Business Incubator and Accelerator Sustainability

Thea Chase and Julian Webb May 2018

Contents 1 Background ...... 4 2 Context for considering financial sustainability ...... 4 2.1 Public support that encourages the right behaviour ...... 5 2.2 The quality of ecosystems is an important factor in self sustainability ...... 5 2.3 Blurred distinctions ...... 5 3 Business Incubator Sustainability ...... 6 4 Property based business model: a foundation for self-sustainability ...... 9 4.1 Critical factors to maximise financial self-sustainability ...... 11 4.1.1 Scale of facilities ...... 11 4.1.2 Free buildings with long term arrangements...... 12 4.1.3 Critical Mass of Demand ...... 15 4.1.4 Time ...... 15 4.2 Cowork spaces ...... 16 5 Building on the foundation with other revenue sources ...... 17 5.1 Success sharing ...... 17 5.1.1 Small percentage of sweat equity ...... 17 5.1.2 Small percentage of sales or increased sales (royalty) ...... 19 5.1.3 Seed Funding ...... 19 5.2 Training ...... 21 5.3 Partnerships and corporate sponsorship broadening revenue opportunities ...... 22 5.4 Hybrids: Super incubators ...... 23 5.5 Other commercial activities ...... 23 5.6 Government funding ...... 23 6 Accelerator Sustainability ...... 25 6.1 Introduction: Accelerator Models still evolving ...... 25 6.2 Views on accelerator sustainability ...... 27 6.2.1 Equity ...... 28 6.2.2 Revenue share ...... 29 6.2.3 Fee for service ...... 29 6.2.4 Related business ...... 29 6.2.5 Economies of scale ...... 29 6.2.6 Conclusions ...... 30 6.3 Models ...... 31 6.3.1 Investment – funding centric ...... 31 6.3.2 Community based – economic development ...... 32 6.3.3 Corporate ...... 33 6.3.4 Targeted populations and industries ...... 34 6.3.5 Conclusions ...... 35

1 Background This paper was initially commissioned by the BADIR Technology Incubator program in Saudi Arabia, in early 2018, to raise awareness about the global reality of incubator and accelerator financial self- sustainability. It was updated for broader circulation in conjunction with BIIA in Mid-2018.

The BADIR Technology Incubator Program, which commenced in 2007, pioneered incubation in Saudi Arabia and now operates 8 technology incubators and 2 accelerators, with more planned. It has become the benchmark for incubation in Saudi Arabia and indeed other countries in the Gulf region.

The authors, Thea Chase from the USA and Julian Webb from CREEDA Projects Pty Ltd and BIIA in Australia, have extensive experience with incubation and acceleration in more than 50 countries and work closely with BADIR in Saudi Arabia. They thank BADIR for making this paper possible.

2 Context for considering financial sustainability Across the globe, most start-ups do not continue and, of the small percentage that do, only a tiny percentage go on to grow. An obvious market failure exists around provision of support to start-ups, whether in terms of infrastructure, advice, mentoring and coaching, or seed finance. Start-ups are simply too risky for this to be viable without public support, of one form or another.

Hence it should be no surprise that all business incubators rely upon public sector support, to some degree, for their establishment and capital costs and to support operational costs, some for a limited time and others for the long term. From a purely private commercial point of view, no business incubators are independently financially viable, in terms of covering both their operating and capital costs and making a return to investors. The few examples are the exception rather than the rule1 and also rely upon either corporate or public-sector support. Over the past 50 years incubators have become an accepted part of the landscape in most countries, with numerous studies of their operations and impact, the results of which help justify public and other investment.

Despite early promise, it seems seed accelerators are in a similar position, with only a few exceptions that are privately self-sustainable, notably y-Combinator, Tech Stars, 500 Start Ups and maybe a few other early examples. The bulk now rely upon government, philanthropic or corporate funding to support their operations. Accelerator models however keep changing as operators search for a viable business models and relevant impact. As a far newer concept and service this is no real surprise and is why data is hard to come by, although research is underway to better understand the role they play and the impact they achieve.

Rather than asking the question can business incubators and accelerators be financially self- sustainable, more pertinent questions are:

• whether or not the public support can be provided in better ways than annual operating grants; • to what degree can they be self-sustainable; and • what are the factors that underpin self-sustainability?

1 Just about the only one is Raizcorp in South Africa, run by an entrepreneur guru, and which receives significant corporate support, http://www.raizcorp.com/ Analysis of financial self-sustainability is complicated by the proliferation of services for start-ups in the past decade, many of which use the term incubation or acceleration in new ways and by fact that accelerator models keep changing. Definitions and distinctions are at times blurred. 2.1 Public support that encourages the right behaviour Business incubators and accelerators should operate entrepreneurially, in one sense as role models for their clients. Grants are necessary to assist with establishment, but in the longer term may not be the best mechanism for support. Grants are normally for relatively short periods and may not encourage the necessary longer-term perspective, recognising it takes many years for client companies to succeed. They can make people lazy and may give the wrong incentive (i.e. more grants), unless they are managed by very tight and clear KPIs, such as creating x number of companies and y number of jobs in a period. There may be better ways than annual operating grants. Ways that encourage a long-term approach, help with at least partial financial self- sustainability and encourage the right entrepreneurial behaviour. As is shown by the following analysis of sustainable business incubator examples, one common way is to provide incubators with buildings at no or minimal cost. They then have to work entrepreneurially to generate rental income from start-ups. Providing seed funds for incubators and accelerators to use to help finance the growth of start-ups, at the same time as encouraging private co-financing, is another way public funds can be used to encourage the right entrepreneurial behaviour and help achieve a degree of financial self-sustainability. A number of examples are outlined in the following analysis. 2.2 The quality of ecosystems is an important factor in self sustainability In parts of the USA, Europe, Australia and New Zealand incubators and accelerators can rely upon voluntary high-quality business mentors, legal, accounting and other professional help. This means they can operate with minimal staff and minimal costs. This is not the case in more disadvantaged regions and countries, where this expertise has to be paid for, or provided by paid staff. Staffing levels and the cost of operating a similar quality incubator or accelerator, with a similar number of clients, may be far higher. For this reason, even with free buildings, many incubators still rely upon a percentage of public funding. The analysis following profiles some examples, in good entrepreneurial ecosystems, which cover all their operating costs by rent and other self-generated income, albeit in free buildings provided by the public sector. They may not be the most relevant examples for countries and regions with less well-developed ecosystems, where more staff may be need, where costs may be higher and where partial self-sustainability may be a more relevant ambition. 2.3 Blurred distinctions Since the Global Financial Crisis, support services for start-ups have proliferated, often calling themselves incubators or accelerators, with little regard for definitions. This is especially so with acceleration, as noted by GUST in their 2016 report: “As new models emerge, the term "accelerator" describes an increasingly diverse set of programs and organizations, and, often, the lines that distinguish accelerators from similar institutions, like incubators and early-stage funds, become blurred”2. The rapid rise of coworking spaces in the same period, complicates the picture even further, especially when they accommodate acceleration programs, or target start-ups.

NESTA in the UK now considers incubation, “not just as the services provided by a self–identified ‘incubator’, but rather as an umbrella term for a range of startup programmes”3.

2 http://gust.com/accelerator_reports/2016/global/ 3 Start Up Programs, What’s the difference? NESTA 2015

In this report, despite blurring lines of distinction, we consider incubator and accelerator financial sustainability separately, to draw relevant insights from each, which then may be combined in practice around a mixed model. Indeed, proven and long-standing incubators that may have started in the 1990s are very likely today to offer most if not all of the services in the table above.

3 Business Incubator Sustainability As the World Bank notes, “Self-sustainability, while a major aspiration for incubators globally, is often seen as a big challenge”.4

However, there are many examples of business incubators that are financially self-sustainable, in terms of covering their operating costs from self-generated revenue, typically in buildings for which they do not pay rent, or the capital costs of the building, and after initial public seed funding for their establishment. This is illustrated by data in the NBIA 2012 State of the Industry Report5, which asked respondents about their ability to maintain operations if cash operating subsidies ceased. One third (33%) said they did not rely upon cash subsidies, on par with survey results from 2006, and only 18% said they would have to discontinue their services if subsidies ceased.

Figure 1: iNBIA - Ability of incubators to continue without subsidy

4World Bank infoDev Program, Module 14 Business Models, Incubator Manager Training Program 5 2012 State of the Business Incubation Industry, NBIA Others are partially self-sustainable, combining self-generated revenue with public subsidies, as illustrated by data from the European Business Innovation Centre Network, EBN, which reports in its 2016 Impact Report that on average public subsidies contributed 68% of member revenues and that of the remaining 32%, 58% was contributed by rent and 15% from other income from SMEs and entrepreneurs.

Figure 2: EBN Impact Report 2016: Incubator public subsidies

Figure 3: EBN Impact Report 2016: Incubator private revenue

Across the globe the vast majority of self-sustainable, or partially self-sustainable, business incubators rely upon public funding for their establishment and then a rental business model, which predominates and has been supported by governments in numerous countries, such as China, USA, Europe, Malaysia and Australia, and which is used as a foundation for a mixed business model, such as India. Indeed, most incubators have a mixed business model to some extent, making revenue from a range of sources, including from training and success sharing with clients.

This is illustrated by UK data which shows the importance of public, university and corporate support:

Percentage of UK incubators receiving funding from different sources6

Other incubators and incubation programs deliberately rely upon long term government funding for the bulk of their revenue, as is the case with the technology commercialisation incubation program in Israel and much of the incubation in the Gulf, at least to date in Saudi Arabia, Qatar and Kuwait, although the situation is changing. In these cases, government is buying the incubation outputs, whether they be jobs, companies, or commercialisation, and providing a service of public benefit at the same time as addressing a market failure.

Self-sustainability is not always desirable, if necessary services have to be understaffed, or below standard, to make ends meet financially. Incubators in many countries or disadvantaged regions cannot rely upon the free mentoring and professional services that incubators enjoy in other more developed ecosystems, which can minimize operating costs by relying on free services without compromising services. These countries and regions also have well developed entrepreneurial ecosystems, meaning there are fewer gaps and hurdles for entrepreneurs to overcome; in other words, less need for incubation.

Understanding the particular conditions that underpin sustainable business models is most important, especially the rent-based property model and how this underpins a mixed revenue model with additional revenue from success sharing, training and other sources.

Ultimately the question is to what extent can incubators be financially self-sustaining in particular circumstances and working for particular objectives. Whatever the answer it needs to be planned and will take time to achieve.

6 BEIS Research Paper Number 7: Business Incubators and Accelerators the National Picture, 2017 4 Property based business model: a foundation for self- sustainability The traditional property-based incubation model is the most common around the world. For instance, in 2012, 93% of USA incubators had a dedicated facility. The model normally relies upon free buildings (not having to pay capital costs, or heavily subsidized rental) with long term arrangements and of sufficient scale, so that the rent and associated facility and office service fees charged to tenants cover all or a large portion of operating costs. Business support is typically bundled in with the rent and not charged separately.

Given incubation relies upon physical facilities, it is no surprise that globally, a very high percentage of incubators rely upon rental income as their main revenue source. For example, the NBIA 2012 State of the Business Incubation Industry report7 shows that rent accounts for 53 % of revenues on average.

Figure 4: NBIA - Incubator revenue by source

As mentioned earlier, with the 150 incubators in the European Business and Innovation Centre Network (EBN), public subsidies provide for 68% of revenues and rental fees (housing) accounts for a total of 58% of the remaining 32% of revenue.8

Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those that rely on subsidies, which can afford larger staff numbers. Incubators that rely on rental fees for sustainability typically have small staff numbers, ranging from one to five members depending upon the incubator’s size. For instance, in 2012 in the USA the average full time equivalent staff numbers per incubator in the USA was 1.8, down from 2.4 in 20029 and in 2012 the average number of clients in USA incubators was 35. In Europe with higher levels of subsidy EBN’s BIC’s employ more people10.

7 2012 State of the Business Incubation Industry, NBIA 8 EBN EU BIC 2016 Impact Report 9 ibid 10 EBN BIC Observatory 2016

However, it must be noted that these incubators in the USA and other developed countries rely upon significant voluntary assistance from quality mentors and business professionals, something that is far more difficult to achieve in many other countries.

Anchor tenants.

A feature of property models is anchor tenants. Anchor tenants are organizations who are not incubatees and who are rented space on longer term arrangements. They may be service providers useful to incubatees, or related organizations who help attract incubatees to the facility, or graduates, or simply organizations renting larger spaces to provide cash flow to the incubator. In the USA in 2012, 15% of space in USA incubators was rented to anchor tenants.

Anchor tenant example: Appalachia incubators:

Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier of New York to northern Alabama, Mississippi and Georgia. A total of 76 incubators responded to the 2009 survey of Appalachian business incubators. Of these 39 ARC incubators (~50%) house service providers and 38 incubators (~50%) house anchor tenants.

The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a positive indicator for two reasons. First, the presence of anchor or key tenants can influence whether an incubator is financially viable. Second, anchor or key tenants can provide important services and benefits to incubating tenants, ranging from providing supplier or service-provider opportunities to acting as mentors.1

Stepped and Discounted Rental Rates

Many incubators have discounted rental rates, stepped up to the commercial rate over the typical period of incubation, say 25% in year 1, 50% in year 2, 75% in year 3 and 100% of the commercial rate thereafter. Others instead and to maximizing the rental yield, charge a premium for smaller spaces and rent clients just for the space they need, allowing them to change (increase or decrease) on a monthly basis, with a license agreement rather than a lease. They may only need 20m2 and be prepared to pay a premium for such a small space. Commercial comparisons are often only realistic for larger spaces around 100m2. 4.1 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable:

1. Scale of the facility; 2. Free buildings with long term arrangements; 3. A critical mass of demand; 4. Time. 4.1.1 Scale of facilities Size matters when it comes to the property-based incubation model. Economies of scale are crucial so that a large proportion of the operating costs are covered by rent. The rule of thumb in the USA and Europe is 3,500m2, but it all depends on local conditions. The size required depends on the level of salaries and other operating costs and potential income, which in turn depends heavily on prevailing rental rates, against which incubator rates are pegged. Incubators struggle when they are too small. Unfortunately, in the Middle east 96% have an average of 1000m2, according to the 2011 iPark11 evaluation benchmarking exercise, which also found the international average size of an incubator is 4,700m2. The situation may be changing, at least if the Qatar Business Incubator is any indication, claiming to be the biggest mixed-use incubator in the world, with a facility of 20,000m212.

China with the Torch Program under the Ministry of Science and Technology takes scale to another level. The best of China’s 1,239 technology incubators and 435 national level technology incubators supported under the program are located in high technology zones, or parks of one form or another, capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory, tax and financing services offered in these zones13 and with many tens of thousands of square metres at their disposal. For example:

• Shanghai Pudong Software Park Incubator, located in the China (Shanghai) Pilot Free Trade Zone and the core area of Zhangjiang National Innovation Demonstration Zone, is a “state-level science and technology business incubator” identified by the Torch Center of the Ministry of Science and Technology and has 40,000m2 for incubation of which 31,741m2 is leasable. The incubator is profitable and most revenues are from rent and will soon be enhanced by returns from its seed fund investment in clients. • National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and Technology Park Development Co. Ltd has a rentable area of 127,000 m2 and more than 350 companies under incubation. It makes 60% of its revenue from rent. The initial capital investment was from the university. • Suzhou(Cao Hu )Tech Park of Xi’an Jiaotong University is a more recent development (2012) by Xi'an Jiaotong University and Xiangcheng Economic Development Zone with 28,000m2 for

11 iPark – Jordan’s Technology Hub, www.iPark.jo 12 http://www.qbic.qa/why-qbic/space/ 13 http://www.chinatorch.gov.cn/english/xhtml/Program.html incubation, with 115 incubatees, in 2017, in a park with a further 90,000m2 of office space. Only 30% of its revenues are from subsidies14.

In effect China combines incubation, technology parks, clustering and early stage financing into one. Since the program started in 1988 it has taken significant investment from the Torch Program and municipal partners, but the reported results including 11% of China’s GDP, are more astounding than the scale. They are summarised by the University of NSW15 in the adjacent graphic, noting the investment may well be understated in terms of the capital cost invested by municipal partners. Writing in the Huffington Post Steve Blank calls the Torch Program the “Glow that can light the world” saying: “In size, scale and commercial results China’s Torch Program from MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the world. Of all the Chinese government programs, the Torch Program is the one program that kick- started Chinese high-tech innovation and start-ups”16 4.1.2 Free buildings with long term arrangements A large facility on its own is insufficient if the incubator has to pay the capital costs Example: INNOVATION DEPOT, Birmingham, Alabama, or rent. There is simply no way to make USA. a margin to cover the costs and in particular the cost of a business support program. Buildings may be provided on a long-term basis with what is called a peppercorn rental, typically a nominal sum such as $1.00, or they may be owned, having been purchased or purpose built with public funding. In the

West incubators commonly use old disused facilities provided by state or Building: Former Sears store in downtown Birmingham local governments, or universities, which Constructed: Late 1940s they refurbish as business incubators. Old manufacturing facilities, schools, Renovated: 2006 council depots are not uncommon. In Renovation Cost: $17 million other countries old disused buildings are far less common, in which case purpose- Renovation Funding Sources: City of Birmingham; built facilities may be the best option. Jefferson County; University of Alabama at Birmingham; This is common for example in China, private donations

14 Information from the authors private contact with the incubators 15 http://www.torch.unsw.edu.au/national-context 16 https://www.huffingtonpost.com/steve-blank/chinas-torch-program-the-_b_3063069.html Korea and other parts of Asia, for instance at the Hong Kong Science and Technology Park17 or Technology Park Malaysia18.

The National Science and Technology Entrepreneurship Development Board in the Department of Science and Technology19 is the main funding body for technology incubators in India. They know the importance of free facilities and mandate in their guidelines that the host institutions, mostly universities and research institutes, have to provide the facilities and utilities at no cost to incubators, which need to be run at arm’s length from the host institution, typically by new non-profit organisations. They make it clear they will only provide funding for 5 years, after which the incubator has to generate the bulk of its own revenues, although they do continue to provide what may be called project funding. To date facilities have not been large enough and rent averages around 25% of revenues. Accordingly, they are changing the guidelines to mandate 2,000m2 must be provided.

t-Hub in Hyderabad is a good Example. T-Hub, India – largest technology incubator in South example. It is being constructed with Asia public funds, claiming to be the largest technology incubator in South Asia with 70,000ft2 (~7,000m2) in Phase 1 and another 300,000ft (~30,000m2) as Phase 2 in the next 3 years20.

T-Hub also illustrates an important trend, whereby leading incubators incorporate incubation, acceleration, cowork spaces and seed funding, sometimes referred to as Super incubators or

Hubs.

17 www.hkstp.org/en/about-hkstp/the-corporation/about-hkstp/ 18 http://www.tpm.com.my/ 19 http://www.nstedb.com/ 20 Personal conversations with NSTEDB head Mr HK Mittal and http://startuphyderabad.com/t-hub-phase-2- hyderabad-4-times-bigger-phase-1/ The Innovation Centre Sunshine Coast is an example of a Example: Innovation Centre Sunshine technology incubator where the university has provided a Coast. 1,500m2 purpose-built facility for incubation, in a regional area just north of Brisbane21.

21 https://innovationcentre.com.au/#

4.1.3 Critical Mass of Demand While the property model works well at scale in major population centres, it struggles in Example; Grand Junction Colorado Business smaller communities, where there is not the incubation Centre, in a community of 60,000 critical mass of demand to underpin the people necessary economies of scale. The model can still underpin a sustainability strategy, but needs to be complemented with other revenue sources and related services, to ensure relevance

This is illustrated by the Grand Junction Colorado mixed use business incubator (BIC). With 35,000ft2 of incubation space, a loan fund and as a provider of SBDC services, BIC is 75% self-funded. Income is generated through a variety of sources, including tenant rent and program fees, low-cost workshops and classes, Business Loan Fund interest, Enterprise Zone administrative fees, and property management fees for a Department of Energy facility located on the campus. BIC also receives grants from city, county, state and federal government entities, and sponsorships from local banks, corporate entities, service clubs, and private donors.22.

4.1.4 Time It takes time to adapt incubation to particular local circumstances, to evolve government support systems and incubator business models that work and maximise the potential for self-sustainability. In other words, policies and government support systems need to evolve along with the incubators supported, to jointly maximise the potential for self-sufficiency. The Torch Program in China started in 1988 and only in the last decade or two has the program and its incubators, with Chinese characteristics, become a beacon for others; it took many years to perfect the system. Similarly, the Indian incubation system under the NSTEDB started in 1984, but took many years to get the policy and ecosystem right, so that now incubators are only funded by the national government for 5 years, but benefit from seed funds they can use with their clients. In most countries the same sort of evolution applies. Malaysia with good incubators in parks such as Technology Park Malaysia (TPM), where government funds the capital costs and the incubator relies mostly on rent, found performance improved dramatically when the incubators were corporatized, i.e. owned and managed by independent government owned non-profit companies as opposed to by government departments.

22 http://gjincubator.org/

4.2 Cowork spaces Cowork spaces have a similar business model to property-based business incubators, making most of their revenue from renting desks and space, as shown by Deskmag data below23:

The big and critical difference is that they do not invest in a comprehensive business support program, allowing 74% of those that need to be profitable to break even, or make a profit. They simply can’t afford to and instead rely upon events and peer learning. None the less numerous property-based incubators around the world now incorporate cowork spaces into their offering and or work with private cowork spaces.

23 Deskmag 2017 Global Survey

5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources, in particular from sharing in the success of clients and training. 5.1 Success sharing With success sharing the incubator shares in the financial success of clients, to generate additional revenue that supplements rental income. Even though it does not generate reliable annual revenue, it can be attractive in that clients only pay if they are successful and the incubator and client interests are thereby aligned. There are a few variants:

1. Small percentage of sweat equity: typically seen in technology incubators, for which there are many examples, e.g. Cicada Innovations Sydney (see below); 2. Small royalty on client revenues: which is far rarer than equity examples, e.g. SINE at IIT Bombay, which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25; 3. Finance brokerage: whereby the incubator takes a percentage of the finance it helps a client raise, typically 1-2%, but not if it takes equity. 4. Own seed fund investment: with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (e.g. IceHouse NZ, Building Clever Companies NZ, Indian Technology Incubators), to the very few where investment is the main revenue source (e.g. PowerHouse NZ).

5.1.1 Small percentage of sweat equity With this variant a small percentage of equity, typically in the order of 5%, is taken in clients. Note the incubators do not pay for the equity with cash. Instead it is provided as a condition of incubation. Equity stakes vary by incubator type and from one client to the next. Most incubators don’t exceed a 10% equity stake, while others go as low as 2%.

The NBIA 2012 Stock Take showed that 29% of technology incubators take equity in some or all of their clients, compared to 13% for mixed use incubation programs. Interestingly this is a significant decline from 2006 when 46% of technology incubators took equity in some or all of their clients.

24 http://www.cticdakar.com/fr/? 25 http://westernbace.com/ This equity, which is likely to be diluted by financing rounds, does not provide for reliable day to day revenues. It may only be realizable at exit events, or Example: Cicada Innovations Sydney: iNBIA Award winner - Randall via founder buy back M. Whaley Incubator of the Year 2018 arrangements, up to 10 With large free facilities, old refurbished railway workshops, in a years later. Instead it allows prime location, Cicada Innovations is a classic example. Rent covers the incubator to share in the basic costs and the 5% equity taken in all incubatees allows both client success and can be the staff and the incubator to share in client success. very useful for motivating and paying for the right sort of staff people, who may be allocated a % of the eventual returns. None the less the returns at times can be high. Cicada Innovations in Sydney26 is just one of many good examples, involving a “free” building and in which rent covers the basic costs and the 5% equity in all clients shares in their success and is used as an incentive for staff.

SINE at IIT Bombay27, one of India’s leading technology incubators is another example that enjoys free buildings and shares in client success, by way of both equity and revenue sharing and with its own seed fund.

Raizcorp28 is a rare example of a for-profit incubator that provides a return to its investors. Raizcorp makes a small profit on rentals and services, charged at market-related rates, shares in the profits, and takes an equity stake in the companies incubated. It currently supports more than 500 businesses with more than 1,500 businesses that have graduated since it started in 2,000. It develops more than 3,000 businesses per year in other entrepreneurial programs and employs over 100 full-time staff. Raizcorp generates approximately 40% of its revenue from profit share and dividends, 40% from Services to Corporates (fees), 5% project work and 5% from rental.

26 cicadainnovations.com/ 27 http://sineiitb.org/sine/about-us/about-sine/ 28 http://www.raizcorp.com/about-raizcorp

5.1.2 Small percentage of sales or increased sales (royalty) As with sweat equity, royalty arrangements typically supplement rental revenue, but are rarer. (see Maxum example below).

In the case of incubation, royalties are often expressed as a percentage, in the order of 2-10%, of the incubatees sales, or increase in sales for a fixed period, such as 3 years, or while under incubation.

Equity is often preferable unless the royalty on sales relates to technology transfer agreements, such as occurs with some Indian technology incubators commercialising technology from the host university, or unless the incubator is actively involved in helping generate sales, as in the case of the CTIC in Dakka29. However, other examples do occur where a royalty on sales is a preferred mechanism for the incubator and clients, for instance Western BACE in Melbourne30 which has a large free building and co-work space and charges for incubation with a 7% royalty on sales. Another is the Maxum Business Incubator in South Africa. Maxum’s incubatees pay for the incubation services through a royalty system. This system means that graduates pay Maxum a royalty of 2% of annual turnover for the equivalent period that they participate in the incubation program. Despite being in operation for a couple of years, only 12% of the costs of the incubator are covered by royalty income.

In India there are examples where royalty is combined with equity, i.e. SINE at IIT Bombay, which helps commercialise IIT technology and has its own seed fund (see below)31. 5.1.3 Seed Funding A few incubators have their own seed funds, which generate revenue to supplement rental revenue (e.g. Dublin BIC32, IceHouse NZ, Building Clever Companies NZ, Indian Technology Incubators, such as SINE at IIT Bombay), and at the same time increasing the power of their incubation. For a very few, return on investment from seed funding is the main revenue source (e.g. PowerHouse-Ventures NZ). It needs to be noted that the vast majority of incubators that operate with seed funds proved their capability by succeeding with incubation first, before managing to set up a seed fund, either with public investment, or a mixture of public and private investment.

Under the guidance of the National Science and Technology Entrepreneurship Development Board in India incubators with proven quality manage seed funds capitalized by the Technology Development Board of India33. This has proven very successful for the incubators concerned, which can use the funds for debt or equity financing, and the Technology Development Board, which has seen the power of investing via incubators in companies supported by incubators34. SINE at IIT Bombay is just one example of an incubator that has succeeded with significant equity returns from its seed fund that enabled it to be self-sufficient after only a few years of operation35. A number of incubators in New

29 ibid 30 ibid 31 http://sineiitb.org/sine/incubation/relevant-facts/ 32 www.dublinbic.ie/ 33 http://www.nstedb.com/institutional/tbi.htm 34 Author’s personal communication with the head of the NSTEDB 35 http://sineiitb.org/sine/about-us/about-sine/ Zealand manage funds capitalized by angel investors and government (www.nzvif.co.nz/) for which good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels.39

PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now generates the bulk of its revenue from investing in early stage companies that commercialise public research. The incubator grew steadily over more than a decade before it reached this enviable position. It started in 2001 as the Canterbury Innovation Incubator, Cii, a reasonably typical non-profit technology incubator, supported by 3 local universities and the municipality in Christchurch New Zealand, along with government funding. It was successful with entrepreneur led incubation. This success stimulated establishment of an angel investor network and angel investment funds, capitalising on government early stage investment mechanisms41. Subsequently Cii and the angel investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership, with the initial public shareholders alongside private investors. It continued to grow, focussing exclusively on commercialisation of public Research and Development, with its own investment in every venture assisted. In 2017 it listed on the Australian Stock Exchange. It illustrates what can be achieved over time with good incubation combined with seed funding.

The Israeli incubator program, which has been copied in a range of countries, such as Chile, New Zealand and Australia, is one example where the government supports technology incubation by buying commercialisation outcomes via seed funding technology commercialisation projects. The Government invests up to USD$1,000,000 in commercialisation projects (future companies) by way of a conditional grant, providing up to 85% of a project’s budget, to be incubated by one of 18 certified incubators (partners), who need to provide the remaining 15% of the project budget. The grant is provided via the partner incubator, so that the incubator ends up with equity in the venture. If the company succeeds the grant is repayable from revenues, in effect as a low interest loan. The objective of the program is to develop innovative technological ideas into start-ups and lead them towards first round investment42. The program started in 1991 and has steadily evolved and been improved. The investment has been substantial. As of 2012 more than USD$650 million had been invested in the program43. The incubators involved make their money from the equity they accrue from the government seed funding in the projects and from subsequent investment, at least for those that have venture capital funds. Over the years the government has also provided direct funding to help the incubators establish.

36 https://www.theicehouse.co.nz/ and www.iceangels.co.nz 37 www.iceangels.co.nz 38 http://www.thebcc.co.nz/ 39 http://www.thebcc.co.nz/investment/mig-angels/ 40 www.powerhouse-ventures.co.nz/ 41 www.nzvif.co.nz 42 http://www.matimop.org.il/Incubators.html 43 http://eipa.eu.com/category/information-centre/science-technology/technological-incubators-program/ 5.2 Training Many incubators with a mixed revenue model make significant revenue from training related to entrepreneurship, SME growth and management or in some industry specific examples vocational training. There are many examples, but a few illustrate the potential.

The IceHouse44 in Auckland New Zealand, a globally recognised incubator, affiliated with the Auckland University business school, but an independent non- profit company, makes most of its revenue from training that complements its incubation, angel investment and cowork space activities.

The Kiln Incubator45, a component of the Canberra Innovation Network in Australia, complements government funding, rent of incubation and cowork space with revenue from start-up training.

Furntech46 in South Africa is the main vocational education provider for the furniture industry and operates an incubator for those of its clients interested in starting a furniture business. The incubator contributes 15% to its overall revenues.

44 /www.theicehouse.co.nz 45 http://www.kilnincubator.com/workshops.html 46 //furntech.org.za/incubation/

5.3 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow, capability and revenue for more and more incubators. Most have some form of corporate sponsorship and various partnerships for delivery of particular programs. The trend for more corporate engagement is illustrated by BCG data47:

Tech Fort Worth in the USA is a case in point48. Incubation and acceleration are their core programs, generating a core of revenue. They have a “free” building from the City for which they pay $1.00 per annum, as well as 22% of the rent they receive till 2028. Adding to this base are a range of programs and initiatives, including:

• Corporate sponsorship revenue; • CowtowTechnest a revenue neutral pipeline generator; • The impact awards to showcase impactful technology and entrepreneurs generating ticket sales; • Angel investors, generating membership fees, application fees and sponsorship; • Partnerships with universities leading to funding, referrals, experts and interns • Partnerships with large universities leading to sponsorship, experts to help clients, potential customers for clients, board member sand referrals.

47 BCG Incubators, Accelerators, Venturing, and More, 2017 48 http://techfortworth.org/ 5.4 Hybrids: Super incubators Most of the examples quoted so far, including Cicada Innovations in Sydney, Kiln in Sydney, Innovation Depot in Birmingham Alabama, IceHouse and BCC in New Zealand, t-Hub and other Indian incubators are hybrids, or what have been called super incubators, combining incubation, acceleration, cowork spaces, sometimes seed funds and numerous partnerships leading to corporate sponsorship and funding opportunities.

The EBN 2016 BIC Observatory reports that 77% of EU BICs incorporate a cowork space, 46% have a start-up acceleration program and 91% offer access to funding. Indeed, just about any proven incubator globally will operate along these lines, with a mixed business model. 5.5 Other commercial activities A few incubators support themselves by making money from other related commercial activities. They are not common but illustrate what can be achieved with innovation and entrepreneurship.

With similarities to franchising, Timbali in South Africa49 incubates poor women as flower growers and makes revenue by selling the flowers under the Ambon brand. The model, has been successful and with additional government funds is expanding into horticulture. The Rural Enterprise Network in Sri Lanka50 does the marketing and sales for its incubatees, who are poor rural producers, and takes a 20% commission.

The Seda construction incubator in South Africa makes money out of project management, by taking on large construction contracts and sub-contracting the work to its incubatees51.

TrecStep52 a famous technology incubator in India makes significant revenue by executing donor funded development projects. 5.6 Government funding As noted earlier government funding is crucial for incubator establishment, in terms of both operational and capital costs. The market failure is clearly evident and incubators simply do not start without Government initiative and funding.

UBI data illustrates the importance of government funding for university incubators, along with that from universities, which may be a combination of facilities and funds53:

49 http://www.timbali.co.za/ 50 http://www.rensrilanka.org/home.html 51 http://www.seda.org.za/MyBusiness/STP/Pages/ethekweni.aspx 52 https://www.trecstep.com/ 53 UBI World Benchmark Report 17/18

Those incubators that over time become financially self-sustainable, typically rely also upon free buildings provided by government, most often municipal or state governments, rather than national governments, or universities, or other public bodies. However, only some incubators are self- sustainable in this way.

Many other incubators are only partially financially self-sufficient, even in free buildings, as shown earlier with date from the EU and examples from China. In these cases, government is in effect buying either jobs, new companies, or at times commercialisation of R&D from the incubator. Given government funding lasts, this strategy can be sustainable and can pay for more intensive incubation than is possible in self-funded examples, in effect paying for: jobs, companies, commercialisation or ecosystem benefits.

6 Accelerator Sustainability 6.1 Introduction: Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months; most last about three months. They provide mentorship and technical assistance that enable the “fast-test” validation of ideas. Additionally, accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment. 54

The first significant research and attempts at definition were conducted by University of Richmond assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg of Rice University) settled on a succinct definition based on four characteristics identified in the Seed Accelerator Ranking Project: “a fixed-term, cohort-based program, including mentorship and educational components, that culminates in a public pitch event or demo day.”55 Y Combinator and TechStars, two of today’s most preeminent accelerator programs, were at the forefront of the accelerator phenomenon, with Paul Graham of Y Combinator credited with establishing the first program in the United States in 2005. When TechStars, founded by entrepreneurs David Cohen, Brad Feld, David Brown, and Jared Polis, launched in 2007, it became Y Combinator’s first real competition.56 The characteristics of traditional accelerator models are as follows.

• Provides seed stage investment 15-25k in exchange for 4-7% equity • Short duration 3-6 months – primary difference with incubation or angel investment • Cohort based – companies entering and graduating at same time • Intensive programs characterized by extensive mentor interaction • Extensive networking, educational and mentoring opportunities • Selection – generally casting wider net due to duration/focus • Companies very early stage – may not have any organizational form • Programs geared toward business model validation and preparation of offer • Most have work space • Demo day culmination – presentation to investors

Inspired by long tested incubator models and experience with investor backed incubators in the dot- com era, the private sector popularized Accelerators starting in 2005. Accelerators are typically focused on highly scalable, high-growth, high-value startups. However, the general profiles of accelerators and their participants have begun to change. Today’s cheaper technology costs, easier routes to customer acquisition, and better forms of direct monetization suit the nimble, talented, technology-heavy teams that are able to create a product or service quickly. Overtime, models have continued to evolve focusing on developing specific industry cluster innovations, fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations.

54 Evaluating the U.S. Small Business Administration’s Growth Accelerator Fund Competition Program, A Report Prepared by the Federal Research Division, Library of Congress, February 2018, 10. 55 Dempwolf, Auer, and D’Ippolito, “Innovation Accelerators” 56 Randall Stross, The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups (New York: Portfolio, 2012), 41. • Business Business development assistance Incubation • Increased success rates Seed

accelerators Angel • Critical early stage capital investment • Access to networks

As models evolve, a lack of clarity exists in what constitutes an accelerator. Some groups refer to themselves as accelerators, but in actuality function as incubators, while others meet the formal definition of accelerator, but continue to call themselves incubators. These programmatic differences, however, become blurred on an organizational level as startups position themselves in the marketplace. Indeed, the 2016 Global Accelerator Report by Gust, a startup service provider, notes that “as new models emerge, the term ‘accelerator’ describes an increasingly diverse set of programs and organizations, and, often, the lines that distinguish accelerators from similar institutions, like incubators and early-stage funds, become blurred.”57

Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly. An increase in finance activity following the arrival of an accelerator leads to new growth in local, regional investment groups. Accelerators also can serve as catalysts, bringing together forces to create an entrepreneurial environment where one did not exist previously.58

57 Gust, “Global Accelerator Report 2016,” accessed September 20, 2017, http://gust.com/accelerator_reports/2016/ global/. 58 Fehder and Hochberg, “Accelerators and the Regional Supply of Venture Capital Investment,” 4, 25, 29. 6.2 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration. Indeed, many Accelerators are not focused on the Accelerator program sustainability, as it may be part of a larger strategy, as shown by the examples below, or a lost leader in the product chain (for example the investment fund or incubator).

In the traditional equity model, unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds. From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity. The Telluride Venture Accelerator (TVA) 59located in Telluride, CO USA started in 2013 in an effort to engage mentors and investors from the region, impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system. TVA was started by a non- profit community foundation – the Telluride Foundation and programmatic funds are raised by the foundation from individuals, private foundations and government grants. Simultaneously, the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10). TVF has raised 3 funds with slightly different investors and has invested in approximately ½ of the graduates from TVA. TVA historically invested $30k USD for a 5% equity stake in participant companies. This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective, however it is implied. TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations. TVF operates independently, making investments in both TVA and other regional companies. It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is “patient capital”

The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango, CO is the increase in active investment capital in Western Colorado. Concentration of capital in the US has historically been on the coasts. The proliferation of Accelerators, the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms. The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado.

59 www.tellurideva.com

Concentration of Venture Capital Investment Across the United States

Source: Richard Florida, “A Closer Look at the Geography of Venture Capital in the U.S.,” CityLab, February 23, 2016, https://www.citylab.com/ life/2016/02/the-spiky-geography-of-venture-capital-in-the-us/470208/.

6.2.1 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership in young companies. Essentially a private sector model, these programs reduce risk for investors, give investors better access and encourage a faster paced growth/fail determination. Accelerators also reduce costs for angel investors and venture capitalists in a number of ways. The accelerator model distributes “the inherent riskiness of investing in tech startups over a large startup pool” and reduces the real and opportunity costs associated with searching for new investment opportunities 60 as well as investment risk along two dimensions—product risk and company risk. Risk is lowered in part because the accelerator gathers candidates in a single location, and thus attracts investors who might find the costs of searching for opportunities in smaller regions too high. The use of a demo day allows investors to observe multiple companies in a single instance and creates opportunities for non-local investors to seek additional investment opportunities in the area. This helps reduce the search and sorting costs for investors when investing in smaller regions.61

Pay back or return on investment is anticipated through liquidation events which returns multiples to investors and the Accelerator programs. Accelerator titans – Y Combinator, 500 Startups and TechStars have been successful in ROI mostly because of outliers or Unicorns. The vast majority of Accelerators have not seen liquidation events in a timely manner, expecting a 5-7 year performance, but in reality, a 10-12 year time line might be more realistic. Even then the challenge becomes the paper value of these investments transitioning to cash available for operations. Although TVA investments held by TF are valued at over $30MM USD, no funds have been returned in 5 years. The

60 Dempwolf, Auer, and D’Ippolito, “Innovation Accelerators,” 1, 17, 18. 61 Fehder and Hochberg, “Accelerators and the Regional Supply of Venture Capital Investment,” 7. Global Accelerator Network (GAN) in 2015 reported a 5% acquisition rate overall (most common liquidation event enabling payback of investment), 6% in Accelerators over 4 years old. In summary the equity model has worked for a few early accelerators, but for the remainder is still unproven. 6.2.2 Revenue share As Accelerators have proliferated a movement away from purely IT to product, services and other STEM focused companies has led to exploration of other manners of funding and returns. Revenue share has emerged as a common alternative to the equity model. This approach generally involves providing an investment in exchange for a percentage of revenue – usually a percentage of gross profit, that kicks in after a revenue milestone and continues through some predetermined rate of return. In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20% of gross profit payment until a 3X return is achieved for the Accelerator. This development recognizes a more appropriate method to finance companies which appeals to both the companies and investors as liquidation events are less likely and less desirable for certain types of companies and economic development minded investors. 6.2.3 Fee for service The value of programming, connection to mentors and increased attractiveness to investors that Accelerator programs provide is a service companies are willing to pay for. The emergence of models providing high level service in exchange for payment is often not connected to an exchange of equity, or other risk orientated return expectation.

Founders Space offers an accelerator and incubator program that doesn’t invest in its startups, but instead offers services in exchange for cash and equity upfront. Founders Space runs more than a dozen types of startup programs, in-person and on-line. These programs range from one day to several months. Some programs are designed for early-stage startups, while others focus on later stage and some programs are focused on particular sectors, like Fintech, Agtech, Health, Advertising, Big Data, AI, SaaS, etc.62

6.2.4 Related business Hybrid models have emerged as a norm. These models combine various aspects from traditional Acceleration, business incubation and fee for service and rely on multiple sources of revenues. Often times providing Acceleration becomes a feeder for the main focus of the effort such as incubation, where the business model may rely on rent and fee payments, or investment funds where the returns are expected on the investment fund itself, rather than any initial investment during the Accelerator program. In fact, Accelerators such as TechStars quickly moved to offering additional capital with terms that somewhat protected the investment from the significant dilution experienced by the first in money Accelerators commonly provided. 6.2.5 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional locations. The most prolific of these models is TechStars based in Boulder, CO.

Techstars is an extensive, worldwide network that provides their clients with a three-month program and mentorship that is authentic, optimistic and empathetic. Once you’re in the Techstars family, you’re in for life. Techstars wants their members to feel cared for, and to give them the freedom to

62 https://www.foundersspace.com/program/ work in the environment best suited for them. That’s what makes them so unique! They offer 34 location options for their programs, giving these entrepreneurs plenty of choices.

“Our global ecosystem of founders, mentors, investors, and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journey.” -- Techstars63

6.2.6 Conclusions Some accelerators are pushing the decision by the startup to provide equity, or other payment, to the end of the program, contingent on the Startup achieving its goals and receiving the benefits offered by the Accelerator programs. This provides a guarantee of sorts and places a good amount of risk to the Accelerator itself to make good on their upfront claims. This caveat is in response to an increasingly competitive environment to attract the best startups into Accelerators.

A variety of success factors and benefits are provided by business accelerators to startups, local economies, investors, policymakers, and the accelerators themselves. The success of these programs can be measured in both short- and long-term events, according to research published in 2013 by Ross Baird, CEO of Village Capital, a Washington DC-based venture capital firm, and others. In their report for the Aspen Institute, Baird and his co-authors found that, in the short term, the success rate of an accelerator can be measured against the acceptance rate and frequency with which graduates are acquired, or otherwise exit the program. In the long run, an accelerator’s success can be measured against its startups’ internal rates of return and abilities to bring in sources of funding, particularly if the accelerator does not take equity stakes in its startups. Other characteristics related to an accelerator’s scale of success include the intensive format of mentoring and business skills training, the program length, and the founder’s historical connections to investors.64

When it comes to financial self-sustainability, recent data from the Global Accelerator Learning Initiative (GALI) shows the importance of corporate, philanthropic and government revenues, not equity. In their 2016 survey nearly 50% of respondents received corporate funding, and 21% relied on corporate funding for at least half of their total funding. Less than 10% generated revenue from equity returns or success fees charged to investors65.

63 “America's Top 7 Startup Accelerators and What Makes Each Unique”, Entrepreneur.com, September 13, 2017

64 Dempwolf, Auer, and D’Ippolito, “Innovation Accelerators,” 28. 65 www.galidata.org/accelerators/ Accelerator Revenues, GALI 2017

The importance of corporates is reflected in UK data also, where 51% of accelerators receive corporate funding (please note the graph below shows the percentage receiving funding from a source not the amount)66:

Percentage of UK accelerators receiving funding from various sources

This reflects the evolution in the industry and the emergence of new models, outlined in the next section. It indicates that financial sustainability more and more depends on corporate, philanthropic and government support.

6.3 Models 6.3.1 Investment – funding centric Cohen’s idea was to help start more companies by investing a small amount in 10 of them at one time and enrolling them in an intense 90-day program, during which they would work closely with

66 BEIS Research Paper Number 7: Business Incubators and Accelerators the National Picture, 2017 mentors and other angel investors in order to get their businesses to the next stage and in a position to raise a full angel round.67 6.3.2 Community based – economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system. Funding for the operation of these programs is through federal, state and local grants, as well as corporate and private foundations. Additionally, accelerators have the potential to impact local economies through tax benefits and economic growth. A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits. Regions with more entrepreneurial activity tend to have better economic outcomes. Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity. Such activity is not limited to accelerated startups, but also impacts non-accelerated companies, primarily from an increase in investors.68

One of the largest intentional funders is the US Small Business Administration’s Growth Accelerator Fund Competition Program (GAFC). Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress. Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards.

SCAPE was founded in 2013 by local angel investors, mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem. Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT), SCAPE raises funds each year for operations and direct company investment. Investment funds are managed through a separate LLP investment entity, with a carry reserved for the SCAPE non-profit entity. Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development. Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens. Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies. The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness. Investment vehicles are both equity and revenue share.

A population of successful entrepreneurs can bring substantial tax revenues to their home regions, as well as broader economic benefits. Regions with more entrepreneurial activity tend to have better economic outcomes. In regions with less venture capital financing, accelerators become more important as a funding source. In light of many local governments adopting the accelerator model, Massachusetts Institute of Technology economist Daniel C. Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems. The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity. Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals, a 289 percent increase in the amount of seed and early- stage funding provided in the region, and a 97 percent increase in the number of distinct investors investing in the region. Fehder and Hochberg were able to tie the increases to the presence of

67 Brad Feld, Startup Communities: Building an Entrepreneurial Ecosystem in Your City (Hoboken, NJ: Wiley, 2012), 15. 68 Hathaway, “Accelerating Growth.” nearby investment groups. Regions with previously existing formal angel groups experienced a larger impact than regions without such groups, meaning that startup accelerators are complementary to existing institutions in a region’s innovation ecosystem.69

The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem. The GAFC awards $50,000 cash prizes to accelerators to help support their organizations. The money can be used for operational expenses, hiring, or programmatic support that leads to better access to capital, mentorship networks, and workspace, enabling high-growth startups to scale up and grow sustainably.

In 2014, GAFC awarded $2.5 million to 50 winners from 31 states, Washington DC, and Puerto Rico. In 2015, it awarded a total of $4.4 million to 88 winners representing 39 states, Washington DC, and Puerto Rico. In 2016, the program awarded $3.4 million to 85 winners, representing 38 states and Washington DC. Overall, between 2014 and 2016, the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $10.3 million. For the 2017 competition, the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50,000 prize. 70

Contrary to the typical accelerator model, in which the provision of seed funding is fairly standard, less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses. Approximately one-quarter of the winners provided seed funding to only their most promising startups. Of those that did take an equity stake in exchange for seed funding, most took 5–6 percent equity. Accelerators that made investments in their startups made an average total investment of $1,827,600 between 2014 and 2016. 71

Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness. One way of doing so is to create their own public programs and funds or reinforce existing programs, so that they can have a bigger impact on the ecosystems they serve. In the USA and Canada, 36% of accelerators reported that they either received a mix of private and public funding, or are 100% publicly funded. Public funding typically comes in the form of government grants and subsidies.72

6.3.3 Corporate Corporates are entering the Accelerator space with a variety of motivations and models. These models fall manly in two camps:

1. to encourage the use of their platforms and tools; and 2. to encourage innovation within their corporation.

Corporate accelerators drive innovation at a much faster pace than is possible internally, create growth options by taking stakes in interesting companies, gain a window into technologies and business models that will become “winners,” and profitably leverage existing sales, distribution

69 Fehder and Hochberg, “Accelerators and the Regional Supply of Venture Capital Investment,” 2–3. 70 Evaluating the U.S. Small Business Administration’s Growth Accelerator Fund Competition Program, A Report Prepared by the Federal Research Division, Library of Congress, February 2018. 71 Evaluating the U.S. Small Business Administration’s Growth Accelerator Fund Competition Program, A Report Prepared by the Federal Research Division, Library of Congress, February 2018. 72 Gust, “USA & Canada Accelerator Report 2015,” accessed October 5, 2017, http://gust.com/usa-canada-accelera tor- report-2015/. networks, and relationships into additional value.73 Just about any good corporate has its own accelerator. Corporate accelerators like Microsoft’s may overly encourage the use of their products, with the chief purpose not making money but “incubating” its parent company’s ecosystem.74 Microsoft for Startups is a new program that delivers access to technology, go-to- market and community benefits and which helps startups grow their customer and revenue base. It is committing $500 million over the next two years to offer joint sales engagements with startups, along with access to Microsoft technology, and new community spaces that promote collaboration across local and global ecosystems. Startups are an indisputable innovation engine, and Microsoft is partnering with founders and investors to help propel their growth.75 6.3.4 Targeted populations and industries Increasingly, Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome. GUST in its 2016 survey found that: “the global acceleration landscape is increasingly moving towards verticalization, with 57.5% of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sector”. None the less others are not focused on a sector as shown by UK data76:

Percentage of UK accelerators with a technology focus.

The chart above also illustrates the sectoral breadth of acceleration, which now operates in varied and very different sectors, as is illustrated also by GUST technology trends77:

73 Dempwolf, Auer, and D’Ippolito, “Innovation Accelerators,” 22. 74 https://www.fastcompany.com/3062151/four-alternative-types-of-accelerator-that-startups-overlook 75 https://blogs.microsoft.com/blog/2018/02/14/grow-build-connect-microsoft-startups/ 76 BEIS Research Paper Number 7: Business Incubators and Accelerators the National Picture, 2017 77 GUST: 2016 Accelerator report

Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food), or a location (such as rural areas or specific counties). Forty- one percent of the winners described themselves as focused on a demographic (such as women, Native Hawaiians, or veterans), or technology (such as biotechnology or clean technology [cleantech]). Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product, a service, or being a social enterprise. 78

6.3.5 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow and value add to fledgling companies. Communities have benefitted from a better eco-system to support a greater network, and targeted industries and populations have seen success in the growth of startups.

Sustainability of these efforts is dependent on the patience and diversity of funding sources, combined with customized investment models to appropriately fund companies and provide returns for Accelerators and investors. In this context it is becoming clear that the vast majority of accelerators require either public subsidies or corporate support, or both, to be sustainable.

78 Evaluating the U.S. Small Business Administration’s Growth Accelerator Fund Competition Program, A Report Prepared by the Federal Research Division, Library of Congress, February 2018.