Since Y Combinator launched in 2005, the tech accelerator has become a darling of Valley circles. The company has been the subject of much hype, and its inevitable companion: accusations that there has been much smoke but no fire. The question: Why wasn't there a significant exit? (think: $100M+)?
But it's just now we're seeing that this revolutionary model is fundamentally changing how tech startups are created, funded and sold. YC and competitor TechStars have pioneered the trend, spawning at least 38 similar programs around the globe in the past two years alone.
Sizeable exits and investments to YC and TS companies have been nothing short of stunning. Y Combinator has had the biggest win in the space: a recording-setting $200M+ exit for 2008 graduate Heroku, a cloud application platform for Ruby.
Including Heroku, YC had three exits in Q4 2010 totaling more than $250M - at a standard of 6% of common diluted down by one-third or 50%, the accelerator probably pocketed $5M (or so).
Those profits could fund another 250 YC startups - and chances are they will.
The Accelerator Model
Accelerators are short-term programs, typically 12 weeks long. Structurally, they provide hands-on mentoring to new entrepreneurs, in addition to modest, ramen-level funding in the $5K to $6K per founding partner range, or between $12K to $20K per idea.
These groups typically hold classes between specific dates, following a "class" or "term" model. Accelerators typically require founders to travel to a home base for the duration of the class. Some look for specific tech verticals (e.g. Joystick Labs in North Carolina only works with gaming companies) but most are open to any "innovative" web or mobile play. The majority of accelerators end with a "Demo Day" in which the projects are presented to investors in the hopes of landing funding. This is, perhaps, their most critical offering.
We have limited our analysis to accelerators (a.k.a. incubators) launched after 2005 in the tradition of Y Combinator. We are specifically leaving out the thousands of "business incubators" that have operated for decades prior to the YC model, as well as "cooperative spaces" (a.k.a. co-working) that bring entrepreneurs together/provide workshops but do not focus on getting products launched and typically don't have equity participation.
Cost & Value
Most accelerators receive 5% to 10% of a startup's common shares in exchange for the mentoring provided in their programs, a standard set by YC. Excluding the "cost" of mentoring and services, these rates value the new companies at a rock-bottom price around $250K. This is a fraction of the average angel round over the past three years, which range from $1.5M and $4M (post-money).
The model adds up to a 90% discount on the accelerators' investment, in turn begging the question, "Are tech accelerators worth it to the new entrepreneurs?"
In terms of Y Combinator and TechStars, the answer is undoubtedly "yes." Their brand names, alumni networks and demo days practically guarantee an angel round - and lifetime access to a network of kick-ass designers and developers.
In fact, YC companies are so hot right now that many are getting funding on their way into the program. At this point, being part of YC is so powerful, founders could just use their acceptance letters as their pitch deck to angel investors and call it a day!
But what about the lesser-known accelerators, where the value is less quantifiable?
The answer: "It depends." Remember these accelerators are startups too, and startups fail. But with a sound model and a still fairly open sector many will undoubtedly succeed. The real question is how many will be able to profitably duplicate the success of the market leaders.
Should I Join an Accelerator?
If you have an idea - and are willing to commit to an accelerator program - carefully evaluate the opportunities in front of you. We thought up a few questions to think about before you make a decision.
- How is the accelerator funded?
- Are the founders of the accelerator successful themselves? Do they have a verifiable exit from a past project? Have they raised money for their own projects successfully?
- Are those running the project well-matched to you and your idea? Do they have domain expertise in your vertical (mobile, social, etc)?
- If the accelerator is established, who has graduated from the program? Where are they now? What do they have to say about their experience? Ask the head of the program for a few examples - two companies that graduated, and at least one that failed.
- Taking a graduate of the program out for coffee and feedback could save several months of wasted time - and a lot of brain power.
On the other hand, the law of diminishing returns applies for most serial entrepreneurs. If you already have the network, or if you have raised angel investment in the past, you're not going to get as much out of a mentorship program designed for new entrepreneurs. Tech accelerators can offer little more than camaraderie, branding and a one-sided angel investment (a $250K valuation is extremely low, and generally doesn't exist outside the accelerator world).
Footprint of Accelerators
A month ago, we set out to discover as many accelerators we could and do a comprehensive roundup. We found 58 accelerator companies worldwide.
1. More than one-third of all accelerators were founded in the past year. At this pace, we could easily see 250 accelerators operating by 2016.
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2. Counting each location for TechStars and Founder Institute, accelerators are a global trend, with almost half of the 79 locations outside the United States - already.
[ By the numbers: There are 39 international accelerator locations of which 18 are in Europe (46% of international), nine in Asia (23%), four in Canada (10%), three in the Middle East (8%), two in Latin America (5%), two in Australia (5%), and one in Africa (3%). Within Europe, the United Kingdom (including Northern Ireland) has five, France three, and Germany and Italy two. Singapore leads Asia with three, India and China have two apiece, and Japan and Taiwan each have one. ]
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3. Within the United States, California leads the pack with 25% of the 40 U.S. accelerator locations. Along with New York, these two states account for well over a third of the U.S. total. Seventeen other states plus the District of Columbia now have accelerators, with Rust Belt states well represented.
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4. Nearly 70% of accelerators are privately owned; non-profits and government play a minor role.
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5. Accelerators often make an initial investment of between $15K and $25K, though more than $25K is common.
[Note: Accelerators were grouped by the maximum investment each makes.]
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6. That $15K to $25K typically buys 5% to 10% of a startup.
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7. Most "class" sessions run between three and five months (the average amount of time it takes to launch a website or mobile-based application).
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The data is clear: tech accelerators are creating massive, marketable value. They're stepping into a huge gap left as higher education gets more and more out of sync with the dynamic, and sometimes even spastic, global markets.
From BSD to Arpanet, the United States' overwhelming success in technology and entrepreneurship has always been strongly tied to education. As that correlation has faded, the market has produced a solution: accelerators, bridging the gap between receiving a diploma and starting a company.
If students are going to invest tens to hundreds of thousands of dollars and years of their lives in pursuit of higher education, the least we can teach them are some skills that match the reality of the dogfight they are about to enter.
Four of our 58 accelerators were housed in universities, including the University of Illinois, University of Virginia, Stanford and HEC Paris, a trend we would like to see expand.
Instead of students spending their senior year on a second major, major universities could provide an "accelerator option" for those who wish to dip a toe in entrepreneurial waters. These academic accelerators would be open to all students, regardless of degree, and could accommodate any students who want to participate.
The funding for these startups could come in the form of half the tuition paid to the university, which would get a small, non-voting interest of 3% in each project in return.
A student could take the rest of his [$5K to $25K] tuition payment and pay half to the university for running the accelerator. He could then invest the other half in developing a business with a co-founder - down the line rewarding the university with an exit, and technology with the best and brightest minds.
Are all fourth-year college students ready to start businesses? Not necessarily, but any bridge between academia and reality is worth considering.
And these accelerators don't need the hit rate of a YC or TS, nor must they focus on technology. For example, Tiesta Tea, which sells high-quality loose-leaf tea in 10 stores and online, is a summer 2010 stand-out from the Illinois Launch accelerator at the University of Illinois. In fact university accelerators might exist as the accelerator you attend before applying to YC or starting a first fundable business.
In an ideal world, existing students from universities would shift from a potential economic liability to our economy to an asset. Instead of adding to our unemployment numbers at graduation, some students exiting school might hire our unemployed citizens (provided they have the right skills - the subject of another LAUNCH newsletter to be sure).
Compared to giving tens to hundreds of thousands of dollars to a university for a piece of paper (an undergraduate degree), we would rather see students give pieces of paper (stock certificates) to universities in the hopes of receiving tens to thousands of dollars in angel investment.
Accelerators are a trend that will only speed up.
They renew our hope that innovation and entrepreneurship is strong in America, despite the numerous challenges we face internally and from new competitors.
All the best,
Jason & the LAUNCH Team (Kirin, Kate, Krute, Nick, Lon & Carolyn)
L005.2: Top Accelerator Success Stories to Date
We found many success stories across the short history of accelerators. We've selected the following "notable" startups based on a combination of user adoption, product excellence, technological achievement, money raised and, of course, size of exit (in cases where there has been one).
1. Heroku (YC '08) currently holds the record for biggest exit from an accelerator with their $212M all-cash purchase by SalesForce in December 2010.
2. Server-management and monitoring company Cloudkick (YC '09) was picked up by Rackspace in December 2010 for around $50M, according to speculation.
3. Zecter (YC '07), known for its cloud-based ZumoDrive that allows users to sync, access and share content, was acquired by Motorola for an estimated $25M, also in December 2010.
4. AirBnb.com (YC '09) has contributed to a couch-surfing economy so strong that New York hotels have lobbied to ban short-term home rentals! The site boasts investors including Greg McAdoo [Sequoia Capital] and Reid Hoffman [Greylock Partners]. We expect them to be taken out by VRBO.COM for north of $100M in 2011.
5. Dropbox.com (YC '07), with $7.2M invested, performed strongly among product visionaries in our "favorite products" newsletter (see L004). Dropbox allows users to instantly create a cloud-based storage drive, sync it with all computers and share folders with others. It's the cloud-based storage product that a non-technical family member could install on her own - and it's something something that Steve Jobs or Google really should have created. We think it will be purchased by Microsoft, Google or Apple in the next year or two.
6. Bump (YC '09) is an app that allows you to knock together two phones in order to send your contact information or a photo with another person. The company recently announced a Series B of $16.5M lead by Andreessen Horowitz. Other investors include Ron Conway, Joshua Schachter (of Delicious fame) and Sequoia Capital.
8. Reddit (YC '05) is a social news site that Conde Nast snapped up in fall 2006 for an undisclosed sum. We would estimate, and have heard whispered, $20M.
9. SCVNGR (DreamIT Ventures ‘08), which does location-based gaming, just raised $15M (for nearly $20M total) and is valued at $100M.
10. Blog-commenting system IntenseDebate (TS '07) was purchased by leading blog platform Wordpress (Automattic) in 2008.
11. DailyBurn (TS '08) is a health and fitness startup that was sold to IAC in 2010 for an estimated $10M.
12. Mobile ad-exchange company Mobclix (Seedcamp '08) was acquired for $50M by British territory-based Velti in October 2010. Interestingly, Mobclix is in the Valley but got its accelerator experience in London.
One to watch: With over 200 million users, Disqus (YC '07) has made blog commenting better for media big (CNN, Fox News) and small (WordPress, Tumblr, etc). So far the company has raised $500K.
L005.3: Accelerator Survey/Feedback
Share your thoughts on our proposal for "Build 500 Accelerators" in our L005 survey.
Our first question:
A plan to greatly increase the number of accelerators is:
Visionary | Doable | Flat-out crazy | ____________
Or simply hit reply and tell us what we got right, what we missed, and how this proposal could be refined. All replies to this email are considered for publication unless otherwise specified (i.e., say "not for attribution" if you don't want your reply published with your name associated with it. Say "not for publication" if you want to send us off-the-record comments).
L005.4: Further Reading and Resources on Accelerators
LAUNCH's List of Accelerators by Location
LAUNCH's List of Accelerators by Deadline
TechStars Results Page
Could Europe Build a Y Combinator?
Open Network Lab: Japan Gets "Y Combinator" For Incubating Global Startups
Copying Y Combinator: Why and How
Job Growth in U.S. Driven Entirely by Startups, According to Kauffman Foundation Study
[ Postscript 1 ]
Danny Robinson of Vancouver-based Bootup Labs was willing to share how and why that accelerator failed [ see http://lnch.is/gDr63t for background ]. We've reprinted the email exchange below.
LAUNCH: What would be necessary for Bootup Labs to accept applications again? Or is it expected to formally close its doors?
Danny Robinson: Bootup Labs ran 8 companies through its seed accelerator. We invested $150k each with one exit and 6 companies still operating. Bootup is now operating under its non-profit arm, Bootup.ca and launched a newer-style accelerator called the Bootup Garage. We learned that the mentorship and connections were far more valuable [to accelerator participants] than the money, so the garage focuses on that part. As a result, there are other, bigger plans in the works for Vancouver.
L: How would you sum up what happened to Bootup Labs in one or two sentences?
DR: We couldn't raise enough money from angels before we proved our model. We did eventually prove it, but, by then, I had moved on to another project. In the end I was too aggressive/ambitious in trying to grow it.
L: What can other incubators/accelerators learn from your experience?
DR: An often-untold part of our story is that we actually did keep everyone informed before they joined and the entire way through. We underestimated the faith they had in our ability to muscle through our sudden funding fallout. Don't underestimate how much faith the entrepreneurs put in you to help them succeed.
L: Our research shows that most incubators/accelerators began operating in 2009 or 2010. What do you think will happen in the incubator/accelerator space in 2011?
DR: The explosion will continue to expand. Most so-called incubators/accelerators have "rent-based" business models and very few will be structured as a true Seed Accelerators, meaning their business model is like a VC. They're drastically different, but often lumped together. It will be a challenge for the seed accelerators to get their message out through the noise. Most we won't even hear about.
[[ Note: Danny is now CEO of British Columbia Innovation Council.]]
[ Postscript 2 ]
David Albrecht, who received a master's in computer engineering from the University of Illinois Urbana-Champaign in 2010, had nothing but praise for the Technology Entrepreneur Center (TEC) at UIUC:
"[I] was very involved with TEC (UIUC's accelerator) when in college. I took several of their marketing classes which were very good, and went to a few invited dinners at prof's houses (actually farms. it is central IL we're talking about here.) I also learned venture finance from Sanjiv Chopra, a TEC adjunct who took two companies public.
"It was a great counterweight to the extreme academia: papers, proposals, and grants -- otherwise known as 'engineering grad school.'"
[[ Note: David is the architect behind PureHome and runs Prefiat, a Seattle-based maker of cloud-powered hardware. ]]
L005.5: LAUNCH Conference Partners: Yammer and SecondMarket
We're thrilled to announce that two A-list, top-level partners have joined sponsors Sequoia Capital and Google in partnering with us on the LAUNCH Conference: Yammer and SecondMarket.
As you know, Yammer - the leader in Enterprise Social Networking - won the launch conference we hosted two years ago (f.k.a. TechCrunch50), and Yammer Founder and CEO David Sacks is a tremendous entrepreneur whom we respect and admire. David joined Jason for an early episode of This Week in Startups, and has been a good friend and mentor. Yammer has graciously decided to host the opening-night Startup, Judges and VIP reception.
SecondMarket, which has revolutionized the market for private-company shares, recently named my company Mahalo as one that people were interested in hearing more about (win!). We're blown away by the progress SecondMarket has made over the past couple of years, and we value their contribution to the startup space. Founder and CEO Barry Silbert was on This Week in Startups as well, and he will be a judge at the event.
Click here to purchase your ticket to the LAUNCH conference.
L005.6: LAUNCH Conference Judges: Rose, Swisher, Sacca, Koyfman
The LAUNCH Conference, taking place on February 23rd and 24th in San Francisco, will feature 40 startups launching killer new products. These startups will face an American Idol-style panel of five expert judges following their presentations. We're pleased to announce our first four (of 20) judges.
Kevin Rose is a serial entrepreneur and angel investor. He created Digg, Revision 3 and the Foundation newsletter, and has invested in foursquare, Gowalla, formspring, zynga, SimpleGeo, Square, DailyBooth, OMGPOP and Twitter. He's been pumped up and taken down by the bloogers through two tech cycles, all the time focusing on building his companies and his personal knowledge base. Live editions of his podcast, Diggnation, are known to draw thousands of fans, some of whom insist on him autographing various body parts.
Kara Swisher is a noted journalist and blogger. She created and hosts the industry-leading "D Conference" with partner Walt Mossberg of the Wall Street Journal. Known for her blunt style and charming smile, she breaks more stories than chops (barely).
Chris Sacca is a sought-after angel investor and advisor, with investments in dozens of startups, Twitter, DailyBooth, Gowalla, Backupify, bit.ly, Photobucket, Twilio, Tipjoy, and Cardpool. He wears cowboy shirts, a Grizzly Adam's beard and is largely found helping people dig out from under in Truckee.
Mo Koyfman is a principle at Spark Capital, a leading venture capital firm that has invested in a series of a winners including Tumblr, Twitter, GDGT.com, and Svpply.com. Before joining Spark he survived six years as a suit at IAC - managing the oh-so-talented CollegeHumor boys.
[[ To nominate a judge, please fill out this form. ]]
Click here to purchase your ticket to the LAUNCH conference.
LAUNCH Conference Grand Jury: Ravikant, Pesce, Levy, Malik
In addition to your judges, the conference will feature a Grand Jury of 12 industry luminaries from diverse backgrounds. The job of the Grand Jury is a thankless one: they have to work the entire event and will have little to no time to network. They're required to watch every presentation, take copious notes and be on stage for a closing panel each day.
At the end of the event the Grand Jury will award a total of 10 prizes: five in the 1.0 and five in the 2.0 competitions. The current prizes exist in both 1.0 and 2.0 categories: Winner (Overall), Best Design/UI, Best Business Model, Technical Achievement and Best Presentation.
The Grand Jury will be given the flexibility to award additional prizes as they see fit.
We're delighted to share four of our 12 Grand Jury members with you today:
Naval Ravikant is a prolific angel investor and a dangerous, dangerous man. He's blown up the early-stage investing space with his nascent AngelList, where it feels like every deal in the Valley is circulated. He terrifies venture capitalists with his ability to "fill out a round" with a single email. We're thrilled to have this bad boy in our camp!
Mark Pesce is a commentator, thinker and digital life liver. Famous in Web 1.0 for co-inventing VRML, he now spends his time Down Under meditating on all things digital, racking up frequent flyer miles doing consulting projects and giving quixotic talks. We hang on his every word.
Jay Levy is a blue-collar venture capitalist from Zelkova Ventures, in the Big Apple, who shuns the limelight while working hard to find startups he can go to bat for. He's the first to show up, the last to leave and returns calls before you make them.
Om Malik is the founder of GigaOm Network, an insightful writer and now a partner at True Ventures. He toiled away at Forbes and Red Herring before realizing he could run his own publications more effectively. He started investing in startups after discovering he could do so as easily as giving them free advice on his blog.
[[ To nominate a Grand Jury member, please fill out this form. ]]
Click here to purchase your ticket to the LAUNCH conference.
LAUNCH Conference Press
With 40 new products launching on stage, and 100 more in the demo pit, for the first time, we're hyper-focused on having the most important bloggers, journalists and analysts at the event covering "the new."
We're thrilled to announce we've received confirmation that the following outlets have agreed to cover the event: Fortune, Gartner, Wall Street Journal, All Things D, CNN, Business Insider, Financial Times, CNET, San Francisco Chronicle, Venture Beat, WIRED, Engadget, GigaOm, TechWeb, Reuters, USA Today, TheNextWeb, Bloomberg and many more.
[[ To join the wait list for press credentials, please fill out this form. ]]
#27: If winning isn't everything, why does it feels that way?
[ Tweet the @LAUNCH Coda and you'll be entered into our drawing for a free ticket to the LAUNCH Conference. ]