Tilburg Law School
ACCELERATORS
Master Thesis LLM International Business Law
Alja Pecenko ANR: 283644
Thesis Supervisor: Ivona Skultétyová, LLM
TILBURG, JUNE 2016 Abstract Several circumstances enabled the development and the popularity that accelerators have today. As there is no widely accepted definition, there are several characteristics that are common to all accelerator programs: the fixed and short duration of the programs, which provides cohorts of startups with networking and mentoring opportunities and end with the event called »demo day«, and in most cases, seed capital and working space. Those characteristics along with the stage of the development of startup when accelerator usually admits startups sets them apart from other investors, such as angel investors, and incubators. One of the characteristic that many have is also the standardized investment terms. As such, accelerator terms mainly resemble the terms of other investors. Accelerators need backers that invest money, which influences the strategy of accelerators. Depending on the strategy and backers, there are four different types of accelerators: independent accelerators, corporate accelerators, university accelerators and government accelerators. But as the government are now investing in independent accelerators and corporation and university accelerators are starting to collaborate more and more, the clear distinction between them is blurring. Due to the high number of accelerators, the low number of exits and thus return on their investment along with a trend of micro- acquisitions, consolidation in the industry might happen.
Keywords: accelerators, startups, incubators, angels, pre-accelerators, investment terms, Corporations, government, business model
2 TABLE OF CONTENTS
1 INTRODUCTION ...... 5 2 STARTUP ECOSYSTEM ...... 6 2.1 CONDITIONS IN STARTUP ECOSYSTEM THAT ENABLED THE DEVELOPMENT OF ACCELERATORS ...... 8 3 HISTORY OF ACCELERATORS ...... 9 3.1 GENERAL INFORMATION ...... 10 4 DEFINITION ...... 11 4.1 FIXED LENGTH OF TIME ...... 11 4.2 COHORTS ...... 12 4.3 DEMO DAY ...... 12 4.4 SELECTION ...... 13 4.5 SMALL TEAM ...... 13 4.6 MENTORING ...... 14 4.7 PROGRAM ...... 15 4.8 NETWORKING ...... 17 4.9 FUNDING ...... 17 4.10 STAGE OF DEVELOPMENT ...... 18 4.11 ALUMNI ...... 18 5 COMPARISON OF ACCELERATORS WITH OTHER ORGANIZATIONS AND INVESTORS IN THE STARTUP ECOSYSTEM ...... 19 5.1 INCUBATORS ...... 19 5.2 ANGEL INVESTORS ...... 22 5.3 MICRO-VENTURE CAPITAL ...... 23 5.4 PRE-ACCELERATORS ...... 24 6 TYPES OF ACCELERATORS ...... 25 6.1 INDEPENDENT ACCELERATORS ...... 25 6.1.1 Business model ...... 26 6.2 CORPORATE ACCELERATORS ...... 26 6.2.1 Strategic Objectives ...... 27 6.2.2 Types ...... 30 6.2.3 Business model ...... 32 6.2.4 Comparison between corporate backed accelerators and corporate venture capital 33 6.3 UNIVERSITY ACCELERATORS ...... 33 6.4 GOVERNMENT BACKED ACCELERATORS ...... 34 6.4.1 European Union ...... 37 7 ACCELERATOR DEAL STRUCTURE ...... 38 7.1 INDEPENDENT ACCELERATORS ...... 38 7.1.1 Structure of Independent Accelerator ...... 39 7.1.2 Convertible Note ...... 41 7.1.3 SAFE (Simple Agreement for Future Equity) ...... 41 7.1.4 KISS (Keep It Simple Security) ...... 42 7.2 CORPORATE ACCELERATOR ...... 42 7.3 UNIVERSITY ACCELERATORS ...... 43 7.4 GOVERNMENT ACCELERATORS ...... 43 8 TERMS OF THE INVESTMENT ...... 43 8.1 RIGHT TO PARTICIPATE IN THE PROGRAM ...... 44 8.2 INCORPORATION ...... 44
3 8.3 INVESTMENT ...... 45 8.3.1 Options ...... 45 8.4 ANTI-DILUTION ...... 46 8.5 LIMITATION ON THE TRANSFER ...... 47 8.6 RIGHTS OF FIRST REFUSAL AND PREEMPTIVE RIGHTS ...... 47 8.7 TAG ALONG ...... 48 8.8 DRAG ALONG ...... 48 8.9 PUT OPTION ...... 49 8.10 REPRESENTATIONS AND WARRANTIES ...... 49 8.11 INTELLECTUAL PROPERTY RIGHTS ...... 49 8.12 INFORMATION AND INSPECTION RIGHTS ...... 50 8.13 RESTRICTIVE COVENANTS ...... 50 8.14 CONFIDENTIALITY ...... 51 8.15 EMPLOYEE OPTION POOL ...... 51 8.16 STOCK VESTING ...... 51 8.17 BOARD OF DIRECTORS ...... 51 8.18 APPROVAL FROM ACCELERATOR ...... 52 8.19 EXCHANGE RIGHTS ...... 52 8.20 ASSIGNMENTS ...... 53 8.21 THIRD PARTY RIGHTS ...... 53 8.22 LIQUIDATION PREFERENCE ...... 53 8.23 WAIVER ...... 53 8.24 OTHER POSSIBLE CLAUSES ...... 54 9 DO ACCELERATORS HELP? ...... 54 10 ACCELERATOR'S PERFORMANCE ...... 58 11 ACCELERATOR BUBBLE AND FUTURE PREDICTIONS ...... 60 12 CONCLUSION ...... 61 13 REFERENCES ...... 63
4 1 Introduction
While accelerator cannot be said to be a novelty as the first one was opened in 2005, they gained major popularity not only among other investors but also researchers only recently. Since the first accelerator opening the number of accelerators has not only significantly grown, they also spread from Silicon Valley to all around the globe gaining attention from all the different organizations and investors, making accelerators widely spread with various characteristics, thus establishing different types that are corresponding to the different objective of its backers. Accelerators are providing help to entrepreneurs that are trying to create a successful business by mentoring, giving them opportunities for networking and funding, but there is still a lot of confusion how to define an accelerator and how to separate an accelerator from other organizations and investors in the startup ecosystem, especially incubators. As accelerators are not primarily defined as investors in the startup ecosystem but are mostly emphasizing other characteristics, this may also be reflected in the deal terms that they are offering to startups. Despite all the popularity of accelerator programs, there is still little information whether the help that they are providing to startups actually corresponds to better success of startups, whether they are improving the survival rates of the startup. To properly understand accelerators first, the whole startup ecosystem first has to be defined as well as the history of the startup ecosystem that enabled the successful development of accelerators. The characteristics generally associated with an accelerator are also provided as well as a comparison of these features with characteristics of other organizations and investors. As the accelerator trend continued, many different types of accelerator were established, as not only the investors who wanted to make a profit but also other potential backers such as governments (as well as the European Union), universities and corporations recognized the potential of the accelerators. Thus, this section is focused on many different types of accelerators that are independent accelerators, corporate accelerators, university accelerators, and government accelerators and the differences that they may have due to the different strategic objectives. Following that section is the deal terms accelerator offers to the startups. Various types of accelerators have different goals so they might also be structuring their terms of investment
5 differently. As the terms are standardized the analysis and common terms that accelerators’ deal terms provide will be done. Lastly, it is important also to determine whether accelerator actually plays a crucial role in the startup lifecycle and are providing the essential help that they may need to succeed. If so it has to be established whether the business model is viable and what the future trends of the accelerators might be, also relating to the previously found results about the viability of the accelerator business model itself. The primary research of this thesis is to establish the effect of accelerators to the startup ecosystem, mainly whether they to what extent they could be said to be a vital part and what value exactly do they add to the ecosystem.
2 Startup Ecosystem
To help understand the accelerators and the role that they play, short introduction of all the important players in startup community is provided below. Understandably, the first phase of the startup business development is the concept stage, which includes exploring the feasibility of building a product or service based on the idea that may. The main focus in this phase is determining how to create a product or provide service and to identify all the relevant market players. Founder or a team of founders who first develop their concept from internal resources and are mainly relying on internally generated and retained earnings, credit cards and home mortgages.1 Some funding may be provided from family, friends or even some governmental funding may be available.2 The first phase, the pre-seed stage is when start-up needs to test and evaluate assumptions made in the business plan, develop a market plan or collect market information.3 At the beginning of this stage, ventures may want to consider joining an incubator program, which provides cheap office space and other services.4 Similarly, helping founders with developing their ideas are the pre-accelerator programs. These programs are much shorter in duration than incubator program and are especially meant to prepare startups to join an accelerator. Accelerators, which provide capital and mentoring to the startups in exchange
1 Markova, Petkovska-Mirčevska (2009): Financing Options for Entrepreneurial Ventures, p. 599 2 Concept stage of company development: Funding, investors, risks and expectations, 2009, available athttps://www.marsdd.com/mars-library/concept-stage-of-company-development-funding-investors-risks- and-expectations/ 3 Clarysse, Bruneel (2007): Nurturing and growing innovation start-ups: the role of policy as integrator, p. 141 4 Bussgang (2014): Raising Startup Capital, p. 18
6 for equity come after, as they invest in either pre-seed stage or seed stage startups as they require startups to have some traction. Seed stage is when ventures start first testing the market, establish the viability of the business idea and measure interest and attractiveness to investors and try to find the product-market fit.5 The main investors in these rounds are the angel investors, with the round also known as the Angel Round.6 Angel Investors often provide financing to startups that have already developed a prototype or a working model of the proposed product or service.7 They are investing in exchange for ownership of equity. They are often successful entrepreneurs, who wish to stay involved in the industry by investing in startups. They are not providing just capital but are helping and guiding startups as well.8 Recent developments and trends have provided a new investor for seed stage startups, and these are the Micro-Venture Capital Funds, which are funds that raise less than $100 million. Start-up phase is when the product is developed, the feasibility of the product has been proved, and the market has been defined, the capital is needed to scale the company and improve distribution or establish a distribution system.9 The next stage, growth or expansion stage is when the venture is taking solid revenue.10 Customer deployment and growth are the primary focus of this round.11 The main type investors in this round are Venture Capital Funds. Venture capital funds are financial intermediaries, who are pooling investors’ capital and investing it in companies.12 Venture capital funds usually invest in high-potential, growth oriented companies that require a substantial amount of capital. They generally take a seat on the Board of Directors.13 This is a series where the majority of deal activity for Corporate Venture Capital happens.14
5 Goldberg (2012): An Introduction to Startup Financing and a New Approach to Attracting Capital Resources, p. 1 6 Therriault: Funding Rounds Explained: Seed Stage, Series A, B and C, IPO, available at: http://www.crowdcrux.com/funding-rounds-explained-seed-stage-series-b-c-ipo/ 7 Harroch (2015): 20 Things All Entrepreneurs Should KnowAbout Angel investors, available at: http://www.forbes.com/sites/allbusiness/2015/02/05/20-things-all-entrepreneurs-should-know-about-angel- investors/#4ef33ae9483a 8 Goldberg (2012): An Introduction to Startup Financing and a New Approach to Attracting Capital Resources, p. 4 9 Bussang (2014): Raising Startup Capital, p. 6 10 Ibid., p. 7 11 Therriault: Funding Rounds Explained: Seed Stage, Series A, B and C, IPO, available at: http://www.crowdcrux.com/funding-rounds-explained-seed-stage-series-b-c-ipo/ 12 Markova, Petkovska-Mirčevska (2009): Financing Options for Entrepreneurial Ventures, p. 600 13 Goldberg (2012): An Introduction to Startup Financing and a New Approach to Attracting Capital Resources, p. 5 14 Wong: Benchmarking Corporate Venture Capital, available at: https://www.cbinsights.com/research- benchmarking-corporate-venture-capital
7 Corporate Venture Capital is defined as a direct investment of corporate funds directly in startup companies.15 The final stage of startup business development is the exit stage or the IPO stage, which might require a bridge round (Series B or C) from VCs and culminates in an IPO or sale to a strategic player.16 In that stage, all the investors from the previous stages would get a return on their investment.
2.1 Conditions in Startup Ecosystem that enabled the development of accelerators
Several factors influenced and enabled the emergence and the current popularity of the accelerator programs. Traditionally incubators used to nurture the nascent startups and venture capital funds provided startups with funding. This was changed with the burst of the internet bubble, which increased the rate of failure among venture capital funds’ invested firms. As the aftermath, venture capital funds changed their approach and decided to reduce the amount of capital invested in early stage firms,17 opting rather for a less risky and less lucrative second or third round financing.18 The burden of funding startups in the seed stage was left entirely on angel investors and the burden turned up too big for them, which meant several startups did not receive the funding they needed, creating a gap in financing.19 Although the dot-com boom discouraged venture capital funds investments, it at the same time also provided good conditions for the nimble internet and mobile tech startups to succeed.20 Moreover, the capital requirements of software startup have fallen significantly, meaning that even a small capital seed accelerators provided them with, was a meaningful assistance to them.21 Not only is running a startup generally cheaper than it used to be (the costs are of course also connected to the sector startup is operating in), the customer
15 Chesbrough (2002): Making Sense of Corporate Venture Capital, available at: https://hbr.org/2002/03/making-sense-of-corporate-venture-capital 16 Startup Funding Rounds: The Funding Life Cycle, available at: http://fundingsage.com/startup-funding- rounds-and-the-funding-life-cycle/ 17 Cumming (2010): Venture Capital: Investment Strategies, Structures, and Policies, p. 126 18 Fishback, Gulbranson, Litan, Mitchell, Porzig (2007): Finding Business »Idols«: A New Model to Accelerate Start-Ups, p. 3 19 Hoffman, Radojevich-Kelley (2012): Analysis of Accelerator Companies: An Exploratory Study of Their Programs, Processes, and Early Results , p. 56 20 Miller, Bound: Startup Factories (2011): The rise of accelerator programmes to support new technology ventures, p. 7 21 Fehder, Hochberg (2014): Accelerators and the Regional Supply of Venture Capital Investment, p. 8
8 acquisition costs have fallen as well.22 Open source also lowered the costs of failure, which means that many new ideas can be attempted. With the cost of failure being so low, many more ideas can be attempted and the likelihood of success is higher as many more ideas can be tested in the market. Some of the ideas was a success and for those that were not, the amount of capital invested was low, meaning that the risk of failure is low.23 On the other hand, looking at historical trends, venture capital funds now raise larger sums, which they need to deploy in large increments, much larger than the amounts of funding required by early stage startups.24 Not only do startups now not necessarily need a large amount of capital in the early stages, their exit might also be smaller. Venture capital funds, whose investments are larger, need startups to have a larger exit.25 Due to above- stated reasons, venture capital funds might not be the right capital provider for early stage startups. All the above-mentioned circumstances created perfect conditions for the development of the small seed fund programs that could invest a small amount of capital in many startups, lowering the costs of a failure by combining ideas (startups) in a portfolio.26 Due to all of this, new firms emerged, called the accelerators that now fill the gap by providing some of the needed support and capital for startups.27
3 History of Accelerators
The Foundry, Inc., located in Menlo Park, California, formed in 1998, was the first-known accelerator,28 but a first modern accelerator was Y Combinator (Cambridge, Massachusetts, but soon moved to Silicon Valley), founded in 2005 by Paul Graham. He got the idea for it after giving a speech to student entrepreneurs at Harvard in which he advised them to look for seed money from wealthy people they knew, preferably ones who
22 Miller, Bound: Startup Factories (2011): The rise of accelerator programmes to support new technology ventures, p. 22 23 New Venture Capital Models- The Rise of Business Accelerator Seed Funds (2009), available at: http://www.firstascentventures.com/blog/?p=27 24 Miller, Bound: Startup Factories (2011): The rise of accelerator programmes to support new technology ventures, p. 22 25 New Venture Capital Models- The Rise of Business Accelerator Seed Funds (2009), available at: http://www.firstascentventures.com/blog/?p=27 26 Ibid. 27 Kim, Wagman (2014): Portfolio size and information disclosure: An analysis of startup accelerators, p. 520 28 Fishback, Gulbranson, Litan, Mitchell, Porzig (2007): Finding Business »Idols«: A New Model to Accelerate Start-Ups, p. 5
9 made their wealth from technology.29 Students turned to him for funding, and although he initially rejected them, he later decided to invest into a batch of eight ventures, with standardized terms. As Paul Graham stated, deal terms have often been a disaster, due to the confusion what the document should look like, so he decided to provide a standard source of seed funding.30 The establishment of Y Combinator was followed by Techstars (Boulder, Colorado), which was set up by David Cohen in Brad Feld in 2007. Since then, due to the Y Combinator’s early success, the number of accelerators has grown rapidly.31
3.1 General information
Accelerators are built on the premise that early-stage startups benefit from greater learning and understanding. Intensive learning from others is particularly useful to them as it provides the advantage of gathering a vast knowledge about specific topics without needing to accumulate experience.32 By assembling groups of potential successful startups and admitting them to the program at the same time, they will enable the development of more or better ideas than by funding them in isolation.33 The initial goal of the accelerator program is to support startups develop their products, identify the market and secure resources, such as capital and employees and provide infrastructure (access to office space),34 help ventures connect with investors and other important stakeholders.35 They provide an intensive boot-camp training, helping entrepreneurs with building the team, develop their idea in great details and helping them through the process of an idea, prototype and product development.36 Accelerators are typically a lean organization with a low number of staff,37 consisting of one or two general managers or executive directors and a small team responsible for the
29 Lee (2006): Running a Hatchery for Replicant Hackers, available at: http://www.nytimes.com/2006/02/21/business/businessspecial2/21startup.html?_r=1& 30 Graham (2012): How Y Combinator started, available at: http://old.ycombinator.com/start.html 31 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon, p. 2-3 32 Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 10 33 Fishback, Gulbranson, Litan, Mitchell, Porzig (2007): Finding Business »Idols«: A New Model to Accelerate Start-Ups, p. 5 34 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon p. 4 35 Malek, Maine, McCarthy (2014): A typology of clean commercialization accelerators, p. 26 36 Hoffman, Radojevich-Kelley (2012): Analysis of Accelerator Companies: An Exploratory Study of Their Programs, Processes, and Early Results, p. 57 37 Hochberg (2015): Accelerating Entrepreneurs and Ecosystems: The Seed Accelerator Model., p. 6
10 operation, marketing or publicity, and stakeholder management.38 Founders of accelerators are experienced entrepreneurs that bring unique value to their organizations.39 Some are backed by venture capital funds or angel groups, some by corporations, other by universities or governments.40 Different backers are the reason for the different strategic focus of accelerators. Moreover, accelerator program may admit a huge variety of startups, meaning they are very general, or be very specific, focusing only on startups in a certain industry.41 More and more of the accelerators is now narrowing down its focus to particular industry or sector as it often requires an enormous amount of people with similar educational and business backgrounds to come up with the new products that may disrupt the industry.42 Geographical focus also ranges from being regionally oriented to very international.43
4 Definition
Although there is no official definition, defining characteristics that are common to all accelerator programs are: the fixed and short duration of the programs, which provides cohorts of startups with networking and mentoring opportunities and end with the event called »demo day«, where they pitch to a large audience of investors. Most of them also provide a small amount of seed capital in exchange for a small amount of equity and working space.44
4.1 Fixed length of time
The accelerator program lasts for a fixed and a short amount of time (3-6 months), because first accelerator programs were solely focused on ventures in digital technology that needed a relatively short amount of time to enter the market. Short term also puts startups under high-pressure circumstances, which makes the program more efficient.45
38 Caley (2013): Seeding Success: Canada’s Startup Accelerators, p. 14 39 Li, Kuberzcyk, Yen (2012): The Exclusive Growth of Business Accelerators in Los Angels in 2012, p. 19 40 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon, p. 5 41 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 10 42 Fishback, Gulbranson, Litan, Mitchell, Porzig (2007): Finding Business »Idols«: A New Model to Accelerate Start-Ups, p. 5 43 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 11 44 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon, p. 4 45 Christiansen (2009): Copying Y Combinator: A framework for developing Seed Accelerator Programmes, p.7
11 4.2 Cohorts
A fixed period of the accelerator program, with the simultaneous start of the program for all the admitted startups, means that several startups graduate the program at the same time and as a byproduct cohorts of startups are created. The advantage that cohorts may provide to startups is the peer support, considering accelerators strongly encourage startups to support one another, as some of the burden of support then falls from the accelerators, allowing them to focus on providing the outside expertise.46 Peers may also easier provide help and support, as they may be experiencing the same issues.47 Admitting startups that are at the similar stage (seed stage) makes them more relatable. Having several startups going through the same program at the same time enables the founders to compare their startup to others, which may also help founders evaluate more clearly and realistically their chance of success and hence quit rather than continue to burn all the resources.48 Cohort peer relationship is more complex than that as on one hand there is a rivalry among startups, which is enabled by public updates on all startups and helps to motivate them to achieve more. On another hand, they also help one another by providing knowledge and also feedback. Companies find it valuable to be able to talk to a group of people that are all doing the same thing and experiencing similar ups and downs.49
4.3 Demo day
As the several ventures graduate accelerator program on the same day, accelerators provide them with an opportunity to show their products or services to the outside world. These events might also be covered by the media.50 To attract more investors, some accelerators publish the date of the demo day on their website. It can be seen as a networking opportunity considering that investors are invited to observe the progress and invest in the startups. It assists startups in finding follow-up investors as demo days are becoming
46Miller, Bound: Startup Factories (2011): The rise of accelerator programmes to support new technology ventures, p. 10 47 Startup Accelerator Programmes: A Practice Guide (2014), p. 23 48 Winston Smith, Hannigan (2015): Swinging for the fences: How do top accelerators impact the trajectories of new ventures, p. 7 49 Cohen (2013): How to accelerate learning: Entrepreneurl Ventures participating in Accelerator Programs, p. 84-92 50 Ibid., p. 10
12 popular with angel investors and early-stage venture capital firms since it enables them to evaluate numerous startups in a short period.51
4.4 Selection
An accelerator program has open application, and it can be in the case of top accelerators highly selective.52 Selecting startups is one of the most important factors for the success of an accelerator program. Selecting startups to whom accelerators cannot offer any mean of support or does not have the potential to grow will guarantee a failure for both accelerator and a startup.53 Due to the highly selective process of the most successful accelerators, the admission to an accelerator program provides startup founders with a validation of their work.54 Moreover, investors see top accelerators as an initial sorting of high-quality ideas that aggregate them in a single location and thus have become for venture capital firms and angel investors a source of deals worth investing in and doing initial due diligence process.55 Screening process differs among accelerators, but it usually involves an open call where portfolio companies can apply and register online.56 Nowadays, more and more accelerators are using a video question-and-answer system to supplement or replace the lengthy written application forms.57 Admission process comes down to a decision whether an accelerator considers the business concept to be viable, finds the idea attractive due to their strategic objectives (this is particularly the case for Corporate-backed accelerators) or likes the entrepreneurial team.58
4.5 Small team
Accelerators focus on startups where startup founders are a small team, with the average size of the team being three. Most accelerators will not take a startup with only one
51 Christiansen (2009): Copying Y Combinator: A framework for developing Seed Accelerator Programmes, p. 14 52 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon, p. 11 53 Startup Accelerator Programmes: A Practice Guide (2014), p. 20 54 Christiansen (2009): Copying Y Combinator: A framework for developing Seed Accelerator Programmes, p. 13 55 Li, Kuberzcyk, Yen (2012): The Exclusive Growth of Business Accelerators in Los Angels in 2012, p. 11 56 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 12 57 Caley (2013): Seeding Success: Canada’s Startup Accelerators, p. 14 58 Hoffman, Radojevich-Kelley (2012): Analysis of Accelerator Companies: An Exploratory Study of Their Programs, Processes, and Early Results, p. 61
13 founder, except under exceptional circumstances since it usually requires too much work for just one person. The limit for the number of staff of a startup is also set upwards, as the cost of a too big team would be too great for the accelerator to cover it. 59
4.6 Mentoring
Mentoring is one of the defining characteristics of an accelerator that provides startups with practical coaching in the form of business and product support. The quality and the size of mentoring is one of the essential characteristics for startups to analyze when making a decision whether to enter a certain accelerator program or not.60 To be able to provide top experts, some accelerators train teams of entrepreneurs, but most accelerators recruit outside experts.61 There are three organizational possibilities, mentors can either be full-time expert partners, an accelerator may have a direct contract with a mentor or may have a volunteer “network” of experts.62 They carefully select their mentors on the basis of their experience, level of expertise, profitability and desire to assist new startup founders.63 While some of the accelerators have established a list of mentors, Infiniti accelerator selects mentors depending on current needs of each startup. It helps to ensure that the mentor will be able to provide the best help to the startup but it also creates some uncertainty as startups do not know who their possible mentor will be and what the relevant experience of the mentor are. As mentioned above, startups may base their decision on which accelerator to apply on a list of mentors of a certain accelerator, having no list of mentors available means that startups have to completely trust the accelerator to provide the most suitable mentor for them. If the mentors of the program are well established in a certain industry (such as CEOs of high-profile companies), that may attract more applicants to the program, but the time such mentors would be able to commit may be very limited. Some reports have shown that most valued mentors are the entrepreneurs who have recently conducted their small exit and
59Miller, Bound: Startup Factories (2011): The rise of accelerator programmes to support new technology ventures, p. 9 60Huijgevoort (2012): The ‘Business Accelerator’: Just a Different Name for a Business Incubator?, p. 26 61Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 3 62 Bernthal (2015): Investment Accelerators, p. 17 63 Hoffman, Radojevich-Kelley (2012): Analysis of Accelerator Companies: An Exploratory Study of Their Programs, Processes, and Early Results, P. 58
14 who are willing to offer their first-hand advice and experience.64 The quality of the mentors is typically assessed through feedback surveys completed by startups.65 Not only is the quality of the mentors important, for the maximum effectiveness of mentoring, mentors and founders also have to be able to work together as well. Accelerators, therefore, match mentors and startups through matchmaking events that enable startups and mentors to find out whether they could work together.66 Most accelerators link entrepreneurs to individual mentors who help them throughout the whole program.67 Mentors work with startup founders throughout the whole program, giving them advice and providing valuable feedback based on their personal experience as entrepreneurs and business owners,68 offering advice on how to build a product, run, and finance a business.69 Moreover, external mentors may help to provide startup founder with an objective view of their business plans and find flaws in it, as the research has shown that entrepreneurs tend to be overly optimistic and confirmation bias.70 Mentors are typically not paid, but they benefit from having early access to startups.71 In the instance of 1440 Accelerator, mentors are receiving more than that, as they get 3% of the equity in the event they become advisors to that startup.
4.7 Program
An accelerator program consists of several events, with themes ranging from legal and tax advice to pitch practice.72 The intensity of the whole program, the degree to which the whole program is structured and the flexibility of whole program vary.73 Besides mentoring, the accelerator provides formal education as well in a form of regularly scheduled seminars, delivered by accelerator directors or guest speakers. Having guest
64 Caley (2013): Seeding Success: Canada’s Startup Accelerators, p. 17 65 Startup Accelerator Programmes: A Practice Guide (2014), p. 22 66 Ibid. 67 Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 5 68 Hoffman, Radojevich-Kelley (2012): Analysis of Accelerator Companies: An Exploratory Study of Their Programs, Processes, and Early Results, p. 58 69 Caley (2013): Seeding Success: Canada’s Startup Accelerators p. 16 70 Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 11 71 Chang (2013): Portfolio Company selection criteria, p. 25 72 Miller, Bound: Startup Factories (2011): The rise of accelerator programmes to support new technology ventures, p. 10 73 Caley (2013): Seeding Success: Canada’s Startup Accelerators, p. 16
15 speakers and accelerator directors tell their stories in the private seminars, may encourage revelation of entrepreneurial problems and pitfalls. Such honest and direct first-hand experience may help startups avoid the underestimating the number of failures, and reduce the likelihood of superstitious learning that often arises from distant learning through reports and news. There might also be some pitfalls of accelerator program as time compressed learning may overwhelm startup founders, who may either fail to absorb a vast amount of knowledge in a short amount of time or may experience superficial learning or take away the inappropriate lessons.74 Despite the above-stated problems with the accelerator program, early-stage entrepreneurs often have knowledge gaps and cognitive biases that can be filled and overcame with the intensive early engagement with relevant industry mentors, who may provide access to a broader set of experiences and knowledge and may help entrepreneurs.75 Various accelerators focus on different topics in their programs, but some of the common topics are teaching founders how to pitch, helping and answering their questions regarding intellectual property, scaling and funding. From what can be observed accelerators that are more general, meaning they do not have specific industry focus tend to have a program that is more general and are focusing on developing a minimal valuable product that will solve a problem and helping them with marketplace traction and financial and business models. Accelerators may provide help with customer desirability, solution feasibility and business viability. With accelerators that are more industry focused, such as Gamefounders that accepts startups that are developing video games, the program focuses on the specifics of the requirements of the industry as well. So the program involves playtesting, field trips to successful game studios, user interface design… From the research, it can be interpreted that accelerators have a substitution effect with former founder formal education, as they are mostly teaching entrepreneurs business basics.76 Due to accelerator programs being mainly focused on first-time entrepreneurs, founders already have all the technical knowledge to develop the product, but do not know how to get the product on the market or how to run their startup. On the other hand, many entrepreneurs, especially those with entrepreneurship experience may have limited need for additional learning. Startups also often pursue venues with limited current competition, which require a new business model, thus reducing the need
74 Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 4 75 Ibid., p. 12 76 Ibid., p. 34-35
16 for learning the best practices as well as not having an effective previous business plan to base theirs on.77
4.8 Networking
Part of the accelerator program is also providing startups with networking opportunities, access to network meetings, relevant industry conferences, and internal guest speakers. Networking provides startups with a path to industry knowledge and business expertise as well as the chance to generate additional funding. Generally, accelerator program provides startups with money and help to develop the product, but this is not where the life-cycle of a startup ends. For the further development, more capital is required, and that is why the connections to the potential follow-up investments are necessary for the founders.78 Accelerators are constantly trying to improve their networks, and many of them are partnering with Venture Capital Funds or are closely connected to the local angel investors. They may schedule regular group and one on one meetings with investors in their network. Accelerators have different corporate partners as well, such as Google, Yahoo, and IBM. These partners provide startups with so-called perks or benefits, such as free or discounted cloud services, analytics, e-commerce, hosting, email, company services, design, and project management. Corporations are hoping for these startups to become potential customers in the future. There are also accelerators that are partnering with other accelerators and thus expanding their networks.79 The special cases are accelerators which are backed up by corporations, as they may structure their program in a way to pair startups with either their clients or executive sponsors which help startups expand their network. 80
4.9 Funding
The amount of funding provided varies between accelerators (and some do not provide any), but it is often based on the amount it cost per co-founder to live during the period of the program and for a short period afterwards.81 In exchange for funding, they take a small
77 Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 13 78 Li, Kuberzcyk, Yen (2012): The Exclusive Growth of Business Accelerators in Los Angels in 2012, p. 6 79 Launchub accelerator has partneres wtih Seedcamp 80 For instance as done in BNP Paribas and Cisco Accelerators 81 Li, Kuberzcyk, Yen (2012): The Exclusive Growth of Business Accelerators in Los Angels in 2012, p. 9
17 amount of equity. Most of the accelerator companies state that they have no interest in controlling the nascent firm.82 Furthermore, since these are early-stage startups, taking too much equity might demotivate founders of startups to scale their startup, as well as future investors to invest in them. Founders of startups rate funding as valuable, but it is rarely evaluated as being the most important consideration for startup founders before applying to the program.83
4.10 Stage of Development
Different accelerators accept startups at various stages. Some accelerators are thus focusing on the startups in the idea stage, while most are taking startups in the prototype stage or that are already getting some revenues.84 Due to this differences, some startups have been in more than one accelerator programs, usually opting for the most prestigious one as a second accelerator to attend. Some startups just want to get additional funding, making accelerators that do not take equity as an attractive option.
4.11 Alumni
Most accelerators offer some post-program support to maintain or enhance startups’ investment viability for as long as possible. Post-program support is provided in various forms, such as public relations opportunities, connections with investors, board participation, human resources or recruitment support, regional meet-ups, online communities listing funding and promotion opportunities, and providing office space. Seedcamp and Y Combinator both established a forum, where founders of startups can connect to one another even after the program has ended. Startups may benefit from the help of other founders who are all experts in certain areas. Seedcamp also organizes monthly masterclasses for their alumni startups, where speakers discuss topics such as funding, international expansion and growth hacking. Y Combinator and Seedcamp also both provide a summit every year to which all the alumni are invited with an aim to connect entire community. Y Combinator also welcomes the startups to remain in their facilities for a specified amount after the program has finished. MergerLane accelerator
82 Hoffman, Radojevich-Kelley (2012): Analysis of Accelerator Companies: An Exploratory Study of Their Programs, Processes, and Early Results, P. 58 83 Ibid., p. 26 84 Baird, Bowles, Lall (2013): Role of Accelerators in Launching High-Impact Entreprises, p. 10-11
18 highlights that mentors’ support does not end with the end of the program, but some accelerators go with their support even further. Gener8tor invests additional money along with angels in startups when the program has finished. Furthermore, keeping an alumni network is valuable to the accelerator program, so most of the accelerators maintain an alumni database. Having a successful startup among its alumni positively impacts accelerator reputation and may attract other startups to the program. As some of the programs are now well established, recognized and have expanded worldwide, they have an opportunity to attract startups from all around the world, making their alumni network global and thus even more valuable.85 Most accelerators run regular events for alumni and invite them back to share their experience. Some accelerators even experiment with the extended provision of support services to alumni companies once they graduated. Taking equity is an additional incentive for accelerators to help their alumni.86
5 Comparison of Accelerators with other organizations and investors in the startup ecosystem
5.1 Incubators
Differentiating between incubators and accelerators is not easy, as both the incubators and accelerator programs vary greatly. Some literature actually defines accelerator as a unique subgroup of incubators with specific characteristics.87 Statistics Canada, for example, defines a business incubator as a business unit that specializes in providing space, service, advice and support to become established and profitable.88 Due to the broadness of this definition, accelerators could fall into this category as well and could form a special subgroup of incubators. Incubators are much less of a novelty as the first incubator, Batavia Industrial Central in New York opened in 1959. They can be divided into three generations, which can be distinguished by their key features and services they provide. The first generation emphasized job creation and acted mainly as renting agency, with tenants being offered an office space and shared facilities for reduced rent. Due to the very limited support provided
85 Startup Accelerator Programmes: A Practice Guide (2014), p. 25 86 Pauwels, et al. (2015): Understanding a new generation incubation model: The accelerator, p. 7 87 E.g.: in article Business Incubators and new venture creation: an assesment of incubating models 88 Hamdani, Bordt, Joseph (2005): Characteristics of Business Incubation in Canada, 2005, p.7
19 to ventures (only in the form of facilities), a distinction between first generation incubators and accelerators is not difficult. In the second generation, incubators expanded their services and provided consultancy services, training sessions, and network access as well.89 On top of the services provided by second generation incubators, the third generation started in the late 1990s and focused on the ICT and high-tech sector, similarly as did first accelerators, making a distinction between accelerator and incubator programs a little more challenging. There are still several differences between the programs, especially how the program provides its support, advice, and services.90 A significant difference between accelerator and incubator is the purpose of their programs. Incubators help vulnerable nascent businesses and help them become stronger and more independent, sheltered from market forces91 while accelerator’s goal is to speed up the life cycle, to speed the learning cycle in a time constrained form.92 Incubator program also usually lasts longer (from one to five years) as they accept startup companies from a very early age that require help, with research and development, infrastructure and environment to develop their product or service. On the other hand, accelerators usually take startups in later stage of development compared to incubators, they accept startup in an early stage of development, whose product is more developed as of startups in the incubators or even a functioning prototype and focus on helping the startup to put the product out on the market to establish revenue sources with a long-term goal of liquidation via Initial Public Offering (hereinafter: IPO) or acquisition by a large company.93 The limited duration of accelerator programs focuses founders’ attention and provides more structured mentorship, with mentors focused solely on the startups, since due to the short term of the program they can more easily commit their time to the startups.94 An accelerator program usually ends with a demo day, which incubators don’t have, as they don’t have a fixed amount of time of their program. Furthermore, due to a shorter amount of time of their program, accelerators usually accept more startups in their program.95 Another main difference compared to incubators is the fixed length of the program, which
89 Aerts, Matthyssens, Vandernbempt (2007): Critical Role in Screening Practices of European business Incubators, p. 255-256 90 Caley (2013): Seeding Success: Canada’s Startup Accelerators, p. 6 91 Startup Accelerator Programmes: A Practice Guide (2014), p. 9 92 Hathaway (2016): Accelerating Growth: Startup accelerator programs in the United States 93 Li, Kuberzcyk, Yen (2012): The Exclusive Growth of Business Accelerators in Los Angels in 2012, p. 3 94Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon, p. 10 95 Malek, Maine, McCarthy (2014): A typology of clean commercialization accelerators, p. 28
20 incubators lack and therefore, does not have its byproduct, cohorts of startups exiting the program as well.96 As incubator program does not have a fixed start and ending time, startups in it might be at the different phases, meaning that the one of the most important thing cohorts may provide- peer support could not be provided. If no peers are going currently through the same difficulties, the support might not be that valuable. After the research was done that found out, that incubated business ventures have lower survival rates compared to the unincubated ventures;97 it has been suggested that the structure of the incubator program has created a protective environment (even overprotective environment) that inhibits startups from developing resilient routines and competencies.98 Accelerators are mostly privately owned while incubators are mostly publicly owned and generally do not invest in startups as accelerators do,99 as many incubators are run by the nonprofit organizations (government, economic development agencies or universities), according to National Business Incubation Association, 93 percent of all incubators are a nonprofit organization. Incubators are recognized as an economic development tool and generally have welfare development goals.100 There are nonprofit accelerators as well, with a goal of developing a region (although they are not as widely spread). Due to the desire to make a profit of its startups, accelerators have a highly selective criteria, but most of the incubators are not as highly selective, with most of the European incubators not screening their potential tenants on an extensive and diversified set of criteria at all.101 It could be due to the most of the incubators being nonprofit or in case that incubator is trying to make a profit it could be explained by the fact that startups in incubators usually pay a reduced rent in exchange for office and administrative support and other business related support.102 Only a small percentage of incubators possesses tenants’ shares.103 The potential for success and growth of a startup is, therefore, less important for an incubator than it is for an accelerator and the incentives are not aligned. If the incubator is charging a reduced rent to its startup, it would actually be most beneficial to the
96 Ibid. 97 Amezcua (2010): Boon or Boondoggle? Business Incubation as Entrepreneurship Policy, p. 16 98 Baird, Bowles, Lall (2013): Bridging the »Pioneer Gap«: The Role of Accelerators in Launching High- Impact Entreprises, p. 4 99 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon s, p. 11 100 Li, Kuberzcyk, Yen (2012): The Exclusive Growth of Business Accelerators in Los Angels in 2012, p. 4 101 Aerts, Matthyssens, Vandernbempt (2007): Critical Role in Screening Practices of European business Incubators, p. 265 102 Allen, McCluskey (1990): Structure, Policy, Services, and Performance in the Business Incubator Industry, p. 62 103 Aerts, Matthyssens, Vandernbempt (2007): Critical Role in Screening Practices of European business Incubators, p. 261
21 incubator that its startup would never leave, or at least have a slow growth to make more profit. After startup leaves the incubator, incubator does not have anything that would incentivize them to help startup even further, like most of the accelerators do with its alumni. Accelerator’s investment in the startup, thus aligns the incentives of the directors closer, as they both desire a future success of a startup. One of the most valuable features of the accelerator program is often cited to be the network that accelerator and its mentors provide, as well as mentoring.104 On the other hand, research on incubators discovered, that those startups in an incubator rarely take full advantage of available advice and network opportunities.105 Due to most of the incubators objective to develop the region, they usually target local startups, 106 some accelerators are regionally focused as well, but they are many accelerator programs now, that went international as this may increase its brand value.
5.2 Angel Investors
They were first identified by academics in the early 1980s and had preferred to conduct business to avoid never-ending requests for funding. Angels invest their own money in an early stage private and high-growth startups and are driven by different objectives, not necessarily only to get the highest returns.107 Angels tend to invest close to where they live since this allows them to be more involved in the startups.108 They may provide mentoring and help startup founders understand and validate their potential markets and provide strategic and operational expertise.109 To mentor them, angels might demand to have a seat on the board.110 Some accelerators might request an observatory seat on the board. The significant difference is between the mentoring provided, as the one provided by angels is not as structured as is the accelerator program. As mentioned above, most of the accelerators help entrepreneurs build a minimal viable product, while angels invest later.
104 Cohen, Hochberg (2014): Accelerating Startups: The Seed Accelerator Phenomenon Accelerators, p. 12 105 Hackett, Dilts (2004): A Systematic Review of Business Incubation Research, p. 62 106 Dempwolf, Auer, D'Ippolito (2014): Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations, p.10 107 Fishback, Gulbranson, Litan, Mitchell, Porzig (2007): Finding Business »Idols«: A New Model to Accelerate Start-Ups, p. 4 108 Shane (2005): Angel Investing: A report prepared for the Federal Reserve Banks of Atlanta, Cleveland, Kansas City, Philadelphia and Richmond, p. 20 109 Angel Investment Handbook (2014), p. 3 110 Cohen (2013): What do Accelerators do? Insights from Incubators and Angels, p. 24
22 They typically invest alone, but a growing number of them have formed angel groups that screens ventures and performs due diligence and can be used as a way to diversify their holdings, collect knowledge and pool capital,111 groups also enjoy more efficient deal screening process and larger investments.112 These groups are providing investors with more flexibility regarding selection of the deals.113 In angel deal syndication, there is usually a lead investor who negotiates the terms with the startup.114 A syndicate of angels may have some similarities to accelerators as accelerators are pooling money as well and investing it in startups in the early stage. Despite the similarities, there are still the above-mentioned differences as well as the time limited support provided by accelerators while angel investors’ support is not limited in time.115 With establishing alumni databases and having several events for them as well as providing additional forms of help, it is difficult to say that the accelerator support stops once the program stops. It just might not be provided as intensely and in such a structured form. The line between angels and accelerators is thus at least in this part slightly blurring. Angel investors usually focus on startups within their social networks.116 In comparison accelerators have an open call application process.
5.3 Micro-Venture Capital
As already mentioned, investments of Venture Capital are getting larger and larger, and they are mostly not willing to invest in early-stage startups. Adjusted to these new conditions in the funding of startups is the so-called Micro-Venture Capital, which is a recent phenomenon and has mostly raised less than $100 million in funds and is investing in seed stage companies. Similarly to accelerator trends, to differentiate among Micro- Venture Capital they are starting to specialize.117 Although their program is not as structured as the program of accelerators, they also provide expertise and network
111 Shane (2005): Angel Investing: A report prepared for the Federal Reserve Banks of Atlanta, Cleveland, Kansas City, Philadelphia and Richmond, p.14-16 112 Angel Investment Handbook (2014), p. 3 113 Shane (2005): Angel Investing: A report prepared for the Federal Reserve Banks of Atlanta, Cleveland, Kansas City, Philadelphia and Richmond p. 12-13 114 Graham (2009): How to be Angel Investor?, available at: http://www.paulgraham.com/angelinvesting.html 115 Cohen (2013): What do Accelerators do? Insights from Incubators and Angels p. 20 116 Hallen, Bingham, Cohen (2016): Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development, p. 9 117 Frost (2015): The Micro VCs Are Coming, available at: https://mattermark.com/the-micro-vcs-are- coming/
23 connections to help with follow-up funding. Some of them are actually working with accelerator programs, while other have their own network of entrepreneurs.118 The reason accelerators and Micro-Venture Capital funds are working together, and micro-venture capital is co-investing with accelerators is that accelerators provide operational efficiencies, which include vetting of deal flow and matching mentors with startups.119 As some of them are run by the same people (notable example 500 Startups, which offers just seed funding or participation in accelerator program as well), they may not be that different. Despite that, Micro-Venture capital funds do not have standardized deal terms as do accelerators and are meant for entrepreneurs who do not need as much mentoring and help from experts. Those Micro-Venture funds that are not connected to any accelerator may have some other differences, such as no open application system instead mostly investing in startups that are referred to them. Moreover, Micro-Venture Capital does not provide a fixed (in length as well) program. There is some overlapping as an accelerator might be solely backed by Micro-Venture Capital.
5.4 Pre-accelerators
Pre-accelerators offer a program that helps people with an idea and that want to join an accelerator but are not quite ready yet. The program is targeted at first-time entrepreneurs and recent graduates as well as those that are unemployed. Their primarily goal is to provide potential entrepreneurs with access to space and tools. It is a mechanism that allows accelerators a straight pipeline to better prepare new companies.120 It accepts very early and pre-seed stage ventures and is very short (between one and eight weeks). Mentors help startups develop their product to the level of quality that might lead them to be accepted into an accelerator program. The program usually includes formal curriculum, mentoring, and pitching.121 They are mostly run by corporations, universities or government, while some of them are connected to a particular accelerator.122 Some pre- accelerators have a business model similar to those of incubators and are providing their
118 Mohan (2015): The rise of Micro VC Fund and the future of stage Funding- 5 Questions for @Samirkaji, available at: available at: http://bestengagingcommunities.com/2015/06/24/the-rise-of-the-micro-vc-fund- and-the-future-for-seed-stage-funding-5-questions-for-samirkaji/ 119 Ellis (2015): Accelerators Imporve VC Deal Sourcing Efficiency by 10x 120 Wauters: What is a 'pre-accelerator' anyway? A primer to get you up to speed, available at: http://tech.eu/features/5650/what-is-a-pre-accelerator-white-paper/ 121 Oliveira: 5 reasons to join a startup pre-accelerator, available at: https://medium.com/@jprcoliveira/5- reasons-to-join-a-startup-pre-accelerator-3e1773b165f7#.zepptstix 122 What is a Startup Accelerator, Business Incubator...?, available at: http://get2growth.com/startup- program-definitions/
24 services for a fee.123 Due to the short program and subsidized fees, the amount that startups are required to pay is usually pretty low. Pre-accelerator program is based on its characteristics a mixture of incubators and accelerator. It similarly to incubators help nascent ventures develop their idea and in return venture have to pay reduced fees for its services. Similarly, to an accelerator, their programs are fixed in time but are, in fact, much shorter compared to the duration of the program of accelerators. As this is a novelty program, their business model may change, as the success and viability of these programs cannot really be evaluated at this point.
6 Types of accelerators
6.1 Independent accelerators
Independent accelerator is defined as a stand-alone, for-profit venture.124 They are funded by angel investors or venture capital funds. Most famous examples of this type of accelerator are the Y Combinator and Techstars. They provide seed capital in exchange for equity. Since these are for-profit accelerators, their screening criteria tend to favor ventures that have the potential to have a follow-up investments and become attractive investment propositions. They tend to be more risk-averse and focus on startups in the later stages of development, that have some proven track record to make the chance of getting the return on the investment bigger, as their sole focus is to make a profit. They often specialize in a certain industry. 125 Accelerators act as an intermediary between startups and other investors. Due to the information asymmetry between startups and investors, they are especially important to their follow-up investors, who are in most cases Venture Capital funds. Since accelerators interacted with these startups at a seed stage, during the program, they possess knowledge about the development of a certain startup. They can potentially act as advocates, recommenders, influences or even saboteurs to funding from venture capital.126 The latter is highly unlikely, due to independent accelerator’s investment in the startup and its desire to have startups that grow and have follow-up investments. Since some of the angels and
123 E.g.: Opportunity hub (OHUB), The Venture Center, FFWD, appfluental 124 Dempwolf, Auer, D'Ippolito (2014): Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations, p. 23 125 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 14 126 Chang (2013): Portfolio Company selection criteria, p. 30
25 venture capital funds invest in the accelerator itself, their passing on the follow-up investment in the next round may potentially have a negative signaling effect.127 For investors’ perspective accelerators have a dual function, they act as deal sorters and deal aggregators. Accelerator program selects the most promising startups, among startups with the highest potential and aggregates them in a single location. Investors often act as mentors and thus are provided with a first-hand look at the startups, business plans, team dynamics and progress. This aggregating and sorting function of accelerators reduces the search costs for private investors when investing in smaller regions.128
6.1.1 Business model
Their business model is evident, identifying the promising startups, making seed investments in them and after providing mentorship and network opportunities, hoping on potential growth and further funding. The final goal of all independent accelerators is to eventually receive a profit when their alumni startups are acquired or have successful IPO or otherwise deliver some opportunity on liquidated return.129 They offer funding from a larger pool of funds that are usually comprised of the private funds of accelerator partners or other private wealthy individuals. Some accelerators are large enough to be investment funds themselves. Besides those two sources of revenue, they get money to operate from hosting a variety of conferences and events for entrepreneurs, from sponsorship and conference fees.130
6.2 Corporate accelerators
Corporate accelerators are backed by companies whose aim is to pursue open innovation, a paradigm that suggests that firms should use external and internal ideas and internal and external paths to the market.131 Investing and nurturing startups may offer a corporation an opportunity to build new and different capabilities.132 Corporate accelerators provide
127 Primack (2014): Y Combinator's YC VC may lose the actual VCs, available at: http://fortune.com/2014/03/28/y-combinators-yc-vc-may-lose-the-actual-vcs/ 128 Fehder, Hochberg (2014): Accelerators and the Regional Supply of Venture Capital Investment p. 7 129 Dempwolf, Auer, D'Ippolito (2014): Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations, p. 23 130 Chang (2013): Portfolio Company selection criteria, p. 24 131 Kohler (2016): Corporate accelerators: Building bridges between corporations and startups, p.1 132 Chesbrough (2002): Making Sense of Corporate Venture Capital, available at: https://hbr.org/2002/03/making-sense-of-corporate-venture-capital
26 insurance for the company in instances of market changes, as the new startups provide them with a way to change or grow a new business quickly to adjust to the market changes.133 Not only that, by admitting certain startups in their program, they might be able to follow current trends in the market. There are 71 active corporate accelerators,134 with companies running accelerators such as Google, Cisco, Disney, Unilever, Airbus, Intel, and BMW.
6.2.1 Strategic Objectives
A collaboration between corporations and startups can produce many positive effects for both of the parties involved. Expectations and goals of running a corporate accelerator differ, and they may be the development of new technologies and services with lesser costs involved as well as the reduction of risk to their own core operations, new source of fresh talent and ideas.135 Furthermore, they provide corporations with a cheaper, faster and more flexible research and development (hereinafter R&D) as accelerators manage and help to grow startups that are complementary to them.136 It means corporations can acquire a diverse set of experimental projects without the typical costs of launching an internal R&D.137 It may help closing the innovation gap, as accelerators are providing corporations with the necessary coordination of ideas that fall outside the scope of existing business units and help a company to expand to new markets. Accelerator format helps firm resolve the problem which ideas to focus on by spending intensive time with the ventures.138 While most of the corporate accelerators have as an objective the above-mentioned goals, there are also exceptions. AT&T accelerator, for example, states its aim is to foster education technology and supports innovative products and services in education. It hopes to provide high school success and prepare workforce especially to students at risk for not graduating high school. Similar to corporate venture capital objectives, corporate accelerators may serve as an intelligence gathering initiative that enables corporations to protect itself from competition.
133 Villano (2013): What Corporate Incubators and Accelerators Mean for Your Business? 134 For the whole list visit: https://www.corporate-accelerators.net/database/index.html 135 Mocker, Bielli, Haley (2015): Winning together: A Guide to Successful Corporte Startup Collaborations, p.7 136 Dempwolf, Auer, D'Ippolito (2014): Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations, p. 22 137 Corporate Accelerators: Spurring digital innovation with a page from the Silicon Valley playbook, p.3 138 Kohler (2016): Corporate accelerators: Building bridges between corporations and startups, p. 5
27 Corporate accelerators allow corporations to gather information at low cost.139 If the product developed is an alternative solution to a product of a corporation, a corporation has it covered as it is aware of it. While this at first glance might not seem negative, it may turn out to be, especially if this is the main goal of running the corporate accelerator. Accelerators in these instances may not structure their programs in the startups best interest as they just want to cover all the basis and not really help ventures to grow and succeed. Startups may help companies with their existing products and solve their business challenges, as accelerator program may stimulate startup activity around a certain platform and convince startups to build a product on top of company’s platform. Running an accelerator program may rejuvenate the corporate culture, as a public commitment to supporting innovation sends strong signals to internal staff and external partners. Connecting the corporate workforce with fresh talent and fresh ideas can result in employees being the effective change agents. Corporation may also gain new entrepreneurial culture that is experimental and risk ready.140 The change in the corporate culture might also help with attracting and retaining talent.141 In addition to the above- mentioned benefits accelerator enables a corporation to screen rapidly a large number of startups operating in a particular sector or particular region.142 Reviewing applications and selecting between startups for an accelerator program gives the corporation an insight into a wide spectrum of business ventures and provides a possibility for a corporation to identify new opportunities.143 It enables them to instead of actively looking for startups and identifying potential innovation or disruption, startups come to the corporation instead as they apply.144 Although this is true, there is actually no guarantee that the most innovative and disruptive startups would apply to the corporate accelerators, as other seed-stage investors might provide them with more favorable investment terms. The corporations are not the only ones benefiting from running the accelerator program. Corporations assist startups in various ways as well as they provide them with market knowledge and experience, economies of scale, an established brand.145 Corporations give
139 Lerner (2013): Corporate Venturing, available at: https://hbr.org/2013/10/corporate-venturing 140 Mocker, Bielli, Haley (2015): Winning together: A Guide to Successful Corporte Startup Collaborations, p. 23 141 Kohler (2016): Corporate accelerators: Building bridges between corporations and startups, p. 5 142 Brigl, Roos, Schmieg, Watten (2014): Incubators, Accelerators, Venturing, and More, p. 7 143 Ream, Schatsky (2016): Corporate Accelerators: Spurring digital innovation with a page from the Silicon Valley playbook, p.2 144 Weisfeld (2015): Are Corporate Accelerators The New Growth Hacking For Enterprise Companies? 145 Mocker, Bielli, Haley (2015): Winning together: A Guide to Successful Corporte Startup Collaborations p.7
28 them access to resources, such as customer and market information which is very valuable to startups, because it helps them determine what features need to be integrated into their product.146 They may get access to corporations top personnel, such as engineers, product managers. Moreover, they may benefit from the corporation’s proprietary resources that can quicken their development process.147 Startups may be able to secure the product- market fit faster, or use corporations as a distribution channel partner. Corporate backing could increase startup visibility and credibility.148 As do all the accelerators, corporate-backed accelerators focus heavily on mentoring as well. What may set them apart from other accelerator programs is their narrow vertical specialization, meaning that their mentors have deep industry expertise in the industry startups operate.149 Mentors in these accelerators are outside experts as well as inside experts who are needed later, for the successful integration of the technology in the business model of the corporation.150 Having a mix of outside and inside experts might provide the optimal solution to receive a mixture of both ideas and advice not only from people who are experts in a particular industry (with the possible negative side effect that advice given might be too focused and fitted to the corporation). Outside experts could provide advice that might fall outside of their sector but could actually benefit the startup. While corporate accelerators provide obvious benefits for the startup participating in the program, there are some potential problems for the startups that may arise. Firstly, they may narrow startup’s focus solely to the areas that benefit the corporation and their strategic objectives more than the startup itself.151 Secondly, intensive involvement with one particular company creates significant signaling for startups. These are early stage startups, and since corporate accelerators are not neutral, there is a risk that competition might not want to engage with a startup that comes out of a rival program. As these are early stage ventures, this could potentially mean not just that potential collaboration and partnership would not be likely to happen but also that the list of potential follow-up investors would narrow down, as Corporate Venture Capital funds
146 Gee (2015): Corporate Accelerators: Not a Bad Option if you Chose them Right 147 Ream, Schatsky (2016): Corporate Accelerators: Spurring digital innovation with a page from the Silicon Valley playbook, p.3 148 Kohler (2016): Corporate accelerators: Building bridges between corporations and startups, p. 5 149 Ream, Schatsky (2016): Corporate Accelerators: Spurring digital innovation with a page from the Silicon Valley playbook, p.3 150 Mocker, Bielli, Haley (2015): Winning together: A Guide to Successful Corporte Startup Collaborations, p. 20-21 151 Villano (2013): What Corporate Incubators and Accelerators Mean for Your Business?, available at: http://www.entrepreneur.com/article/227952
29 might not want to invest in these startups. Looking at the data it can be found that some startups that were participating in the corporate accelerator program have been later acquired by a different company, meaning that this may not be problematic. According to crunhbase.com some of the corporate accelerators (Hub:raum, Disney Accelerator, Mediacamp Accelerator, Microsoft Accelerator) all had startups in their portfolios that were later acquired by different companies, some even by prominent corporations such as Apple, Google, Yahoo!. In fact, out of 22 startups that were acquired, only one startup was acquired by the corporation that was running the accelerator.152 Moreover, startup participating in a certain corporate accelerator the feedback provided to them would be very limited and not the broadest product feedback needed for success. The transfer of knowledge and mentoring provided by the corporate accelerator would thus be very company-specific. While the aim of a startup is to build a product that solves a general problem, corporate accelerators may provide them with help to design a fitted solution to one company’s challenges.153 The corporation running an accelerator may be a competitor with the startup in the program and thus, there may be a conflict of interests as they want to gain information about their competition or even acquire it to either develop the product or service themselves or to prevent the further competition. To avoid some of the possible adverse effects of the collaboration for both parties, they should ensure that their objectives are aligned in a meaningful way.154
6.2.2 Types
Corporations can participate in accelerator activities in various ways; the most basic version would be for corporations and their executives or emissaries to join the independent accelerators as either mentors or investors.155 If the company decides to establish the accelerator, there are various ways to do it. Powered by model is the one, where corporations contract with another party to run the accelerator. In this instance, companies want to stay close to innovation, but do not want to
152 MetricsHub was acquired by Microsoft after being in the Microsoft Accelerator 153 Crichton (2014): Corporate Accelerators Are An Oxymoron, available at: http://techcrunch.com/2014/08/25/corporate-accelerators-are-an-oxymoron/ 154 Gee (2015): Corporate Accelerators: Not a Bad Option if you Chose them Right, available at: http://sktainnopartners.com/corporate-accelerators-bad-option-chose-right/ 155 Hochberg (2015): Accelerating Entrepreneurs and Ecosystems: The Seed Accelerator Model, p.23
30 build new infrastructure and hire new personnel.156 As running a successful accelerator requires a lot of work, partnering with an accelerator with good reputation makes sense. The most distinguished accelerator that is contracting with corporations is Techstars, which is engaged in programs such as Disney Accelerator Powered by Techstars, Barclays Accelerator Powered by Techstars, Sprint Accelerators Powered by Techstars. The outside accelerator provides various services such as program creation and management, staffing marketing and back office service as well as offices. The main issue with this model is that it may be challenging to maintain hands-on involvement and ongoing engagement with startups.157 While there are some considerations for corporations to establish this type of accelerators, it guarantees more freedom to startups, which might help them to get rid of some of the possible negative effects of being involved in a corporate accelerator program. The second model is a model where a corporation itself creates an inside run and led accelerator. It is based on the unique value the corporation can provide for startups while growth and scaling of startups will ultimately help the corporate grow as well. It can target a great variety of spectrum of startups, or it can be very vertically focused. Lastly, there is also the consortium model, in which corporation chooses to partner with another company to create a jointly-run dual or multiple partnerships accelerator. This model is internally run as well.158 With a jointly-run program, aligning incentives and objectives would be even more difficult, one of the possibilities would be to partner with an established accelerator and construct accelerator in a type of powered by. This is one way to divide between corporate backed accelerators. There are also various models of operation that differ between levels of involvement and the value the program brings to the company. The direct development model is the model where corporation houses startups that are relevant to them and these startups may help them develop a certain product. The corporation provides them guidelines as to what it expects the startup to help with, and they find an innovative way to get it done. An example of that model used to be Nike+ platform. The direct development is clearly more beneficial to the corporation, but it does raise the above-mentioned concerns about narrowing down the focus of startup to help company develop the product that fits their needs. In the business development model corporations host a group of startups from the industry it operates in or
156 Weisfeld (2015): Are Corporate Accelerators The New Growth Hacking For Enterprise Companies?, available at: http://www.forbes.com/sites/groupthink/2015/09/15/are-corporate-accelerators-the-new-growth- hacking-for-enterprise-companies/2/#6f82cf923138 157 Hochberg (2015): Accelerating Entrepreneurs and Ecosystems: The Seed Accelerator Model, p.23 158 Weisfeld (2015): Are Corporate Accelerators The New Growth Hacking For Enterprise Companies?
31 complimentary industry and enables them to develop solutions that might fit the needs of corporations.159 Corporations may have accelerators close to the headquarters, but not in the facility, or within the facility. Accelerators located close or in the corporation itself give the company the highest level of control and opportunities for more frequent interactions. On the other hand, positioning them separately may help to avoid conflicts between corporation and startups. The downside to the latter method is that isolating a corporate accelerator might be too distant for the business to influence and leverage, and thus, corporation might lack resources and power to win the organization’s cooperation. Regardless the location, corporate accelerators must provide its startups with enough freedom.160
6.2.3 Business model
These types of accelerators are often not profit oriented and do not offer any funding for the startups admitted to the program.161 If the goal of corporate-backed accelerators is not to economically benefit by achieving financial results, their strategic focus is to benefit from integrating innovating technologies or business models into their organization.162 The more corporate accelerator is vertically specialized, the higher are the chances of creation of a partnership between a corporation and a startup that could be successfully integrated. Corporations that take equity are defending their decision to do so, by stating that they do it to align the incentives. But this is a rarity, most of them don’t invest in them, taking too much equity will reduce the entrepreneurial drive and might reduce their attractiveness to future investors.163 Taking equity might provide an incentive for a corporation to help the startup after the program has ended. Most of the corporate accelerators are focused on benefiting from new technologies and ideas, and not from making a profit because the startup had a successful IPO. Startups involved in a corporate accelerator should be ventures that might want to be partnered or be acquired by the particular corporation. If the founders goal is to have a successful independent company, independent accelerators or other seed-stage investors might be more appropriate.
159 Ibid. 160 Kohler (2016): Corporate accelerators: Building bridges between corporations and startups, p. 9 161 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 15 162 Mocker, Bielli, Haley (2015): Winning together: A Guide to Successful Corporte Startup Collaborations, p. 15 163 Kohler (2016): Corporate accelerators: Building bridges between corporations and startups, p. 6
32 6.2.4 Comparison between corporate backed accelerators and corporate venture capital
Although strategic objectives for establishing a corporate venture capital funds are similar to those of establishment corporate-backed accelerator, there are many differences between them. Corporate Venture Capital invests in later rounds of startup financing as it usually focuses on more mature ventures, who are mid-stage companies while accelerators engage with early stage startups that are on the verge of launching revenue-generating activities. Furthermore, corporate-backed accelerators usually do not invest in startups, while corporate venture capital funds do, although it is usually a minority equity investment and in comparison with the corporate venture capital funds provide more structured and fixed program. Corporate venture capital may provide mentoring, but in many cases, startups cooperate with corporations as an equal partner. The corporate accelerator program is typically three months long, while corporate venture capital usually supports ventures between five to seven years.164
6.3 University accelerators
The primary expectation and goal of the university accelerators is to develop and stimulate student entrepreneurs and innovation at universities.165 Universities might have an considerable part in encouraging entrepreneurship in the region as well.166 This has resulted in growing interest from governments as well with the intention to foster the closer links between universities and industry to facilitate effective research and technology transfer.167 This government interest can be detected in some university backed accelerators in Canada, for example, Ontario has established a Campus Linked Accelerator Program that is investing in universities in Ontario to increase entrepreneurship.168 University accelerators are usually not focused on a specific technology and provide the same range of services as the other accelerators do. These programs typically require applicants to have some sort of affiliation with the university and are more focused on the
164 Brigl, Roos, Schmieg, Watten (2014): Incubators, Accelerators, Venturing, and More, p. 6-7 165 Dempwolf, Auer, D'Ippolito (2014): Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations, p. 21 166 Van Looy, Debackere, Andries (2003): Policies to stimulate regional innovation capabilities via university-industry collaboration, p. 217 167 Minguillo, Thellwall (2015): Which are the best innovation, support infrastructures for universities? Evidence from R&D output and commercial activities, p. 1058 168 Goldberg (2014): Ontario's Campus-Linked Accelerator Program gives $3 million boos to U of T entrepreneurs, available at: http://news.utoronto.ca/ontario-campus-linked-accelerator-program-gives-3- million-boost-u-t-entrepreneurs
33 education and mentoring them than on the future profitability. The programs are typically run during the summer.169 They typically provide seed grants and normally do not take equity, as these programs are non-profit.170 The primary motive of university accelerators is commercializing research and generating development, not making a profit from its student entrepreneurs.171 Universities have first access to students, which puts them in advantage in comparison with corporate accelerators or independent accelerators. That is certainly an advantage they have over other types of accelerators, as they do not need to work as hard to attract young entrepreneurs, who might join the program because of sheer practicality and not because of its reputation. Their physical facilities such as laboratories and workshops are an advantage when compared to independent accelerators as well.172 They enable them to focus on a vast variety of startups as they have the ability to provide them with the appropriate facilities. The main focus of first independent accelerators and still of most independent accelerators nowadays were the IT startups, which also do not require laboratories and similar facilities that independent lack. Although most of the universities run an accelerator themselves, or in cooperation with other universities or institutions, some have partnered with an established accelerator program similarly to the type of corporate accelerators defined as powered by. University accelerators have partnered with the independent accelerator to foster student entrepreneurship.173 The partnership provides benefits for all parties involved, as universities have the access to research facilities and student entrepreneurs, accelerators, on the other hand, can provide the funding that universities may not be able to. 6.4 Government backed accelerators
Sometimes also called ecosystem accelerators, as their main strategic focus is to stimulate startup activity within a specific region or specific domain 174 since there is evidence that
169 Hochberg (2015): Accelerating Entrepreneurs and Ecosystems: The Seed Accelerator Model, p. 26 170 Dempwolf, Auer, D'Ippolito (2014): Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations, p. 21 171 Ibid. 172 Carney (2013): For university accelerators, good intentions aren't good enough, available at: https://pando.com/2013/03/26/for-university-accelerators-good-intentions-arent-good-enough/ 173 For Example Penn State partnered with Dreamit and Washington State University partnered with Accelerator Corp. 174 Department for Business Innovation & Skills (2015): Policy paper: 2010 to 2015 government policy: research and development
34 fast-growing small businesses contribute to economic growth.175 Often they want to attract talent and promote technological entrepreneurship among the young population.176 Screening criteria, therefore, correlates to startup characteristics that would help the Government’s vision of the ecosystem development.177 Their program is developed in depth as they organize training sessions, workshops and practically oriented events. The most known example of the accelerator that fits the above mentioned description of government accelerator is Startup Chile. It is an accelerator program created by the Chilean Ministry of Economy in 2010 that aims to establish Chile as a center of innovation and entrepreneurship in Latin America. Its primarily objective is to stimulate entrepreneurship in the region.178 The program inspired similar accelerators in the region, for example, the one Start up Peru.179 Since the inception of the program, Chile has become an entrepreneurial hub, and much of the evolution is due to the program, and it is attracting startups from all over the world. The possible downside might be that due to not taking any equity, accelerator would still have an advantage eve if the mentoring and the general quality of the program would be bad, possibly providing wrong lessons for the startups. Accelerators with just governmental backing are relatively rare. Their business model is unclear.180 The main reason for the lack of clarity is that just providing grants for startups does not seem to produce a sustainable accelerator model. That’s why North America and European governments mostly went the other way, with the government being a part of an accelerator program as an investor in an independent accelerator. Objectives of private accelerators differ from those of governments, but mostly do not contradict. The government is investing in independent accelerators, whose main aim is for its startups to grow and succeed, which at the same time helps to develop the region, provides new jobs and might help stimulate the entrepreneurship in the region. Although independent accelerators do not aim to develop the region, if they require startups to be in the region while the program is running (or even further), they just might do that as their byproduct. With government as an investor, they might demand in their deal terms for a startup to
175 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 15 176 Komarnicki (2014): Accelerators are not VCs: how should they approach their portfolio management, available at: https://fundacitylive.wordpress.com/2014/09/02/accelerators-are-not-vcs-how-should-they- approach-portfolio-management/ 177 Clarysse, Wright, Van Hove (2015): A look inside accelerators: Building businesses, p. 15 178 Meija, Gopal (2015): Now and Later? Mentorship, Investor Ties and Performance in Seed-Accelerators, p. 6 179 Gonzalez-Uribe, Leatherbee (2015): Business Accelerators: Evidence from Start-Up Chile, p. 42 180 Pauwels, et al. (2015): Understanding a new generation incubation model: The accelerator, p. 9
35 remain in the region for a period of time. By that logic, every accelerator could help develop the region and is thus an ecosystem accelerator. Moreover, governments have different methods to align the goals. They either have a seat on the board of directors181 (as seen in CTCG), who help to ensure that also their goals are met, or might carefully select between accelerators182 before making a decision whether to invest or not. Accelerators accepting government investments received some critics. As Brad Feld, one of the founders of Techstars said, having only private investments and being focused on the financial returns of their investments, forces them to be very thoughtful about how they are allocating capital. If the government is investing in the capital accelerators, capital is going to be allocated poorly, and incentives will not be as tightly aligned. Furthermore, he questions why the government should fund the accelerators if the entrepreneurs cannot understand how to run a self-sustainable accelerator themselves.183 Since investing in a seed stage startup, accelerator’s investments are long-term investments, so it is difficult to be self-sustainable after a short amount of time of running the program. Although the incentives might not be aligned as tightly, governments are just providing the funding necessary to keep the program running to help startups succeed and by doing so, hopefully, stimulate the entrepreneurship in the region. One of the models of government-backed accelerators that is becoming more and more popular is the so-called International Accelerator. These are accelerators that are run in the United States of America (U.S.) but are backed by a foreign government, with the main goal to help their companies reach their goal, which is to penetrate the U.S. market. It is not just about helping the companies to enter the U.S. market, it is also about maintaining a presence and establishing contacts in the U.S. as well as having direct access to valuable information.184 One of the most active countries to help companies reach that goal is Canada. In order to help them, the Canadian government is running a Canadian Technology Accelerator, who is supporting Canadian tech startups in New York, Silicon Valley and Boston as well as supporting health IT companies in Philadelphia, life science companies in San Francisco and clean tech companies in Denver. There are several
181 An example of that is Clean Technology Commercialization, which is a Canadian accelerator and its board of directors consists of of representatives of public and private investors. 182 A popular way to select between accelerators is to hold a competition, in which government decides, similarly as to U.S. Growth Accelerator Fund 183 Feld (2013): Government Shouldn't Be In the Accelerator Business, available at: http://www.inc.com/brad-feld/government-shouldnt-be-in-the-accelerator-business.html 184 Canada and Wall Street, available at: http://can-am.gc.ca/new- york/bilat_ny/rue_wall_street.aspx?lang=eng
36 European accelerators in the U.S. as well. Switzerland, Germany and Spain all opened accelerators in the U.S.185
6.4.1 European Union
As the incubators gained popularity, European Union opened several incubators as well, called Business Innovation Centers, which are an instrument for regional development developed by the European Commission to contribute to the overall economic and social development of the regions.186 The growth of accelerator programs backed by the European Union has not been so popular, but that is not to say the European Union is ignoring the new trend of accelerators completely. Due to Horizon 2020, a financial instrument implementing the Innovation Union, an initiative aimed at securing Europe’s competitiveness, European Union is using accelerators to secure that goal as well.187 One of the biggest issues is the fragmented nature of web entrepreneurship in the European Union, with most of the European accelerators being focused on attracting startups from the country that they are located in.188 This is thus the major focus of EU and to resolve it, it created several platforms, where accelerators can connect, a place to support and promote existing accelerators and to exchange best practices.189 European Union opened some accelerators as well, for example, EU-XCEL, which is a virtual accelerator. Most common activity in the European Union regarding accelerators is not to run accelerators, but to just provide funding to selected accelerators. European Investment Fund thus provided $15 million to Seedcamp,190 while European Regional development Fund invested in Eleven, Bulgarian accelerator as well as Ignite Accelerator and Growth Accelerator, both located in the United Kingdom. The European Union might be investing in an accelerator for a different reason than to develop a particular region. When European Union invested in 16 FIWARE Accelerators, a part of FIWARE accelerator program, which is a third phase of Future Internet Public
185 International Accelerators Operating in the U.S.(2014), available at: http://ssti.org/blog/international- accelerators-operating-us 186 European Union (2010): The Smart Guide to Innovation Based Incubators (IBI), p. 10 187 What is Horizon 2020?, available at: https://ec.europa.eu/programmes/horizon2020/en/what-horizon-2020 188 Assen (2014): Horizon 2020: The Future of Internet 189 E.g.: EU Accelerator Assembly, Startup Europe's Accelerator 190 Seedcamp Launches $30m Fund, available at: http://seedcamp.com/seedcamp-launches-30m-fund/
37 Private Partnership,191 it invested with the aim to drive and further Europe’s competitiveness in internet technologies and to help with the development of certain applications that have public and social importance.192
7 Accelerator Deal Structure
As accelerators have different objectives and different strategies, their deal structure and how they provide funding also differ between them.
7.1 Independent accelerators
To fully understand the deal terms that accelerators offer there should first be given some introduction to the structure of the independent accelerator. They are a mixture of formal and informal governance mechanism.193 Formal mechanisms involve all the formal boundaries that are in place in accelerator itself and all the formal contracts between participants in accelerator system. That involves all the contracts between an accelerator and Local Fund, between Direct Investment Fund and accelerator as well as with the startup companies and between sponsors and service providers and accelerator.194 Among more important relationships that remain mostly completely informal is the one between mentor and startup.195 There is no direct payment provided to mentors as the accelerators claim it strengthens objectivity and honesty since mentors are the people that really want to help startups and are not doing it strictly for their financial benefit. Low cost of mentors also enables accelerators to establish a bigger expert network, making the possible match between mentor and accelerator easier.196 Due to no pecuniary compensation provided for the mentors, this reduces legal conflict, as some of the mentors that are helping the startups might be bound by a duty of loyalty.197 While this is true, along with reducing the costs of running the program it leaves control rights, intellectual property rights, and confidentiality to completely informal constraints. While it could be argued that these issues could be
191 FIWARE Accelerator Programme, available at: https://ec.europa.eu/digital-single-market/en/fiware- accelerator-programme 192 Future Internet Public Private Partnership, available at: https://ec.europa.eu/digital-single- market/en/future-internet-public-private-partnership 193 Bernthal (2015): Investment accelerators, p.18 194 Ibid., p. 19 195 Ibid., p. 21 196 Ibid., p. 26 197 Bernthal (2015): Investment accelerators, p. 27
38 dealt with negative constraints, formal restrictions face intense hostility among accelerators.198 Furthermore, accelerators are strongly opposed towards Non-Disclosure Agreements as well, stating that they are not in the business to steal ideas and that success heavily depends on the execution of the idea not only the idea itself. Startups are encouraged to share confidential information, and open communication is the norm in accelerators. Although opportunism, theft and misuse of information seem likely to happen, mentors and startup founders state it is unusual to happen within the accelerator system.199 With corporate accelerators, where corporations could easily steal the idea, startups in the accelerators should be more cautious.200
7.1.1 Structure of Independent Accelerator
198 Ibid., p. 23 199 Bernthal (2015): Investment accelerators, p. 35 200 Bernthal (2015): Investment accelerators, Forthcoming, Stanford Journal of Law, Business, & Finance (2016) p. 25
39
Source: Bernthal
The local fund provides the amount of money needed to pay for all the operations of an accelerator and to provide initial investment made into portfolio company. If the accelerator provides additional funding, this is done through a separate investment fund, Direct Investment Fund, which is managed by the accelerator. Startups can choose whether to select the additional funding provided by Direct Investment Fund or not.201 As explained by 500 startups Accelerator about their investment structure, Direct Investment Fund provides investment in convertible notes ($125.000) while at the same time Local Fund charges $25.000 for the program. The amounts are handled differently so that the Direct Investment Fund does not receive non-investment income, which could potentially affect its the tax status.202 While charging portfolio company for participating in the program can be detected among some other accelerators,203 the prevalent trend is the Local Fund to provide some investment as well in exchange for equity, while some are not providing any funding but are still taking equity (in exchange for costs of participating in the program).204 While this particular accelerator takes only a small amount of equity (4%)
201 Ibid., p. 20 202 https://www.quora.com/How-does-500-Startups-structure-its-investments, date accessed: 4th of June 2016 203 Such as Emerge Education Accelerator 204 Manos Accelerator
40 it is hard to imagine that it can compete with the top accelerators that not only have a better reputation but are providing funding as well. Alternatively, some of the accelerators that are not providing additional investment through Direct Investment Fund structure their investment as a convertible note, SAFE or KISS. When structuring it like that, the amount of equity accelerator is going to take is not standardized and is determined for each startup participating in the program separately. The amount of funding may depend on the number of founders,205 or might be standardized for all the startups no matter the number of founders. RevUp Betaspring is structuring their deal in an entirely new way, as they are providing company with $75.000 cash in exchange for a small percentage (4%-8%) of revenue over the 36-month period. There may potentially be several issues with this, especially because these are early stage companies that may not be getting any revenue at all and if they are getting the revenue it may not be enough for RevUp Betaspring business model to be self-sustainable.
7.1.2 Convertible Note
A convertible note is unsecured debt instrument that can be converted into equity at the option of the holder (giving thus the holder a chance to participate in the upside).206 It pays interest and has a maturity date. Looking at accelerator terms, it seems that interests are not demanded by all. Convertible notes have several positive sides compared to shares, such as lower legal fees and not having to negotiate a price or other extensive terms. There are also negatives, as the company is obliged to repay the debt (principal and interest) if the maturity occurs before the conversion event. In case that companies do not have capital to repay the debt, convertible notes may be negotiated with lenders having a considerable leverage over the company. To prevent companies having too high valuations some convertible notes include a conversion price cap, that sets the maximum valuation at which convertible note could be converted into equity, which is especially troublesome when the convertible offers conversion discount.207
7.1.3 SAFE (Simple Agreement for Future Equity)
205 For example: Alchemist Accelerator 206 Magennis, Watts, Wright (1998): Convertible notes: the debt versus equity classification problem, p. 303 207 Coyle, Green (2014): Contractual Innovation in Venture Capital, p.151-164
41 The investor makes a cash investment but gets stock later, at a specific event. It is intended to be used as an alternative to convertible notes. Negotiations are even easier than negotiating convertible note, as there is only one item to agree on, the valuation cap thus, SAFE being a flexible, one-document security. It is similar to convertible note, but does not accrue any interests, has no maturity date and terminates when a safe holder receives stock or cash.208
7.1.4 KISS (Keep It Simple Security)
KISS is the answer of 500 Accelerator to increasingly more complicated convertible notes that thus require long negotiation process. KISS has two versions, equity and debt version (accrued interests, maturity date). Both versions convert automatically when a qualifying priced round is raised. The only significant difference with a convertible note is that they are trying to keep the terms of their investment simple and flexible.
7.2 Corporate accelerator
Corporate accelerators structure their deal differently. Even in the cases of the accelerator type powered by, which are most similar to the deals of the independent accelerator. In the case of Techstars (which is the most popular accelerator to partner with) accelerator is still providing $20.000 for 6% equity so the deal with the Local Fund of the accelerator is the same. The main difference is that the Direct Investment Fund usually does not provide additional investing, that may be done by the corporation itself (how the Sprint Accelerator does it) or not at all. The majority if the corporate-backed accelerator is not type powered by the accelerator usually does not invest in exchange for equity in common stock but may structure its deal as an option agreement209, or invest in exchange for convertible notes.210 Some accelerators might provide funding but do not take any equity (for example Samsung), while some might not even provide any funding (Blueprint). A completely different approach has been taken by BMW accelerator that does not take equity but rather purchases the first unit of technology, making it a first client. The money startup received is meant to pay for a prototype of startup technology and to cover the costs of the integration.
208 https://www.ycombinator.com/documents/ 209 For example: Infiniti, JLAB, Last Mile DPD Accelerator 210 OrangeFab offers $20.000 in a form convertible notes that is optional
42
7.3 University accelerators
Although there is no universal way that university accelerators are running their program and investing in startups (if they are providing funding at all), commonly they are not taking any equity. They might provide funding, either they provide it directly, or the special fund, run by the University is providing it.211 Capital may also be provided to just a certain startup in the program, the so-called winner of the demo day. If the university accelerator is partnered with an independent accelerator the terms are different, as the independent accelerator is the one providing the investment terms (and the one investing in the startup). UCS Viterbi has partnered with Startup Garage that is providing startups with funding of $20.000 for 4% of equity.
7.4 Government Accelerators
They require startups to be incorporated in their national ecosystem, and are not investing in exchange for equity but rather are providing grants. Providing grants follow their main objective of developing the region. But as they are focused on the developing the region as a whole, that means that their main focus is not the success of each startup in their program, but rather to incentivize the entrepreneurship in the region. The incentives are not completely aligned, with startups being focused on their own success and with no equity taken there is no incentive for the accelerator to desire that each of the startups succeeds. Of course, the success of each startup is helping accelerator with their goal of developing the region and getting new jobs and stimulating entrepreneurship. Having no stake in the startups means that the failure or success of each individual startup does not affect accelerator, but rather these types of accelerators are concerned with the overall effect of the startup activity in the region.
8 Terms of the Investment
211 Funding or grants by separate funds are provided by StartX (Stanford University), Skydeck (Berkley).
43 Below are described some of the common terms that are found in the accelerators’ term sheets. Since most of the term sheet available are terms of the independent accelerators, it is focused mainly on the terms this type of accelerator provides.
8.1 Right to participate in the program
The most basic right that is given to the startup is the right to participate in the program. At the same time, most of the independent accelerators hold a discretion right to require startup to leave the program at any time for whatever reason. If the shares were already transferred, they would be transferred back. Similarly, to independent accelerators, corporate accelerators hold an option to disqualify startups from the program as well, if the company does not fulfill the commitment and has to return the investment. The independent accelerators mostly hold a broader right, as they have a discretionary right to disqualify the startup any time. The discretionary right may, therefore, be used in instances startup is not fulfilling commitments as well as in cases accelerator may recognize that it cannot provide optimal help to the startup or may even recognize that investing in the startup was not the right decision as they believe they could not profit from their investment. The startup has to do everything to prepare for the investments such as hold a meeting of the Board of Directors to adopt articles, pass any resolution that may be needed, issue new shares. Some of the conditions may be demanded to be met before entering into an agreement, such as the completion of due diligence, enter into subscription and shareholder agreement, founder and employees enter into an employment agreement and IP assignment, service agreement. Due to the extremely competitive process of selecting the startups to be admitted to the program, the completion of due diligence should be done before making the decision whether to accept certain startup into the program and not.
8.2 Incorporation
Some accelerators demand only incorporated companies to apply to the program but most of them do not. A part of the Agreement may therefore also be the incorporation clause. The details in which this particular clause is written vary. It may just determine the period in which company should be incorporated, or also the location of incorporation and the
44 type of company they should incorporate as. Specification of the location of the incorporation can be found in both independent accelerators, independent accelerators which have government investors, as well as government-backed accelerators.
8.3 Investment
As described above, there are different ways to structure the investment, but the most common way is still to invest in exchange for equity. Most commonly they demand their shares to have the same rights as the shares of founders hold. Their investment, therefore, depends on the shares that founders are holding. Accelerators usually structure their investment in more tranches (with two tranches being the most common). There is usually a milestone startup has to reach to get the second tranche, which might be just a completion of a certain amount of weeks in the program or is more demanding such as getting follow-on investments. Milestones might be equal for all participating startups or may be agreed with each startup individually. That helps to align them with the absolute goal of the business as well as help founders gain perspective on what their short-term goals are. An accelerator may take the whole amount, or it may be divided with mentors or in case StartupBootcamp, where a small percentage goes to their global organization while a majority of the equity is taken by the local accelerator that is running the program.
8.3.1 Options
When corporate accelerators are providing funding through option agreement, they are investing a certain amount of money for an equity stake that would be negotiated in each case separately before starting the accelerator program. The investment is meant to help startups develop their business. In exchange, the corporation receives an option to buy shares. If they exercise their option, they pay nominal value of the share for their investment for the pre-negotiated amount of equity. The second option is negotiated in advance of the percentage of the company, which the corporation can acquire for a pre-determined amount. The company will be notified before they will exercise its options and company will have to issue them. Although they are not providing funding in tranches, a startup should set milestones for the business and notify the accelerator what is happening in the company. If the startup does
45 not reach the milestones, it may be asked to repay the investment. If the corporate accelerator decides to exchange their options for shares, the rights that they demand are very similar to those by independent accelerator as described below.
8.4 Anti-dilution
Most of the independent accelerator’s deal terms involve an anti-dilution clause. The conditions under which the investor’s equity share would not dilute vary, they are usually conditioned upon a determined amount of either follow-up investment or the pre-money valuation of startup. If the pre-money valuation exceeds a certain amount or the financing round exceeds a certain amount, the investor’s equity position would be diluted in the same amount as the shares belonging to the founders would (this is the most common way to determine how the shares would dilute). Of course, that means that accelerators might not be protected against anti-dilution if the founders’ shares do not have anti-dilution protection. Accelerator might want to determine the dilution formula itself and define it, such as broad-based weighted average anti-dilution clause. If the valuation of the 100% of the share capital of startup after the new capital investment is lower than the specified amount, investors shall not be diluted at all and founder should transfer shares to accelerator so it can maintain its position without payment of additional consideration. While the anti-dilution clause might be limited in time (such as: upon the closing of any financing round of less than $500.000 within one year after the execution of the stock purchase agreement) this is not common. The main characteristics to judge an anti-dilution clause by are the valuation and the time limit. As most of the accelerators’ deal terms have anti-dilution clauses with no time limitation, the only prevalent factor is the pre-money valuation or the financing round. The pre-money valuations vary between €3.000.000 and €4.000.000. Considering these are pre- seed or seed stage startups, this clause would protect investors for quite some time. Moreover, accelerators are trying to prevent just the percentage dilution of their investment, as their investment in exchange for equity does not correlate to their valuation of the startup, it cannot aim to protect against potential down rounds, so it cannot be said what the economic dilution instances would even be. Accelerators invest early in startup business cycle, so by the time startup will either have an IPO or be acquired, many new investors would invest in it, and some form of protection is necessary.
46 Even in the instances of issuance of convertible loans anti-dilution clause still applies as well as in the case new shares are issued to employees, due to which shareholder interest would dilute, accelerator’s interest shall not dilute. Even if additional investor provides non-cash investment to the startup, accelerator position shall not dilute. The above-defined conditions are not common, as accelerators do not usually define issuance of convertible loans as a condition under which the anti-dilution clause shall apply. Furthermore, issuance of the shares to the employees and the establishment of option pool may already be taken into account when taking an equity stake.212
8.5 Limitation on the transfer
Most commonly accelerators are not allowed to transfer the shares. The prohibition may be absolute, or it may require for shareholders to approve the transfer or the transfer can be done when market value is higher than the agreed minimum exit value or is limited in time. For companies in the accelerator program, accelerator holding an amount of their equity might assure them that their incentives are aligned, transferring the shares at an early stage might have an adverse effect on the company, especially if the new investor’s objectives were completely different since startup would otherwise have no way to prevent the transfer shares to another party. But because accelerator wants to receive a financial return on its investment, completely prohibiting the transfer might have a negative effect. So having a minimum exit value gives the startup a confirmation that accelerator would support them until a certain point but at the same time still not completely restricts the possible transfer of the shares so it would have an ability to profit earlier from its investment. The only source of the problem could potentially be determining the minimum exit value, especially considering that traditionally accelerators offer standardized terms. This means that accelerator has to define the minimum amount of money that it is prepared to get in return for its investment. Interestingly, the deal term of one corporate accelerator does not limit the transfer of corporation’s options to a third party. This may be as it is still an option at this point.
8.6 Rights of first refusal and preemptive rights
212 At the time of the investment, Upstart will own 8.8% of the company, so this will dilute to 8% after all ESOP fully issued.
47 Accelerator might demand to have the rights of first refusal or preemptive rights. Independent accelerators require preemptive rights in future fundraising with them having pro rata right to participate in subsequent financing or even have the option to participate at the discount. While there is nothing wrong with having preemptive rights that may help them prevent dilution of their shares or increase their shares having preemptive rights with discount raise some issues as it may send negative signals to other investors if accelerator does not want to invest more capital even if it were able to do so with the discount. On the other hand, corporate accelerators may demand a right of first refusal on any product or service developed during the program as their focus is on getting the product and not receiving a financial return on their investment.
8.7 Tag along
Tag along rights are common with most accelerators but when the rights can be exercised varies. Some demand tag along rights, the right to sell under same conditions as the selling party with no further specified conditions, meaning that every time a shareholder is selling tag along right be exercised. Most have certain conditions such as the sale of a controlling stake or more than 50%. Seller has to notify the other shareholders before selling and thus giving an option to other investors. Some of the tag along clauses do not have any specific conditions, which at one hand can be good as the accelerator could exercise this right at any time (and demand to sell to the seller under the same conditions and thus get a return on its investment) on the other hand, it is the accelerator’s obligation as well to inform others and give them ability to tag along.
8.8 Drag along
It allows a shareholder to require other shareholders to sell as well under the same conditions. The shareholder that demands the other shareholders to sell has to be a majority shareholder, some demanding them to hold minimum ranging from 51% up to 90%. In drag along, where the shareholder is holding 51% of equity, there are other conditions as well, as it is demanded that shareholders have to sell for a minimal price that is in accordance with fair market value, which is determined by the third party and is appointed with the consent of shareholders. This path might be longer compared to the one that has already determined the price that has to be offered for drag along right to be exercised, but
48 since the companies accepted and these terms are at an early stage and are the same for all companies it might be an obstacle to exercise the right. The accelerator might not be able to profit from the investment if the value is too high and the buyer of shares wants to purchase the whole company, meaning that it may prevent to get its return from acquisitions if the other shareholders do not agree. With the minimum of equity 90%, there are no additional conditions like a minimum price, meaning that a 90% of the equity holders have to agree that the price and value offered is appropriate. It seems highly unlikely the drag along right could be exercised at all.
8.9 Put option
Put option gives shareholder an option that in case the shareholder receives an offer for entire startup and other shareholders decline it, then the shareholder that wanted to accept it has a right to require the refusing shareholders to purchase that shareholder’s entire shares in the startup at a purchase price which corresponds to the consideration which would have become payable to the shareholder should the offer had been accepted. As accelerators are minority stakeholders, drag along clause may not be exercised exclusively by them. As they are not able to sell or even suggest the sale if at least some other investors do not agree, they want to ensure the option to still sell their share and get the financial return.
8.10 Representations and Warranties
There are several representations and warranties startup makes such as: it would perform all action required to perform obligation under Agreement, no pending litigation, all tax issues have been assessed, there are no holders of depository receipts and that accelerator ranks equally in all respects holding the same rights as the existing shares or shares of other shareholders. If the accelerator demands that startups entering the program have been incorporated, representations and warranties would also contain that the company has to be incorporated. The company has to further warrant that it has power and authority to enter.
8.11 Intellectual Property Rights
49 Startup also has to represent that Intellectual property (IP) is legally and beneficially vested to the business of the company, ensuring that the particular startup has the absolute entitlement over it and that founders have unconditionally and irrevocably waived all their rights which they may have in connection with the IP. The transfer of the IP rights from the company to a potential buyer is usually limited with Company agreeing not to transfer, assign, or sell IP rights unless it is at market value and the price is higher than the Minimum Exit Value (which has been agreed beforehand). Startups at this phase usually do not have many assets, with the most valuable asset usually being their IP. Accelerator is taking some of the startup equity and thus wants to ensure that the most valuable asset is a part of the startup.
8.12 Information and inspection rights
Accelerators demand startups to provide general updates. Startup may even be penalized if it does not provide them with it. Founders are obliged to inform accelerator promptly of any events or risk and share information that may affect the accelerator, its reputation or employees. The startup is also usually required to maintain accurate and complete accounting and other financial statements and deliver them to an accelerator. Accelerator also may have a right to annually audit startup. This demand keeps accelerator informed about what is happening (as any other investor would want as well) and also helps them provide advice to them if startups request it (as many accelerators state that their support does not end with the ending of the program).
8.13 Restrictive covenants
Accelerator demands founders not to refrain from being the shareholders. Very often there is also a non-competition and non-solicitation clause, ensuring that founders do not run a business or activity that is competing with the startup in the accelerator program, or even hold an interest in the organization that operates business or activity competing with the company as well as being prohibited from employing, soliciting, or attempting to employ away any person that is a key employee of the startup. Not only that, founders are not allowed to solicit or entice customers or representative agents in cases of comparable business or one that competes with business as well.
50 Accelerators want founders to focus on the startup that is enrolled in their program and after that to continue to focus on it, they often see team as crucial part for success of the startup and are actually also using it as a part of screening criteria, so logically they are demanding that the essential team members stay working in the startup.
8.14 Confidentiality
Parties might be required to keep all information regarding the Agreement confidential as well as abstain from disclosing any confidential information regarding the program or even giving negative feedback about the accelerator program. Confidentiality is much more important in corporate accelerators, where corporations may reveal their trade secrets.
8.15 Employee option pool
The accelerators might require the company to allocate 10% of ownership structure on a fully diluted basis to establish employee option pool (with 10% being the most popular choice for the accelerators). Although setting up an employee option pool typically lowers the pre-money valuation of startup, accelerator’s investment does not reflect a valuation of startup and thus does not affect it. Employee option pool is to help startup (and accelerator) assure that it would be able to attract and retain the talent.
8.16 Stock vesting
The accelerator may determine the stock vesting scheme, how the stock currently held by the employees and founders would vest. For employees, accelerator determines the vesting schedule and for founders, it may require reverse vesting provisions under which founders do not have full control of the shares that they own. Reverse vesting ensures that founders cannot suddenly leave a company and take their portion of shares with them which would make it almost impossible for an accelerator to recover its investment.
8.17 Board of Directors
51 Almost all accelerators demand to appoint their representative to the Board of Directors with an observer role. Accelerator should be notified with written agenda about each meeting, and there should not be less than four meetings per year (which may also ensure good corporate governance). Alternatively, an accelerator may demand a company to form an Advisory Board (with 3 to 4 people drawn from accelerator’s mentor pool) or an external Board of Directors. These roles are mainly to ensure that accelerators receive all important information as they are usually taking too small amount of equity to demand the seat on the Board of Directors. On top of that accelerators also demand to receive general updates (as mentioned above). Advisory board, as well as Board observer, may contribute unique knowledge but at the same time, at least in the beginning stages also lengthen the meeting of the Board. Moreover, accelerator might also demand that the Board of Directors has at least two directors, so accelerator may to a very limited extent provide a structure of the board.
8.18 Approval from accelerator
Accelerator often require its startups to request for approval before taking certain actions, such as: dissolving the startup, sell or give away assets, issue new shares, take loans, pay dividends, raise salaries, changes of control, adoption of equity incentive plans, creation of subsidiaries, purchase of securities from another entity, waiving of provisions, merger, amendments to the Company’s Article of Association, appointment or removal of auditors, entering or varying contract, distribution of dividends. These are all situations that may affect accelerator’s position. Having in mind that accelerators are minority equity holders it may seem too much to require to approve certain actions. Considering that accelerator do not often require a liquidation preference it might lose all of its investment without having any control over it. So in certain cases, it might be an appropriate solution but requiring startups to request for approval in too many situations may have a negative impact as it would not only lengthen the decision-making process, a startup would also have to depend on the opinion of the minority stakeholder and their plans for startup. Giving advice may be actually requested as people behind accelerators are skilled investors.
8.19 Exchange rights
52 If accelerator invests in exchange for preferred stock it shall have the right to convert the shares into such preferred stock, on an exchange ratio of one share for each one share of preferred stock. They can exchange at any time. As stated above, the common shares are still most widely used so most of the accelerators would logically not have that term in their term sheet.
8.20 Assignments
Startups are not allowed to assign rights, transfer obligation or subcontract. As accelerators often emphasize they are not only investing in the idea but are also investing in the team so it is understandable that they want to enforce that the startup team is the one that performs all the obligations.
8.21 Third party rights
The management company may sometimes be authorized to act on behalf of Investor and is entitled to carry out all of Investor Rights and benefits. This term was found in only one StartupBootcamp term sheet and as the accelerators are being run in several different locations by local Startupbootcamp accelerator, giving some rights to the Startupbootcamp Global (who is the management company) may provide some benefits as it enables the global company to have some oversight of their accelerator programs.
8.22 Liquidation preference
Proceeds shall be distributed first to the accelerator up to the full amount of their capital contribution plus a preferred return in the case of liquidation. The liquidation preference is a term that is included in only a few of the agreements, with accelerators partially protecting themselves against liquidation with demand for their approval.
8.23 Waiver
53 Services provided by the accelerator, mentors, consultants are all advisory in nature and thus, the final decision whether to follow the advice or not lies within the startup. The company, therefore, waives all claims against accelerator or its service providers (such as mentors). Since there is no formal agreement between mentors and startups, accelerators arrange the need to classify mentor’s advice as advisory as well in the agreement between them and startup. Startups are obliged towards accelerators that they would not bring a suit against mentors.
8.24 Other possible clauses
Virginia Commitment clause is a part of MACH37 accelerator deal term. It obliges a startup to establish and maintain a significant presence within 24 months in Virginia. If the company fails to do so, it has to repay some of the cash portions. From the crunchbase.com, it can be seen that all the startups that have participated in the program have headquarters located in Virginia, but it is rather unclear what could be interpreted as a significant presence. The reason that accelerator requires that is the fact that accelerator is partly sponsored by Virginia. Here it can be observed how the government objectives are being pursued. As they aim to provide new jobs and help the economy, accelerator demands that the company stays in Virginia for 24 months. Furthermore, the accelerator also limits the outside funding, as startups are prohibited from receiving funding from other publicly-funded economic development or company that would require them to relocate outside of Virginia.
9 Do Accelerators help?
To determine whether the accelerator programs work, the post-program success of startups has to be researched. In order to do this, the data was taken off crunchbase.com, which collects its data from companies that are self-reporting. From the about 2.428 startups that were in an accelerator program in Europe, at least some data was found for 1641 companies. Another way the data was gathered was by accelerators that keep collecting and reporting financial information itself, such as Techstars and Startup Reykjavik. Startups are operating in the different sectors, with most of them despite not operating strictly in the IT sector, a majority of them are still developing either an application, a platform or other kind of software as their product. Despite that those startups were
54 classified by the function their product has (so a social platform for medical professionals was classified as a startup operating in the healthcare industry) the highest percentage of startups (37%) is operating in IT industry, that may develop products related cloud computing, file sharing and so on. The least number of startups is operating in social change subsector, mainly as the number of accelerators accepting not-for-profit startups is limited.
% of startups
40 35 30 25 20 15 10 5 0
% of startups
Combining the information available it can be shown that out of all the 1641 companies only 5% are not active anymore. While this seems positive news for accelerators it has to be taken into account that there is no data for about 900 companies so the percentage should be higher, especially as Techstars is claiming that 10% of its startups have failed. What could affect the seemingly low failure rate is also the fact that only 9,4% of the companies are more than five years old. In fact, 49,4% of the startups that were in the accelerator program are between one and three years old. Startup death is hard to identify, as many are essentially death but continue to operate, with investors usually being quiet about the failure of the startups.213
213 The R.I.P. Report- Startup Death Trends, January 18th 2014, available at: https://www.cbinsights.com/blog/startup-death-data/
55 Age of startups
60
50
40
30
20
10
0 1 year or less 1-3 years 3-5 years More than 5 years
% of startups
Moreover, out of all the startups that have participated in the accelerator programs 33% received follow-up funding and 9,7% have raised more than $500.000. This percentage has taken into account all the startups, even those where there is no information available. Among 710 startups, that have the information about raised funding available, 66% has raised less than $500.000, and 22% has raised more than $1 million. While the startup founders claimed that getting access to the network and potential follow-up investors, more than half of them are not actually able to raise it. It has to be taken into account that follow-up funding here was meant as funding provided by other investors and not accelerators itself (as sometimes accelerator would provide additional investment after the participation in the program). Although this helps startups, it changes slightly the business model of the accelerator, and it does raise a question whether this is just providing a delay for an inevitable failure of a startup.
56 Funding raised
7000%
6000%
5000%
4000%
3000%
2000%
1000%
0% Less than $500.000 $500.000-$1 million $1 million-$5 million Over $5 million
% of startups
Another way to look at how the startup is doing is by looking at the number of employees. Since the majority of startups operates for less than three years, the number of employees is consistent with that, with 65% of startups having 10 or fewer employees.
Number of employees
70 60 50 40 30 20 10 0 1-10 employees 11-50 employees 51 or more
% of startups
57 10 Accelerator's performance
It is not only crucial to determine the performance of the startups in the accelerator programs, but accelerators themselves have to also have a positive performance that enables their proposed business model to work, with the main proposed source of profit for accelerators being the exits (acquisitions and IPO) of the startup in their portfolio. The number of accelerators is 235 according to seed-db.com or 467 according to angel.co, but the number of accelerators that have a substantial amount of information on crunchbase.com is less, at 75. Out of those 75 accelerators, 44 accelerators had startups that were acquired in the portfolio (58,7%), and 5 had startups that went public (6,7%). While this data shows that more than half of the accelerators received at least some return on its investment it does not demonstrate whether this makes accelerator model a sustainable one. For the better interpretation, some other results also have to be shown, such as a number of exits compared to the number of investments of an accelerator. For this comparison, a number of accelerators was brought down to 39 as either there was no information about the number of investments or the number of investments made was incomplete and thus exceptionally high compared to other accelerators or accelerators have not had a startup exit yet. The top accelerator with 12.6% exits out of all the investments made was unsurprisingly Y Combinator. All the top and the most renown accelerators have a number of exits compared to investments made above 8%. Not only do the most renown accelerators have a high percentage of exists they are also able to attract the most of the follow-up funding. As already mentioned, accelerators act as deal sorters for the follow-up investors, graduating from the top accelerator may be an indicator of the quality of the startup. As reputation is one of the selecting factors when startups are choosing among accelerators (the number of which continues to rise), the top quality startups are being accepted to the accelerators that are the most renown making the reputation of accelerator one of the key factors for potential follow-up investors, who are deciding in which startup to invest or which demo day to attend.
58 Number of accelerators with below ranges of exits per number of investments
14,5
14
13,5
13
12,5
12
11,5
11 0.9-3.9% 4-7.9% 8-13%
The sustainability of this model depends on two factors first, how big the actual exit from the startup is and how much accelerator invested in it. Top accelerators generally invest more with also more investments made, with 500 startups, Techstars, and Y Combinator all making more than 500 investments. To calculate some of the returns, they are getting, taking the average price of acquisition of successful US startup as $155 million,214 although the recent trend has been changing to focus more on micro-acquisitions, shifting from targeting the startups with established product, proven revenue stream and hundreds of employees to startups with smaller teams.215 If the price of acquisition would indeed be as high as suggested, considering also the average percentage of equity accelerators take (7,2%) that would mean getting a return of $11.2 million on an acquired startup. As accelerators have averagely 6 acquired startups in their portfolio that would be summed to $75 million, comparing to investing about $4 million averagely per accelerator (with each accelerator having made an average of 90 investments for $43.413). Looking at startups from European accelerators it can be observed that the trend of micro-acquisitions is still visible, with an average startup being 4 years old at the time of the acquisition, also leading to less funding raised. Startups have raised from only $10.000 up to $13 million, averaging at $2.56 million raised before the acquisition. That means that accelerators are getting significantly less return on their investment to what has been suggested above, as the average company being acquired at
214 According to: http://techcrunch.com/2013/12/14/crunchbase-reveals-the-average-successful-startup- raises-41m-exits-at-242-9m/ 215 According to Amit Paka: The Rise of Micro Startup Acquistions, 15th of April 2015, available at: http://techcrunch.com/2015/04/15/rise-of-micro-startup-acquisitions/
59 $155 million has raised $29.4 in funding. If the ratio between raised funding and price is similar, that would actually mean that each investment would provide a return $949 thousand, with an average accelerator getting $5.7 million so far. This means that accelerators are getting less per each acquisition of a successful startup, but also obtaining a return on their investment earlier. With the acquisition price falling, to keep a model sustainable the number of acquisitions would have to be higher, with possibly even bigger classes of cohorts. Top accelerators already have double the amount of average exits per investments (around 12%), which might be due to them being older as well as being the distinguished program that they are, attracting the most promising startups. As stated by 500 startups founder Dave McClure, return on the investment is not the only source of income for them (suggesting that this may be true also for the other accelerators). Its sources of revenue are also management fees, accelerator program fees, conferences, and events. Notably, the numbers are suggesting that they receive the least amount from the actual investments.216
11 Accelerator Bubble and Future Predictions
As accelerators are becoming increasingly popular critics are warning that this might enable startups of lesser promise to enter into such program as well as the decrease of funding and quality of the program and mentoring.217 The competition thus is not just among startups to get accepted into the best accelerators, but also among accelerators to accept the best startups, that are more likely to be successful, helping accelerator receive a highest possible return on their investment. Due to some accelerators having success with their model it cannot be said that accelerator will completely disappear, but there might be some changes in the future. As of now, the number of general accelerators is still high, but it can be predicted that with the increasing number of accelerators, they will try to separate themselves from the others by vertically specializing in one particular sector. Although there are suggestions that the accelerators might take a similar approach as venture capital funds did and started supporting startups
216 What is 500 Startups' Business Model?, 2013, available at: http://www.forbes.com/sites/quora/2013/04/22/what-is-500-startups-business-model/#1402b5203d9e and https://www.quora.com/What-is-500-Startups-business-model 217 Clark (2013): Waiting for Accelerator Bubble to Pop, available at: http://www.bloomberg.com/news/articles/2013-03-14/waiting-for-the-accelerator-bubble-to-pop
60 that already have some level of success,218 it may be not beneficial as accelerators are providing mentoring that startups with some success might not even need anymore. Accelerators are trying to expand their networks and ranges of services provided by partnering and cooperating with other accelerators. On top of that, EU has stated that the local focus of accelerators is problematic and is encouraging establishing accelerator networks which may result in consolidation and concentration of accelerators.219
12 Conclusion
To conclude, there are several common characteristics accelerators have, and that separate them from other organizations in the startup community. As the trend continues characteristics may change making the separation even more difficult. Different types of accelerators have different objectives, making their proposed structure of investment into an accelerator more varied but as the trend of partnering between different types of accelerator continues, the structure of the investment might become more similar as the independent accelerators are usually the ones that are driving the partnership and offering their terms. Moreover, partnering up also provides them to benefit from advantages that other types of accelerators might have while at the same time none of the strategic objectives of different types is contradicting or clashing. Independent accelerators provide funding that other types may not be able to while their advantage is either the existing facilities, skilled mentors or a direct pipeline to potential new entrepreneurs. While the structure of an investment differs, independent accelerator terms structure their deal terms similarly and are mainly focused on protecting their investment made in the startup, with few additional terms that they might demand such as participation in the program. The strategic objective of the investors can be recognized as well, as it is common for the government to demand startup not to move after a program for a certain period. Whether this is actually efficient is still questionable, as most of the accelerators that have participated in the Start-up Chile accelerator still state to have a headquarters elsewhere, thus not really improving the region. What might be still the problem is that these startups are at an early stage of their life-cycle, meaning that they would need follow-
218 Friedman (2015): The Future of Accelerators: It Takes More Than Money to Come Out On Top, available at: http://www.forbes.com/sites/theyec/2015/01/08/the-future-of-accelerators-it-takes-more-than-money-to- come-out-on-top/#7117c0442b4a 219 Wauters (2015): European Startups: current state and future trends, available at: http://tech.eu/features/4555/european-startup-accelerators-current-state-future-trends/
61 up funding. Although accelerators in the region are providing some funding and mentoring, there might be too little investors in the region who could provide them follow- up investments. On the other hand, if the majority startups that were participating in the accelerator program proves to be a successful business, that may attract other investors in the region. As for corporate accelerators, the results of the startups in that programs show that startups in the programs are as successful as those enrolled in the independent accelerator program. While this is true, the research has not been done on the effect accelerator program has on the corporation to show whether corporations are benefiting as well. To predict whether accelerators may be able to produce majorly successful startups it has to be determined the effect that accelerator may have on a startup. As accelerators are a rather new occurrence, it is difficult to determine the sustainability of the model itself and whether the program helps the startups partly due to the unavailability of the data and partly because most of the programs are too young to actually decide whether the programs are effective or not. Moreover, although the data might suggest that accelerators are helping the startups, since most of the accelerator programs are quite young and most of the data was found about startups that are less than 5 years old it is difficult to determine, whether just the additional funding is helping or the mentoring and other opportunities are making them better off as well. What it can be said is that the huge number of accelerators would essentially mean for accelerators to accept lower quality startups, unable to provide the return on the investment accelerator needs to survive. Accepting the lower quality startups might also decrease the reputation of the accelerator, as them being unsuccessful might be interpreted as the program being ineffective or badly structured. Consolidation in the industry between the accelerator of lesser quality might be needed as it would enable them to provide higher funding with a wider arrange of mentors and bigger network to potential follow-up funding, enabling them to provide better startups. Although the full effect of the accelerators remains to be seen as most of the accelerators are too young to get the full return on their investment, founders are generally finding them helpful so accelerators are here to stay, but some changes in the industry might be required for them to remain profitable businesses.
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