Tag: Seedcamp

What do investors get from accelerator programs?

The next question we’re looking at as we explore the world of accelerator programs is why investors get involved. News a couple of months ago that Yuri Milner and SV Angel plan to offer every Y-Combinator team a $150,000 convertible note put this all in headlines, but investor motivations aren’t always straightforward. In fact there are a range of investors who get involved for a range of different reasons.

Angel investors

Some angels invest directly into accelerator programs, some invest in the startups during or at the end of the accelerator program, others simply participate in events and mentoring. You might think that angel investors are a completely hard headed bunch and will only invest because of the return they might get but that’s certainly not universally the case.

The main reason for getting involved is that they get to make more informed decisions about companies to invest in at the end of the program. After three months of intensely working on a startup, a number of things are much clearer. Does the team work well together under pressure? Is there a product market fit? Can they pitch well? As an angel investor, it’s actually quite hard to get a really good level of information from very early stage companies but accelerators make it much easier.

We also heard a lot of stories from angels that one reason they got involved was not to invest and get a return directly but because they could see benefit in the long term of improving the local ecosystem for startups (even if that would take a decade or more). This was less of a reason for programs in the Bay Area but in New York and London, was often cited as a motivation.

Another reason people mentioned was that it’s good fun. There’s a buzz associated with getting involved with early stage companies that is absent from other roles they might take on in larger firms or other types of investing. They seem to get involved because they find it interesting and enjoyable rather than relying on any direct return.

Institutional investors

The people with bigger pockets in the world of high tech investing are the venture capital firms. In the UK they have backed Seedcamp and in the US, Y-Combinator is backed by investment by Sequoia, perhaps the most successful of the Silicon Valley venture capital firms.

One problem that accelerators solve for VCs is that they create new deal-flow. A number of people have said that this was the compelling reason for supporting Seedcamp in London in the early days — that there simply weren’t enough young founders and companies having any contact with the world of investment. The venture capital community has an interest in there being a far greater number of good companies. If they can attract talented people to think about setting up startups rather than going to work for large organisations that’s good news for the whole sector.

Revolution?

There is a wider issue which came out from some of our interviewees that accelerators are one example of a profound shift in the venture capital industry as power shifts away from venture capital firms and towards founders and angel investors. Dave McClure is one believer. But I’ll come back to that in another post.

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What do founders get from accelerator programs?

When I think back to why we applied to Seedcamp, it was probably the money that attracted us in the first place. We’d been working on School of Everything for about a year, running the company on a very small amount of cash which was rapidly running out, so €50,000 of investment was quite enticing. My guess is that for a lot of teams applying for accelerator programs, in advance of being accepted, it is the idea of investment that initially peaks their interest in applying. I’d like to test that hunch though.

In truth what accelerators give first time founders is actually very different. Having spoken to quite a few companies that have been through Y-Combinator, Seedcamp and the like, there are a few themes that stand out:

  • Accelerators give you the chance to meet people in the tech industry, both from successful startups and in larger tech businesses. Many of the people I’ve spoken to have told stories about how they met people who later went on to help them be successful. This could be the guy from PayPal who tells you what you need to do to take payments in a particular way or the branding consultant who gives you the insight you need to change your name. For Seedcamp, Techstars and Springboard, this is achieved through ‘mentoring’ (for example see this list from Seedcamp) while in the case of Y-Combinator, the speakers are the most obvious exposure the teams have to people who are already founders.
  • Accelerators give you introductions to investors and time face-to-face with them which can be hard to get for first-time founders. Because accelerators do a great job of providing a quality pipeline of new companies (more on that in a future post), a lot of investors make sure they go along to accelerator events and getting them all in the same place is something that is a very rare opportunity for new companies.
  • Accelerators give young companies validation. The idea that you’ve been vetted by a group of successful founders and investors helps any early stage company, whether that’s with journalists, or investors or potential clients. It helps to be able to say that you’ve been selected as a ‘promising startup’ by an accelerator program. The value of that validation is linked to how well the program is regarded. Saul Klein has written about this in relation to Seedcamp.
  • Accelerators give you a peer support group. Strange as it might seem it’s actually quite hard to meet people who are doing the same thing as you, even in London and to some extent in other tech hotspots. And for teams who are starting out elsewhere, it’s really tricky. The problem is that most interactions with other founders are very superficial and you really need to be spending time in the same building or meeting each other regularly over the course of a few months to get to know them to a level where you can provide each other with meaningful support.
  • Finally accelerators provide pressure. A number of people have said that one of the things they got out of an accelerator program was a deadline and basic framework for getting there. Of course every company should be able to provide this themselves, but in reality in the early days it’s tricky to do.

So those are first thoughts. Let us know if there’s anything we’ve missed in the list of benefits for founders.
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Defining Accelerator Programs

As we start working on The Startup Factories there are a few things we need to get straight. First of all we need to try and settle on a definition of what constitutes an accelerator program. Quora is doing a great job of listing the kind of scheme we’re interested in as they pop up, but what are the defining features? Our first thoughts are:

  • They work with pre-seed stage companies — usually with small teams (2–4 people) of first time founders.
  • They are selective — they have some form of application process, this could either be by referral or by an open application system with expert judgement that picks the most promising companies.
  • They are time bound — they have an intense period of support for companies that usually lasts for three months, although there is often some form of support beyond this period.
  • They support teams in cohorts — they tend to take companies in batches to create peer support. This can be anything from six per cohort up to over 30 in the case of Y-Combinator.
  • They have a heavy focus on mentoring — bringing in people from the local tech and business communities to help the companies
  • They have the aim of securing further funding for companies. Accelerators are often described as ‘on ramps’ to the investment world.

Then there are a few features that accelerators have different approaches to:

  • Providing shared office space — Y-Combinator and Seedcamp don’t provide shared office space, Techstars and Springboard do.
  • Providing finance at the beginning of the program — While most accelerators do provide finance up front, Village Capital for example provide a prize at the end of the program.

I’m sure we’ll come up with a sharper definition as the project progresses — in the grand scheme of things it’s early days for the accelerator model and things will change over the next few years. There’s also a lot of room for diversity within the model because the context makes a big difference. Whereas we know an awful lot about starting companies using bank credit because the model has been in place for centuries, we’re only just learning how to create and support new businesses in the internet age.
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