University Startups and Spin-Offs: Guide for Entrepreneurs in Academia (2015)

Part I. Strategies for University Startup Entrepreneurs

Chapter 13. Incubators and Accelerators

Both incubators and accelerators provide startup aid in the form of advice and services. In comparison to venture capital firms, which focus on investment capital, incubators and accelerators house startups at their offices and are in daily contact with them about challenges at hand.

Both may have what they call an intake, which marks the term of a new batch of startups admitted to enter a program. These programs begin at certain times during the year, similar to university semesters. When a program has run its course, the startups are often shopped to first-round investors on a demo day.

Most people use the terms incubator and accelerator interchangeably, but there are some small distinctions between them. This chapter explores these modern forms of startup support and their usefulness for university entrepreneurs.

Incubators

In contrast to research and technology parks, which provide business infrastructure for established companies and government agencies, incubators firmly concentrate on companies in the startup stage. Many research and technology parks house incubation programs, but they are not incubators themselves. Incubators provide offices and other real estate, along with various business support services, to fledgling companies in a wide variety of fields. Resources provided include help with business basics; networking activities; help with accounting and financial management; access to bank loans, loan funds, and guarantee programs; links to strategic partners; access to angel investors or venture capital; advisory boards and mentors; intellectual property management; and more.

As author Linda Knoop mentions, about one-third of business incubation programs are sponsored by economic development organizations. Government entities (such as cities or counties) account for 21% of program sponsors. Another 20% are sponsored by academic institutions, including two- and four-year colleges, universities, and technical colleges. In the United States, most incubation programs are sponsored privately. About 25% of all incubation programs take equity in the companies they hatch. The others provide a service as nonprofits that they hope will create jobs, improve the community’s entrepreneurial climate, or kick-start community revitalization.1

Unlike with many freely available business support programs, entrepreneurs who wish to enter a business incubation program must apply for admission. Acceptance criteria vary from program to program, but in general only those with feasible business ideas and a workable business plan may join.

Accelerators

Accelerators (also called seed accelerators) are comparable to incubators. A clear distinction between the two is seldom made, but you could say that accelerators are for-profit versions of incubators. They are also more common in the technology and software space. Authors Paul Miller and Kristen Bound identify the following criteria that distinguish accelerators from business incubators: the application process is open to all and competitive, they give a pre-seed investment in exchange for equity, the focus is on small teams rather than individual founders, support is time-limited (around 90 days), and cohorts or classes of startups exist rather than individual companies.2 The business model of accelerators consists of producing venture-capital-style returns. The first seed accelerator was Y Combinator. Started in Cambridge, Massachusetts, it moved to Silicon Valley in 2005. In short succession, Techstars, located in Boulder, Colorado, followed in 2007. Seedcamp, calling London its home, opened its doors in 2008. There are now many incubators in startup hubs around the world, some of them with billions of dollars of funding on the backend. New startup hubs are seeing an increasing number of privately funded accelerators pop up. The accelerator model seems to work not only for the accelerators themselves, but also for startup entrepreneurs.

One of the most established seed accelerators, Y Combinator, had an acceptance rate of around 2% in 2012.3 The primary value for the entrepreneur consists of world-class mentoring, connections, and the recognition of being part of the accelerator. Gaining access to a high-powered network of entrepreneurs consisting of Y Combinator alumni and the who’s who of the Silicon Valley billionaire club is clearly a huge advantage for startups. Famous examples out of Y Combinator include Dropbox and Airbnb.4 The accelerator likes to describe itself as a “new college for entrepreneurs.”5 Such seed accelerators can be a pre-filtering mechanism for later-stage funding.

There may be an incubator or accelerator in your city. Someone from an accelerator may even have reached out to you and wants to find out whether you would consider joining them. Should you? Here are some things to consider.

Shortcomings of Accelerators

It is important to remember that accelerator programs are not free government programs, but for-profit operations that need to produce a return with the startups they seed. Prominent venture capital firms often fund them with massive backing. They are mostly focused on software and technology startups, and technology firms may support these programs because they see additional business for the startups using their technology. Facebook, for example, ran its own accelerator for a while to encourage startups to use its platform.

Because startup costs for software companies have shrunk in the past decade, with prices for server space and computing power rapidly racing to the bottom, software startups can be lifted off the ground with small investments. This is where accelerators shine. However, programs geared toward hardware startups—for example, in the field of robotics, material science, or transport technology—are relatively rare. If you are a tech startup, great; accelerators cater to your needs. But if you are a hardware startup, an accelerator may not work for you.

There are a few criticisms of accelerators, as Miller and Bound point out, both for the startups they seed and the investors who fund the programs6:

·     They focus on smaller companies. It is highly unlikely that an accelerator could help build a Facebook or a Google. They concentrate on companies that already have a business model and that a bigger fish can buy soon after launch. Only then will the 10X or 100X gain the accelerator is looking for become reality.

·     Useful companies may fail after accelerator programs. Because the program’s support is brief, companies still have much to learn about how the actual market works. The hype around the accelerator program may dull their senses and lead to complacency about how hard it is to establish a successful business.

·     Startup founders may feel exploited. Some startup entrepreneurs have publicly expressed anger about “rich guys starting a startup accelerator so they can rip off founders.”7 Some of the seed capital to startups exists in the form of loans that startups have to pay back—yet accelerators still demand an equity stake of around 7% in the company. This may be marginally acceptable when the value of the alumni network is significant and the accelerator’s support is large. But if an inexperienced group has started an accelerator as a profit center, then the practice of demanding a high equity share for a small loan is questionable.

·     Accelerators have a reputation for being more attractive for B-grade companies. This point is up for debate, but it can be argued that if a business finds an accelerator or incubator attractive, it probably will be less profitable than a company that needs no support.

·     Accelerators are creating bubbles. Although many small companies are bought each year, the market for acquisitions is still only in the hundreds. If many more accelerators pop up and begin turning out new companies in the thousands, then a crisis of confidence in the sector may develop, because most of the new companies will go under. Accelerators subscribe to a “spray and pray” approach to investing, where they make many small investments in the hopes that the tide will lift all boats. Some investors have the opinion that targeted investments would be a better and more sustainable use of investors’ money.

·     Accelerators are just startup schools. Some see accelerators simply as a reaction to the defects of the university system in creating sustainable businesses out of their research. They doubt the benefit to the investors whose money is invested in the startups, because many founders see the accelerator track as an experience worth mentioning in their CV more than a serious try at building a business. This may undermine the ecosystem of accelerators in the long run, when sustainable success stories dry up.

Here is another damper for you: 93% of companies backed by Y Combinator fail, despite the best efforts of the accelerator and the entrepreneurs themselves.8 The venture capital model focuses mainly on quick-turnaround equity funding. Scalability with the potential to monetize 100 million users relatively soon is also one of the cornerstones of tech accelerators. It is unclear whether this model makes sense for smaller-scale startups that need longer-term development, or for startups in non-tech fields.

Long story short: the incubator and accelerator model is promising. For tech startups, it is an alternative to going it alone. The alumni and founder networks of some accelerators are excellent and can help build synergies for founders early on. However, not all accelerators are created equal. The superstars may be valuable to their portfolio companies, but there are many second- and third-tier accelerators. These may have limited benefits for entrepreneurs past the usual advice and a little funding, in exchange for a large chunk of equity.

Can Universities Benefit from Accelerators?

Unless accelerators have a proven track record of success with strong networks that can provide real value, they may add little to what the university as a platform already has to offer its startups. Universities have many synergies available, most of which currently evaporate, unused. It is a matter of reactivating them and directing them toward adding value to the university’s startups. I address approaches to achieve this in the second part of this book.

As soon as accelerators have expanded their focus to sectors outside of tech, they may become interesting platforms for startup founders from university research labs. In either case, startup entrepreneurs should never rely on someone else to carry out their work. First and foremost, they need drive and an open mind. They need the right presentation and communication skills with which they can actively seek out synergies and potential industry partners to give them feedback about their processes and minimum viable products. As soon as they know how to develop their value propositions, engage third parties, and move interactions forward with goal-oriented next steps, they can begin building their own networks on the platform of the university. With the right mindset, a strong startup environment can add a lot of value. Without it, even the perfect ecosystem will only make a small difference.

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1Linda Knoop, 2006 State of the Business Incubation Industry (National Business Incubation Agency [NBIA], 2008).

2Paul Miller and Kirsten Bound, The Startup Factories: The Rise of Accelerator Programmes to Support New Technology Ventures (London: Nesta, 2011).

3Ryan Lawler, “With a 50% Increase in Applications, the Next Y Combinator Class Will Be 80 Strong,” TechCrunch, May 22, 2012, http://techcrunch.com/2012/05/22/ycombinator-80-strong/.

4Y Combinator company list, www.yclist.com.

5Tomio Geron, “Top Startup Incubators and Accelerators: Y Combinator Tops with $7.8 Billion in Value,” Forbes, April 30, 2012, www.forbes.com/sites/tomiogeron/2012/04/30/top-tech-incubators-as-ranked-by-forbes-y-combinator-tops-with-7-billion-in-value.

6Miller and Bound.

7“Let’s Mug a Startup Founder,” Treehouse Blog, May 10, 2011, http://blog.teamtreehouse.com/lets-mug-a-startup-founder.

8Henry Blodget, “Dear Entrepreneurs: Here’s How Bad Your Odds of Success Really Are,” Business Insider, May 28, 2013, www.businessinsider.com/startup-odds-of-success-2013-5.