Paper to be presented at DRUID15, Rome, June 15-17, 2015 (Coorganized with LUISS) Swinging for the fences: How do top accelerators impact the trajectories of new ventures? Sheryl Winston Smith Temple University Fox School of Business, Dept. of Strategic Management [email protected] Thomas J. Hannigan Temple University Fox School of Business, Department of Strategic Management [email protected] Abstract Increasingly, entrepreneurs in search of critical early stage resources face an evolving paradigm: the rise of accelerators that integrate small equity investments with an intensive, cohort-based mentoring experience. The emergence of these accelerators attracts substantial interest in the popular imagination; however scholars know little about their overall impact. Specifically, in this paper we ask: What is the impact of receiving financing from a top accelerator, relative to that from a top angel group, on the subsequent trajectory of the venture- i.e., being acquired, deciding to quit, or obtaining follow-on funding from formal venture capitalists (VCs)? To answer this question, we bring to bear a novel, hand-collected dataset of n= 619 startups and their founders. We identify each cohort that has proceeded through two of the most established accelerators?Y Combinator and Tech Stars?from the period 2005-2011 and construct a matched sample of startups that instead receive their first formal financing from top angel investor groups. We find that participation in a top accelerator program increases the speed of exit. This occurs through two distinct channels: accelerators increase the likelihood of exit by acquisition as well as exit by quitting. We also find that participation in a top accelerator initially increases the speed of receiving follow-on funding from VC investors, particularly in the window surrounding the culminating ?Demo Day? presentations. However, in the longer term, participation in a top accelerator relative to a top angel group appears to decrease the speed?i.e. decelerate?the timing of follow-on funding from VCs. Jelcodes:M13,O31 Swinging for the fences: How do top accelerators impact the trajectories of new ventures? “There’s so much luck involved with startups you increase your odds of success by swinging the bat multiple times. Each time you do something that isn’t swinging the bat, you theoretically decrease your odds of success.” (Harj Taggar, co-founder Auctomatic and partner in Y Combinator, quoted in Stross (2012)) 1. Introduction A long-standing question in the study of entrepreneurship and organizational growth has been: how do different early resources shape a nascent venture? From an organizational perspective, startups are resource constrained, yet inherently more malleable and open to advice than established organizations (Fern et al., 2012, Stinchcombe, 1965). A key challenge faced by young startups is how to secure sufficient financial and mentoring resources necessary to advance beyond the idea stage (Cassar, 2004, Eisenhardt and Schoonhoven, 1990, Mollick, 2014), particularly after informal investors have contributed initial financial support (Kotha and George, 2012, Mollick, 2014). Professional angel groups —with formal screening mechanisms and investment criteria—have traditionally filled this gap with early-stage seed capital (DeGennaro, 2012, Ibrahim, 2008, Kerr et al., 2011, Wiltbank and Boeker, 2007). Increasingly however, entrepreneurs face a shift in the entrepreneurial ecosystem that opens up an alternative model for formal equity backing and mentorship at a formative stage: the rise of seed accelerators. Accelerators have been heralded as a new model of intensified mentoring and equity investment that facilitates launching a new venture efficiently. Top accelerators integrate small equity investments with an intensive, cohort-based mentoring experience in a compressed time period (Andruss, 2013, Cohen and Hochberg, 2014, Gruber et al., 2012). However, although anecdotes abound about the purported role and success of top accelerators in helping entrepreneurs to “do more faster,” as a notable program proclaims (Carr, 2012, O'Brien, 2012, Stross, 2012), scholars understand relatively little about how accelerators might shape the trajectories of new startups relative to other early resources, such as angel investor groups. In this paper, we ask: how might receiving early equity financing from a top accelerator impact the trajectory of a new venture? To study more broadly the relationship between early entrepreneurial financial and mentoring choices and venture outcomes, we compare facets and outcomes of receiving the first formal outside equity finance from a top accelerator relative to that from a professional angel group. We treat this problem in two steps: 1) the decision to enter a top accelerator instead of a top angel group; and 2) the impact of this choice on the subsequent trajectory of the new venture through exit by acquisition, exit by quitting, or receipt of follow-on formal venture capital (VC) investment. We frame the expected differences in outcomes as arising from the differences in the structure and incentives associated with top accelerators relative to top angel groups from the perspective of entrepreneurial finance and organizational growth. The evolving paradigm of accelerators is important 1 because it represents a key juncture for the entrepreneur, when decisions are being made about the trajectory of the startup. Entrepreneurs face decisions about alternative paths as part of the inherent evolution of nascent ventures (Arora and Nandkumar, 2009, Parker, 2006). Because accelerator or angel group funding occurs at a very early stage—and because the nature of mentoring and group interaction in top accelerators differs dramatically from that of top angel groups—these different sources of early funding likely condition the subsequent choices of the startup. The entrepreneurial finance literature has long recognized that the type of financing obtained by startups will influence decisions that entrepreneurs face revolving around continuation, growth, and exit options (Chemmanur and Fulghieri, 1999, de Bettignies, 2008, Winton and Yerramilli, 2008). On one hand, the entrepreneur may have exit options, which may take the form of an attractive acquisition offer or an insight into quitting (Arora and Nandkumar, 2011). Alternatively, the entrepreneur may attract follow-on funding from VCs. However, this opportunity is double-edged, simultaneously enabling the growth potential of the company but also curtailing the founders’ rights (de Bettignies, 2008, Winton and Yerramilli, 2008). Finally, the company may simply plow forward without growth capital (Åstebro and Winter, 2012). For entrepreneurs, each option carries distinct implications. The relative paucity of scholarly attention paid to the longer-term impact of accelerators is partly a function of the novelty of the phenomenon. The most established accelerators are starting to provide a sufficient track record to identify distinct trajectories for the startups emerging from the accelerator experience. We develop a novel dataset consisting of all startups funded by the two top accelerator programs, Y Combinator and TechStars, over the time period 2005-2011. We create a comparable angel group sample that covers 19 of the most active professional angel groups spanning a similar range of industries and geographic locations over this time period. We track the full range of trajectories that each startup might follow through June 2013: exit through acquisition; exit through quitting; continuation through VC investment; or remaining alive without VC investment. Thus, we identify outcomes without selecting on a given event (such as receipt of VC financing) having to occur. Creating a matched sample controls for differences along observable dimensions, but does not alleviate selection biases that result from preferences unobservable to the econometrician (Heckman and Vytlacil, 2007). In this paper, we develop a novel instrument to mitigate selection bias. Specifically, we exploit the relationship between the development of top accelerator programs and roots in “hacking” culture (Levy, 2010). We leverage the affinity between of founders coming from an educational institution more heavily steeped in computer science culture with the “hacking” ethos that underlies the accelerator model to estimate a two-stage selection model to help account for selection bias that results if the founders or startups selecting into each of these paths—either a top accelerator or a top angel group—differ systematically. 2 We find that after accounting for founder selection into financing from a top accelerator, startups going through a top accelerator experience significantly quicker exit outcomes through acquisition and through quitting relative to those in angel groups. The timing of follow-on VC investment is more nuanced: investment is accelerated in the period following “demo day” but is slower in the longer term for startups going through the accelerators relative to angel groups. Our contribution to the literature is two-fold. First, we make a substantial empirical contribution to the literature on strategic entrepreneurship and entrepreneurial finance. To the best of our knowledge, we provide the first large-scale, empirical analysis of the effect of accelerators on the full spectrum of entrepreneurial outcomes: acquisition, quitting, and subsequent VC financing. In so doing, we provide an empirical answer to the important