable Product (MVP). A MVP provides an initial version of the product intended by the applicant. It also allows the business accelerators to assess the “development skills” of the entrepreneurial team.
4. Portfolio fit
Some business accelerators focus only on specific industries/sectors (“verticals”). For example, these business accelerators only accept applicants that focus on the “mobile” industry. Derivatives of this approach are the business accelerators that aim to establish a broad portfolio by focusing on a set of verticals. For example, in the next program the business accelerator accepts 4 applicants that focus on “mobile”, 4 that focus on “big data” and 2 that focus on “clean tech”.
II Success criteria
Reflecting on the main question “How do business accelerators measure success?” I found that business accelerators use the following criteria to measure success:
1. Amount of funding
Business accelerators aim to establish a strong foundation that enables the startup to grow from the seed-stage to the post-seed stage. A very important factor in evolving to the next stage is the need for additional funding. For this reason, the business accelerators pointed to “The amount of funding raised by participants after completion of the program” or “The amount of companies that are able to raise funding after completion of the program” as a way to define (measure) success.
Still, this criterion tells to some extent something about the “expected success” of a startup, but not of the “actual” success. However, to measure the “actual” success of these startups, longitudinal data is necessary. As of today the scarcity of this data does not allow for a thorough analysis.
Another way to define success is how much “traction” a startup has been able to establish during its participation in the business accelerator program. In this case traction refers to the amount of customers/users that have adopted the product/service provided by the Internet startup. Traction is an indicator that the startup “is on to something” and could be considered as a beneficial sign on which investment decisions can be made.
Some business accelerators pointed out to perceive their program to be successful when participating startups would become sustainable companies in 3-5 years after the program. Although, the acknowledgement must be made that business accelerators are a new phenomenon and therefore this way of defining success will be more relevant in the future.
The creation of jobs (employment) can be seen as a way to define success for business accelerators. The creation of jobs is to some extent related to the sustainability of startups that participated in the program. In contrast, there are many examples of startups that have become sustainable companies, but remain relatively stable in the amount of employees.
Business accelerators aim to assist its participants in achieving a higher chance of succeeding, or in other words: reduce the risk of failure. Business accelerators serve as catalysts in developing startups from the seed-stage to the post-seed stage.
The extent to which the business accelerators contribute to the success of its startups, is largely depended on how the business accelerators position themselves within the startup ecosystem. When business accelerators succeed in establishing partnerships with “high-profile” mentors and “high- profile” investors, this leads to an expected increase in the total amount of startups that ultimately will develop from the seed-stage to the post-seed stage.
The mentors deliver the most significant value to the startups during the business accelerator program. By actively engaging in the program and being committed to designated startups, the mentors assist startups by “shaping the business”, introducing the startups to valuable resources (i.e. network) and by providing “food for thought”. The program mentors are responsible for preparing the startups to Demo day, the final activity of the business accelerator program, which purpose is to raise the next round of funding for startups (post-seed).
The novelty of business accelerator programs makes it difficult to measure their long-term “success”. It would be beneficial to keep track of business accelerators and its startups for a significant amount of time, to provide an insight on their long-term impact.
Written by Alexander (Sander) C.T. Dronkert