July 29, 2011 

The Startup Factories

‘Incubator’ has become a dirty word for startups. During the dot-com boom of a decade ago, there were hundreds of spaces in the US and Europe dedicated to growing new digital businesses which investors hoped would take over the world. But it didn’t work. John Doerr of Kleiner Perkins Caufield & Byers, one of the investors behind Google, Amazon and Sun Microsystems described them as ‘incinerators’. They were places that spent millions of dollars keeping ill companies alive not places that were likely to create the high tech giants of tomorrow. As the crash came, the incubators disappeared.

So when Paul Graham and friends founded Y Combinator in 2005, there was a healthy degree of scepticism in the tech investment world. But what they started seems to be altogether different to the incubators of old. The ‘accelerator’ model they created was cheap (investing a few tens of thousands of dollars rather that millions), it was time limited (just a three month programme), and it created a peer support group of young founders who could help each other out.  About the only similarity was that they were working with early stage tech companies. Y Combinator has helped over 200 companies including a few that are now becoming Silicon Valley household names and have valuations rumoured to be in the billions of dollars such as AirBnB and Dropbox.

Since 2005 the model has been adapted by tens of other programmes in the US and  in Europe. Not all programmes are the same but they do all have five features that make them ‘accelerators’:

  • An application process that is open to all, yet highly competitive.
  • Provision of pre-seed investment, usually in exchange for equity.
  • A focus on small teams not individual founders.
  • Time-limited support comprising programmed events and intensive mentoring.
  • Cohorts or ‘classes’ of startups rather than individual companies.

Over the past six months I’ve been exploring the rapid growth of the accelerator programme model through a research project with NESTA called The Startup Factories. We’ve visited many of the programmes and interviewed the founders, investors and participants to see what makes them work. We also gathered together a hundred experts together at the end of June to discuss and provide feedback on our findings. We published our first report on the subject a couple of weeks ago which aims to introduce the model, profiles some of the best programmes and presents the evidence about their successes so far. However, this is such a quickly developing field – two new European programmes have been announced in the last month for example – that we realise it’s an area we’ll have to continue to monitor and explore. For us the interesting questions going forward are:

  1. How should we track this trend and measure the wider impact of accelerators? Are there risks and downsides to the phenomenon? How will we create reliable evidence on how this compares to other methods for incubating startups?
  2. How can accelerator programmes be improved even further for founders? How should they measure their success as individual programmes? What lessons have been learned about supporting very early-stage businesses that can be transferred to other arenas?
  3. How many accelerators could there be? Could accelerators be used as an economic development tool in regions outside traditional technology hotspots? How should the public sector be involved?
  4. Could accelerator programmes work in other sectors? The model seems particularly suited to those where the equity investment culture is strong and early-stage costs are falling, but what are the limits?

The video of the event we held in June and our report are available here. Please do let us know what you think.

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