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Accelerators with names including TechStars, LaunchBox Digital, DreamIt Ventures, Boostphase Ventures, Bootup Labs and London's Seedcamp, to list but a few, are springing up to help entrepreneurs bring companies to life. "This is the year all the competitors appeared all over the place," There's a good reason for that. Traditional venture capitalists have for the past several years favored less risky, later-stage investments. Having raised large funds, they also remain under pressure to make bigger investments than are often required by cash-sipping Web 2.0 startups these days. Angel investors have partially stepped in to fill the capital gap, but their regional focus and the swelling ranks of Internet entrepreneurs have created demand for more-specialized investors who can also offer the guidance and services fledgling companies need. The emergence of tech accelerators is attributable to two countervailing forces: Starting a Web or software company is cheaper than ever, and, perhaps as a consequence, there are more people with good ideas than ever. As always, of course, turning an idea into a business remains hard work. "The cost of launching a Web site and reaching millions of users is now effectively zero, given founders who will work for free," says David Cohen, executive director of TechStars, a Boulder, Colo.-based accelerator that launched its first startup boot camp last year. "So it's cheap to find out if those users care or not. It's never been cheaper to test and refine a theory." Making it even easier to launch a startup is the abundance of technology platforms -- including Facebook Inc.'s social network, Apple Inc.'s iPhone and Google Inc.'s Android for mobile devices -- to build offerings around, which can speed growth. For example, within a month of introducing a messaging tool aimed at Facebook users, TechStars 2007 graduate J-Squared Media had roughly 1 million users. The term "accelerator" is believed to have been coined in a 2007 report by the Kauffman Foundation that described the growing phenomenon as an "American Idol"-like process for identifying and establishing startups. Many accelerators bristle at being called "incubators," a corporate development model that often amounts to little more than startups jointly renting office space and sharing overhead costs. Most incubators faded away following the tech industry meltdown in 2001. Accelerators operate by inviting, or recruiting, startups to join. In exchange, the tech groups generally get a 2% to 10% equity stake in companies (see chart). Firms typically winnow applicants to a manageable number, ranging from five or fewer startups to as many as 20. Company founders typically move to where accelerators are located, and some firms, such as Y Combinator, require it. Three months or so of intensive product development, mentoring and code writing lead to the culmination of the program -- presenting a business plan to potential investors and acquirers. For VCs and other seed-stage investors, these pitches offer an early look at potential investments, with the accelerators acting as a filter to identify more promising startups. Entrepreneurs, meanwhile, get a game plan and the resources to execute it. "Especially outside Silicon Valley, there's a real mismatch between talent and the structures needed to get going," says Julius Genachowski, co-founder of Washington-based LaunchBox, which this summer concluded its first program with nine budding companies. "We are focused on creating an ecosystem where, whatever you need, you are a conversation away from getting it, because every early-stage company hits roadblocks on the way to great success." Of all the tech accelerators to have cropped up, Y Combinator is considered the pioneer, having to date funded 102 startups. These include a number of well-known Internet startups, such as Auctomatic, which helps users manage their eBay Inc. business; Anywhere.FM, an online music service; and When the group started in the summer of 2005, however, its founders were simply trying to learn about early-stage investing, not coaching entrepreneurs on how to hatch a business. "We didn't know anything about investing, so we decided to try a program where people could start a company as a summer job," says Graham, himself a programmer who sold his startup Viaweb Inc. in 1998 to Yahoo! Inc. for $50 million. "If we turned out to be disastrously bad investors, we could just call it an experiment." Y Combinator invited several hackers (a term -- positive in this context -- for software programmers) to attend a weekly dinner. "It was really by accident, but this format turned out to be a fabulous discovery that grew out of a throwaway experiment to learn how to do investing," Graham says. Besides claiming the title as the first accelerator, Y Combinator also boasts significant successes from its first graduating class of startups, including Reddit, a site that lets users rank Web content. After raising a grand total of only $90,000, it was acquired in 2006 for undisclosed terms by Condé Nast Publications Inc. of New York. Y Combinator in 2005 also helped develop and invested in location-based services startup Loopt Inc., which subsequently drew an additional $5 million from blue-chip VC firms New Enterprise Associates Inc. and Sequoia Capital. Not everyone believes in accelerators. One common criticism is that the approach amounts to throwing a handful of ideas at the wall to see what sticks. More important, no top-tier startups on the order of a YouTube Inc. or Facebook have emerged from accelerators. Advocates of the programs note that the oldest accelerator graduates have been around little more than three years, making it premature to judge their success. Meanwhile, entrepreneurs who have participated in accelerators often heap praise on When Josh Fraser and Rob Johnson, who were roommates at South Carolina's Clemson University, wanted to transform their networking tool for connecting conference attendees from a one-off contract project into a business in 2005, Johnson stumbled across a program for startups called TechStars while reading one of his favorite blogs. Fraser applied for the accelerator's first summer program, filing the application an hour before the deadline. One of TechStars' mentors, Wendy Lea, a managing partner at early-stage startup consultancy Chatham Group Inc., "dove headlong into our company," Johnson says. Among other things, she helped the startup, dubbed EventVue, remove online registration from its offerings after evaluating the marketplace and discerning that customers were already satisfied with existing conference registration products. EventVue's revenue model is simple: It charges a flat $250 fee plus $4 per attendee for organizers to use its networking product. Following the investors' day at the end of the program, EventVue became the first TechStars company to get funded. It has received about $250,000 from Cohen and from Brad Feld, managing director at Foundry Group, a Boulder, Colo., early-stage venture firm and also a TechStars founder, and from other angel investors. That should be enough to keep the company and its three employees running for a while, Johnson says. "There's key value to the mentorships and advice and support they gave us," the 24-year-old says. "The credibility of having Feld behind our company really adds a legitimacy we wouldn't have Seven of the companies that came out of TechStars' first program last year have secured additional funding, Cohen says. "That's a pretty amazing hit rate versus being in the wild," he adds. "Of course, the companies are not even a year old yet, so time will tell." Adds Graham: "We know that if you give hackers roughly $10,000, put them in an apartment with ramen and do all the paperwork for them, they can come up with something interesting." -- Olaf de Senerpont Domis
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From: Alain,
Carmen--Happy to. What's your email? The newsletter is daily, btw. Alain Sherter
Posted on:
September 19, 2008 12:04 PM
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