Why Startup Accelerators Compete with Smart Money
What Startup Accelerators Do
Five to ten years ago, startup accelerators were in their golden age. Nothing like them had existed before, and they served a valuable purpose in the market. With the cost of “starting up” a software company having gone dramatically (thanks to SaaS infrastructure), the number of startups exploded; and investors needed someone to help “sort” out the gems from the duds.
Accelerators were thus built to serve as an important “signaling” intermediary between startups and investors. They would devote significant resources to finding and selecting high-potential startups, and in doing so they would attract investors and other key talent to their programming events. The better startups they could attract, the better investors would show up, and then more startups would come to meet those great investors. It was a positive feedback loop that sustained the accelerator service model for years, allowing many to charge between 6-9% of the company’s equity for entrance; their “entrance fee.”
But as is the case with many markets and services, things change. Importantly, as startup ecosystems matured, the best “hustlers” in the ecosystem realized that many of the investors and talent accessible through the accelerator could be accessed just fine through conventional networking, saving the accelerator “fee.” Those key investors and talent started developing their own personal brands, and pipelines for vetting startups sans an accelerator. High-profile institutional investors, who historically never invested before Series A, even now have “scouting” programs and seed funds that seek to find and nurture startups at an extremely early stage.
In short, a significant amount of competition has emerged for startup accelerators. Based on our observations in a number of markets, including Colorado, the average quality of startup that enters even some of the most prominently known accelerators has gone down significantly, for precisely this reason. If I’m a talented entrepreneur, I, on the one hand, see an accelerator promising “access” to early money and advisors in exchange for 6-9% of my company. On the other hand, if I’m decent at networking, I can save myself that valuable equity and find/access the very same people the accelerator would introduce me to, by navigating the ecosystem directly without a gatekeeper.
Startup accelerators now face, in many markets, a “negative selection” problem that is the reverse of their original positive feedback loop. The best companies, with the most talented entrepreneurs, simply don’t need them. The best investors and other talent know this, and “participate” less often in accelerator programming, which makes the accelerator less attractive to startups, and reduces the average quality even further.
High-profile accelerators produced some extremely impressive companies in their earliest days, when talent and funding markets were highly opaque, and the market really needed a credible “sorter.” Today, the typical cohort looks far less impressive. It does not mean that accelerators don’t still serve a purpose. They are, and will likely remain, a valuable part of the options available to early-stage entrepreneurs for sourcing important resources. But it’s clear to experienced observers that their “golden age” is over.