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Five baseline assumptions on seed accelerators

There has been an explosion of new seed accelerators recently, and with that comes an explosion of press interest, blog articles, and more. I was even interviewed for a recent article by the Wall Street Journal, though my quotes were all cut. (Speaking of which, I learned a lot of about media through that experience. Sometimes it doesn’t matter what the writer/journalist thinks, the editor really calls the shots and enforces a point of view.)

I want to lay out the five baseline assumptions that I make when explaining seed accelerators:

All accelerators improve the chances of startup’s success
There is a wide spectrum to how much help an accelerator gives a startup due to reputation, deal flow, quantity/quality of applicants
The best seed accelerators are started in order to do better investing, and partners really make money through follow-on investments
A lot of seed accelerators will fail, and there’s no problem with that
Entrepreneurs should understand what they’re selling to an accelerator (but not worry about it too much)

And here’s why:

All accelerators improve the chances of startup’s success

While I don’t think that every startup should go through an accelerator, I do believe that going through any accelerator improves the probability that that a startup will be successful. It’s very straightforward: the whole point of the accelerator is to provide tools, mentorship, connections, and support to startups so they can be successful. Perhaps I’m a bit of an optimist, but I would be surprised if any startup coming out of an accelerator would say that the program had hurt their chances for success or provided them with zero value.

Unfortunately, this is a very difficult data point to test. I’ve assembled a lot of information about the status and success of over 1100 startups that have been through nearly 100 accelerators across the globe, but capturing the data for the entire startup ecosystem that hasn’t gone through an accelerator is damn near impossible.

There is a wide spectrum to how much help an accelerator gives a startup due to reputation, deal flow, quantity/quality of applicants

I doubt this is a controversial point. The degree of acceleration that startups get by going through Y Combinator is significantly different than many of the newest accelerators. For example, YC companies have a very high rate of getting follow-on funding, and their alumni network is unparalleled. Newer programs don’t have anything like this.

When it comes to understanding the seed accelerator ecosystem, the best metaphor is the US university educational system. There are some programs that are clear leaders; like Y Combinator / TechStars and the Ivy League. There’s massive demand to get into these handful of programs, and they attract the very best startups. Once inside, you have some of the best access to people in industry and massive advantages because of that credential. And because they’re so good, they attract the best people with the best chance of long-term success.

There are also more regional accelerators, like the state university system. They tend to be more attractive for people looking to stay closer to home. Some of these have the capacity to be real powerhouses, but many are just average. But even though I call them “average”, by graduating from the university/accelerator, you have a better chance of long-term success than if you did it all on your own.

Finally, I like seeing the growth of vertical-specific accelerators like RockHealth and Imagine K12, which are like professional schools. They provide real benefits for companies in verticals that have very specific needs and very specific markets. It’s no wonder you see companies like Agile Diagnosis go through Y Combinator and then later on also decide to go through RockHealth. As I mentioned in my thesis three years ago, I believe these specialized accelerators are where some really great and successful programs can and will be built.

The best seed accelerators are started in order to do better investing, and partners really make money through follow-on investments

When I interviewed Paul Graham and David Cohen for my thesis back in 2009, one thing was very clear to me. They started Y Combinator and TechStars in order to do angel investing better. In short, Y Combinator and TechStars were primarily founded to make money. This aligns the program and the startups; the startups want to create successful businesses, and the program partners want to make money which can only happen if those businesses are successful. Because they’re judging and assisting startups solely on their product/market fit and potential, I believe they have the greatest chance of generating the exits required to become profitable.

I’m personally not a fan of accelerators that are started for the purpose of, say, “kickstarting the startup ecosystem in Northeast Montana.” They usually get some government funding or grants from organizations that they’ve convinced to fund them. In short, these programs are often funded for ego. Now I don’t think these programs should die, because of the very first point above. (Any program will improve a startups’ chance of success.) But the incentives are not necessarily aligned in this situation. Startups still want to create successful businesses, but accelerators want to prove they’re doing good things for the community. I believe that these programs will not typically generate startups with exits that will make the program profitable long-term, so the program will need to go back to their investors to continue.

No accelerators that I know of do any follow-on funding, though some programs are able to offer convertible loan notes of small size. This limits the profits that the accelerator will eventually earn. But this hides the fact that the partners of the programs DO invest in follow-on rounds individually through their own personal angel investing. For example, I understand that many/most of the YC partners invest in YC companies, though from what I’ve been told they don’t lead any follow-on rounds. (Probably partly for signaling effects, and partly because they have a lot of demands on their time.) So while the accelerators’ stake is initially 5–10%, it’s diminished with each round of funding. The partners who invest personally are able to continue to invest in future rounds, and while I have yet to do an in-depth analysis here, I believe that’s where the partners REALLY make their money.

Leading on from that, what an accelerator really brings to program partners is deal flow. So even if a program is marginally profitable or unprofitable, the founders/partners could effectively use it as a loss-leader for much more profitable follow-on investing.

A lot of seed accelerators will fail, and there’s no problem with that

I’m modifying this phrase from Pascal Finette’s blog post. A number of accelerators are started for the wrong reasons (ie, not strictly to make money) so I believe that they do not have a bright long-term future. I agree with Pascal that the money many programs earn from exits will never be able to make up for the costs of the program, and many will eventually close.

Seed accelerators failing isn’t bad! Even if an accelerator that’s trying to kick-start the startup ecosystem in north-east Montana runs for two years and then dies, that’s two years of startups that have been trained and two years of connections between startups and investors and mentors. Sure, while it could have potentially had a better outcome, that’s not a bad result. From my data, just under 10% of the seed accelerators I’m tracking have already failed. (Though some have been resurrected in other forms.)

Who really loses when an accelerator dies? It’s not the startups; they’ve already gone through and had their experience. The only people that lose are the investors behind the program, and they should have understood what they were getting into before they began.

Entrepreneurs should understand what they’re selling to an accelerator (but not worry about it too much)

When I was speaking to the journalist from the Wall Street Journal, she mentioned her editor was very concerned about the cost of these programs, that startups are giving away too much equity. I believe this line of thinking is short-sighted and wanted to briefly explain why.

The default end-state for a startup is failure. The reason for an accelerator’s existence is to help prevent failure, and they take a small equity stake in companies in order to align their incentives. The accelerator only ever “wins” when their startups “win”. Paul Graham has (of course) written on this topic, and made an easy mathematical argument. You should be willing to give up X% equity if afterward the business has a (100/(100-X))% better chance of success. So if you sell 10% of your equity to an accelerator, you’re better off provided that your business is (100/90 = 1.11) 11% better off than before you went through the program. I think with the vast majority of matches between startups and accelerators this price is most definitely worth it.

There is a market “price” / valuation for different programs, and entrepreneurs should recognize what they’re selling. For experienced entrepreneurs to go through a new accelerator is perhaps not worth the cost, because it could duplicate their existing experience, adding no real value. That’s why these programs should (and do) specialize in new entrepreneurs. Top-tier programs are able to add value even for experienced entrepreneurs, so it’s not uncommon for founders to go through Y Combinator even after starting and successfully exiting a previous YC company.

Summary

Seed accelerators are great opportunities. For beginning entrepreneurs virtually any program would improve their startup’s chances for success. For beginning program founders, I would suggest that you deeply examine your motivations, and what could/would happen if the program doesn’t get the exits you expect from the first 1–3 years of startups.

There will be more programs founded, and a lot more startups going through them in the next few years. I hope the information here provides a good framework for discussing seed accelerators in the future.

A sad milestone

My father, Glen Christiansen, died when I was 17 years old, in my senior year of high school. As of today, he’s been gone for half of my life. As of tomorrow, I’ll have lived longer without my father than I did with him.

(I grew up in the US Midwest, where normally this kind of thing generally isn’t talked about in public. Part of me is fighting my instincts in writing and posting this note. But I’ve been thinking about this for a while, and feel a real need to mark this milestone in public. It’s quite a departure from my normal blogging; and is likely the last time I’ll post something this personal.)

My father was a wonderful man. I still have great memories of working with him on projects around the house, on my Cub Scout Pinewood Derby cars, on Boy Scout camping trips, and just as a loving father. My work ethic can easily be traced to the example that my father set. What would start out as a simple project at the beginning of a weekend would transform to a massive project by the end of the weekend, largely because he insisted on doing things right, and designing something that built a product with long-term flexibility and options. He also worked incredibly hard at his job, and in the service of others. Literally days before he died (and during Christmas vacation) he was at home processing paperwork so farmers that worked with his company could get bonuses that were owed them.

No father is perfect, but I think my dad came pretty damn close. And as the years have gone by, what remains are the most warm and generous memories of my childhood. He was diagnosed with cancer just about two years before he died, so our family had two years of knowing the end was near and in that time we were able to really savor that time together. Considering the late-stage cancer, he was in pretty good health that entire time.

I should mention here how much my mother means to me. My mother and father were such a great team, particularly during those last two years. She has always been a strong influence in our lives, but in my father’s final years really became the backbone of our family, and remains so today. We couldn’t have gotten through the experience without her. Her emotional support of our whole family was incredibly strong, despite the fact that she had just lost her husband and partner of 25+ years. I love and admire her strength and character.

What saddens me to my core is knowing how much of my life I haven’t been able to share with my father; how much more I could have learned from him. When he died, he knew that I had a full scholarship to college through the Navy ROTC program. But after he died, I ended up going to a different university. I had amazing experiences at the University of Michigan, and then spent six years in the Navy. I’ve lived in London for the past eight years. More importantly, I met my wife, fell in love, married and now have our first child on the way. I look back and see what I’ve done and how much I’ve changed in the last 17 years.

I wish I could have had him experience racing through the Australian Outback with my university team. I wish I could have had him out on my submarine for a Tiger cruise; I can only imagine the pride we both would have felt. I wish I could have taken him around to all of the amazing places in London. I wish I could have introduced him to my wife; I know he would have loved her nearly as much as I do now. And as I approach fatherhood now, I really wish I could turn to him for advice.

I still remember the last time I saw my father alive; up and walking off to the surgery that we hoped would prolong the time he had left. (It’s still painfully ironic that he survived his very first incredibly risky surgery when a football-sized tumor was removed from his body, but didn’t survive the surgery that was virtually routine.) While this memory will always be bittersweet, I try to focus on the fact that he lived a full life and literally walked with life, energy, and purpose to his dying day.

As sad as this all is, I’m incredibly grateful. For over 17 years, an amazing man helped raise me and become the person I am today. I’m very happy I had a loving father, who taught and guided me and set such positive examples of how to live life. While I’ve missed him for 17 years, and will miss him every day for the rest of my life, I am blessed and grateful for the life and love he gave me. I had a gift of 17 years with a wonderful man, a wonderful father (and two wonderful parents).

I love you, Dad.

Ferran Adria — speaking at Google and his new book

In late September I was lucky enough to be able to hear Ferran Adria speak at Google, and also get a copy of his new cookbook. Ferran is one of the most famous chefs in the world; though lesser known in the US/UK since he doesn’t speak English and doesn’t have TV shows. His restaurant (elBulli) was named the best restaurant in the world for four years straight.

What Ferran is really known for is his creativity. He pioneered “molecular gastronomy”, where chefs do absolutely crazy stuff to create new flavors and textures. But unlike other chefs, he did this not just with the food but with the entire restaurant! In order to have the time available to be creative, he shut the restaurant down for half the year. In order to have time to be creative even when they were open, they shut for lunch.

His talk was all about creativity, and was recorded below. It’s pretty slow to watch, since he’s speaking Spanish and everything is translated live. But if you’re interested at all in food, cooking and creativity, he has a thought-provoking perspective on creativity.

https://www.youtube.com/embed/RFQg-UiGJ5s

I sat next to a woman who practices “visual notetaking” and grabbed her notes from the talk from Flickr. (Click image to get to the original) Ferran’s talk is the bottom part of the page, under the dotted line.:

Ferran Adria talking about Creativity @ Authors at Google

The points from her notes are clear. His definition of creativity is simple: not copying. Some forms of creativity are more simple, such as new ingredients in an omelette. Others are more complex, like re-defining what an omelette can be.

Another key perspective is that creativity depends on production. If you can’t breathe life into your idea (or at least give it a go!), then it’s debatable if you were ever creative at all.

Finally, we all got/bought copies of his newest book, “The Family Meal.” I heartily recommend it. The recipes are what the staff at elBulli restaurant would eat before restaurant service.

There are a few awesome things about this book:

The recipes are laid out as 31 complete 3-course meals (starter, main, dessert). One month of meals, with a lot of variety amongst them.
Each meal gives you ingredient portions for 2 people (yay! for couple portions), 6 people, 20 people, or 75 people.
It’s a picture book; each recipe is on two pages; ~15 photos for each recipe showing what it should look like at each step of preparation
Each three-course meal has an outline of when you need to start each major step of preparation (2 hours before, 30 minutes before, night before, etc.
Each three-course meal also has a condensed list of ingredients, and what should be bought fresh, what you should fine in the cupboard, and what you should find in the refrigerator.
There’s some great advice on different preparation techniques that’s invaluable for home chefs (like me) that don’t have a formal cooking education

Again, I highly recommend his book and the video above; Ferran thinks about creativity on a different level from nearly anyone else.

Ten years on…

Ten years ago, I was Engineering Duty Officer on the USS Hartford (SSN-768), in port in Groton, Connecticut. We were due to leave on a six-month deployment, and were doing last-minute maintenance checks. That day was extraordinary; within hours we had closed out all the maintenance and were effectively ready to go. (And security on the base changed incredibly quickly.)

For the rest of the week, we didn’t know if would be sent to sea that day, the next day, or on our originally scheduled date. In the end, we left about a week after 9/11 for our six months at sea.

I have a strange relationship with 9/11 because of all of this. The Hartford left just after 9/11, and we got back to the US it was the end of March, 2002. We got very little news during that period, we missed all of the memorial events, the unity of the country, and the invasion into Afghanistan. (Though we were in the Gulf during the invasion, our boat didn’t directly participate.) By the time we got back, we saw all the flags on the interstate overpasses, the yellow ribbons everywhere, and all of the other signs. The country had moved in and done a lot of healing in those six months, and I hadn’t been involved.

I was fortunate enough not to know anyone that was killed in any of the attacks. And with time, my experiences feel like they’ve gotten closer to everyone else’s. But a six-month hole between my experiences and the country’s collective consciousness is still a strange gulf to bridge.