Y Combinator, was the first accelerator program to open its doors in the US in 2005, followed by TechStars in 2007, Startupbootcamp in 2009 and Dave McClure’s 500 Startups in 2010. Due to the phenomenal success of these early programs, startup accelerators have grown like mushrooms. Today there are more than 500 startup accelerators in the US alone and more than 1,000 worldwide.
As a natural consequence of this rapid growth, several mediocre programs have been launched. A refocus on quality before quantity has become increasingly important. But before we take a look at what we can learn from the most successful programs, let’s start by laying out the most common elements of a startup accelerator:
• An application process open to all, yet extremely competitive. Y Combinator (YC) accepts less than 3% of applicants, compared with about 6% for the Harvard Business School.
• Selecting small and young but extraordinary teams, usually two or three founders per team, 20-30 years of age and with an Ivy League background or strong technical and business skills.
• Investing in highly scalable startups in exchange for equity – average around 6% equity for $20,000 for startups seeking product-market fit.
• Cohorts or batches of startups, normally around five to 10 teams per batch. YC with its current 60-plus batches is an outlier, but the trend among the top programs is towards larger batches.
• Intensive mentoring and coaching supported by experienced entrepreneurs and investors, normally three of four months, 50-plus mentors and aiming for three of four dedicated mentors per team.
• A program that culminates in a “demo day” when startups pitch to a large investor network to raise follow-on funding, normally involving 100 or more active investors.
• Rapid data-driven experimentation, validated learnings, and “getting out of the building”, all underpinned by a sense of urgency driven by weekly or biweekly sprints.
Now that’s out of the way, let’s have a look at some of the core elements that the top programs all share and which to varying degrees are absent in failed programs. By “failed” I mean not being able to attract startups that go on to raise follow-on funding and build scalable and repeatable business models.
Here are the top nine reasons why most startup accelerators fail.
1 They are unable to attract the best startup teams
With so many accelerator programs to choose from – anyone can Google a current list in a heartbeat – it becomes increasingly difficult for tier 2 and 3 programs to attract the best teams.
Perhaps the strongest card they can play is simply to happen to be in the geographic vicinity where great teams reside. The probability for this increases exponentially if the program is located in a bustling city, for example Berlin, New York or London.
But besides location, what can be done to attract the best teams? Since I have already written about what to look for when picking great startup teams, I will not go into that here. Instead let’s take a bird’s eye view of the selection process.
2 They lack a strict and streamlined selection process
How you structure your dealflow funnel makes a huge difference to how successful you will be in identifying the best teams. All successful accelerator programs have a funnel that is both effective in selecting great teams and efficient in streamlining the process, without doing lengthy due diligence on each and every startup.
Programs that fail usually have quite relaxed selection processes where they end up accepting:
• Teams because they happen to be their friends.
• Teams because they happen to be local.
• Single founders.
• Consultant outfits.
3 If you can’t lead, focus on a vertical
At the beginning of the accelerator craze it was okay to do a program on “web/mobile”. Today, given the large number of programs, it has become more common to focus on a specific vertical, such as HAX for hardware. A vertical focus and greater specialisation makes sense for three main reasons:
• Venture investors that focus on a particular industry tend to outperform their more diversified peers.
• Mentors and accelerator teams with deep domain expertise are better able to provide their startups with relevant advice and networks.
• A well-known accelerator program focusing on a vertical, can more easily help to connect the startups with the industry they need to break into. A curated network builds trust.
Programs that fail often have not defined a clear vertical or have chosen a vertical that is out of touch with the local investor and mentor networks.
4 They fail to attract top entrepreneurs as dedicated mentors
“Many of the mentors in TechStars are experienced entrepreneurs.”
– Brad Feld, managing director, Foundry Group, and co-founder, TechStars
Without a great mentor network it becomes difficult to attract the best startups. The best programs go to great length to attract the top entrepreneurs and investors to become mentors, before scouting for the startups.
Although “rock star” mentors definitely help to attract great teams, but name-brand mentors that don’t give their time to engage with the teams are not going to produce long-term success for the program. Attracting highly motivated mentors and keeping them engaged throughout the program is key to running a successful program.
Programs that fail usually attract experienced people with specific domain expertise or theoretical academic knowledge but who lack the entrepreneurial experience, wisdom and network that can only be gained by having been in the trenches yourself.
5 They fail to build a large active investor network
Although attracting 100-plus active investors to show up for demo day at the end of the program is essential, the investor perspective must permeate the program from day one.
Programs that fail usually manage to attract only a small group of investors to demo day. Sometimes the people of this group call themselves investors but mostly show up for networking, cookies and coffee. Just as vetting the startups and mentors, it is equally important to make sure that only active investors that can provide value to the startups beyond money, are invited to demo day.
6 They fail to recruit a competent accelerator team
Accelerator programs that are run by well-meaning young students usually fail because they lack the necessary experience to guide the teams. A top-notch accelerator team excels at marketing the accelerator program while coaching and advising the founders on how to:
• Engage the mentors.
• Apply the lean startup methodology.
• Leverage technology.
• Negotiate with angels, super-angels and VCs.
7 They fail to attract excellent dealflow
To increase your chances of finding the top teams, it helps if you have plenty of applicants to choose from. Although it is difficult to compete with YC, with its thousands of applicants desperately wanting to join each batch. To have a decent pool to choose from, a new accelerator program should aim to get at least 100 to 200 applicants per batch.
Not starting early enough to scout for the best teams usually results in too few teams applying. When the deadline for launching the program quickly approaches, the pressure is on to select the teams. In poorly-run programs, sticking with the launch date often takes precedence over selecting quality teams. If the selection process is too relaxed, the take-up area too small and the timeframe too short, ending up with a great batch becomes nearly impossible.
Top accelerator programs are elite institutions geared to one thing alone – to accelerate and leverage the best teams. This mindset is at odds with cultures that premier equal treatment, for example the Nordics or government-funded accelerator programs where a balanced gender and ethnic perspective or inclusion of underserved groups and individuals must be premiered.
Those programs that force arbitrary rules and external micro-management tend to fail. You cannot expect to win the gold medal with one hand tied behind your back.
8 They fail to nurture a loyal and generous alumni network
The more successful each batch is, the more valuable the alumni network will become. To the founders of current batches, it is invaluable to have access to successful founders who can open doors and secure meetings with key people. This aspect is often overlooked by many programs.
9 They lack a clear and measurable strategy
“If you can’t measure it, you can’t manage it.”
– Peter Drucker
It is common to measure the success of accelerators on the following parameters:
• The average amount of funding raised per startup.
• How many of the startups are still around two to five years later.
• The number of exits and at what valuations.
• How satisfied the alumni are with the program.
If you do not know what your strategic goals are, you cannot optimise operations to achieve the desired output. Simply focusing on performing a set of activities without connecting them to a clear and measurable strategy is a waste of time, money and goodwill. This may seem basic, but surprisingly many programs fail at this.
In summary
Although accelerator programs differ on many aspects such as batch sizes, how hands-on the program is, whether they offer office space and the amount of funding versus equity asked, they all have the following eight key ingredients in common:
• A highly competent accelerator team to support and guide the startups.
• A streamlined application process open to all, yet extremely competitive.
• Able to attract outstanding dealflow, often with an Ivy League background or strong technical and business skills.
• A large network of highly successful mentors and professional investors.
• A loyal and active alumni willing and able to open doors and provide advice.
• A diversified portfolio of several hundred startups.
• A lean startup approach.
• The financial muscle to be in it for the long haul.
The great majority of the 1,000 or more startup accelerator programs around the globe do not live up to these points. So it should come as no surprise when most programs fail. Expecting to emulate the success of Y Combinator or TechStars just is not realistic.
In the white paper Best practices for designing and running startup accelerators (available from leanventures.se/publications/) I go into more depth on the above points and also present 10 key points to consider before launching a program.