Category: Seed Accelerators

Review — “The Launch Pad” by Randall Stross

What is it really like to be involved with Y Combinator? “The Launch Pad” is the newest and most complete piece to date. While other writers have penned articles about YC (notably Stephen Levy in Wired magazine), this is the first book. It follows the Summer 2011 class of Y Combinator from the applications/interviews, during the program and Demo Day, through to the successes and failures the startups have experienced to date. In addition to this class, the author has interviewed a variety of founders across numerous YC classes to provide a more detailed history.

If you don’t know much about Y Combinator, I would highly recommend this book. It’s a very thorough picture of what it’s like for the founders of the startups going through YC (including what it’s like to get accepted!) as well as insights into the YC partners’ experience. It details a microcosm of the startup experience; initial successes, technical breakdowns, pivoting business models, and debates about age and gender. I found it a nicely complete book.

For people who are familiar with Y Combinator, you will probably enjoy it but you will likely not learn much more than you already know. There were some details that I hadn’t heard before, like the exact investment splits of the early YC partnership. And there are a lot of interesting stories and anecdotes about a lot of different YC founders and YC partners. But there’s little that would be unfamiliar or groundbreaking if you’re a regular Hacker News reader.

Overall, if you’d like to get more detail and color into the Y Combinator experience, check out “The Launch Pad.”

Thoughts on scaling seed accelerators

One of the more interesting phenomenons I see in seed accelerators is how they scale, and in general I see three models. There’s the YC model, which features large class sizes (>25 startups per class) and/or continually adds more and more startups to each class. There’s the TechStars/franchise model, which keeps class sizes largely the same (5–15 startups per class), but scales by adding more classes per year and/or more franchises in different cities. Finally, there’s the quality (aka default) model, which doesn’t change class sizes or frequency, but “scales” by getting better startups through the doors. (The last model is effectively just keeping the status quo and not scaling; I’ve included it here to be complete.)

There are only a small number of accelerators that use the YC model: Y Combinator, 500startups, and Startup Chile are the top examples. They have developed programs which scale with more startups, and through portfolio theory should have a better chance of generating a solid financial return on their investments.

Many accelerators use the TechStars model; TechStars in particular has popularized it through their Global Accelerator Network (GAN) with which ~50 accelerators are affiliated. In this model class sizes are “no more than 10–20 companies at a time” involving “40–80 mentors”. By capping the size of each class, it does limit the scaling potential; instead of adding more startups per class these programs add classes or add similar franchises in new locations. Clearly the GAN has taken a stand that it’s more important to provide the in-depth, personal mentoring for all startups in their programs than it is to scale to larger numbers in a class.

Finally, a lot of accelerators are really in the default model; these programs either don’t have enough quality deal flow or cash to invest to expand the number of startups they fund. In this case, they need to scale the quality of the startups they do fund by continually marketing their program so they can raise the bar for admission.

Which is the best of these models? There’s no definitive answer. I’ve discussed this with a number of people and currently believe it depends on the startup. Susan Cohen, a founder of Priceline.com and a PhD researcher of seed accelerators at the University of North Carolina, was particularly helpful and shared with me her thoughts from her research to date. If you’re coming into a program with just an initial idea, the programs that provide in-depth mentoring can help founders iterate on their ideas and business models faster because of the intense mentoring. But for startups going into a program with a well-established seedling business, the YC model can provide the time/space to hack and iterate on a product because of the lighter-touch mentoring. I’d be interested in your thoughts; please send me an e-mail with yours!

Seed-DB three big new features

I’m very happy to officially announce three big new features in Seed-DB. Some of these have been live for a while, but together they make the site much more useful.

1- Accelerator ownership

I’m proud to announce that accelerator owners can now get access to edit the entries of their accelerator and the startups they fund on Seed-DB! Access will be granted manually to verify that only program partners/administrators are given access. But once granted, you’ll be able to edit your own information, add startups you’ve funded, and provide information on when your program is open for applications. To get access to your program, follow the instructions on the guide page for accelerators.

By doing this, I’m hopeful that the data on Seed-DB will be even more up-to-date, since the program administrators will be able to make any changes without me (Jed) being a bottleneck.

2- Application dates

Accelerators can now provide information on application dates to their programs! Simply provide the date applications open, the date they close, and a link to the application page. If your program currently is open for applications, it will be highlighted on the list of seed accelerators. And if you’re a startup wondering which programs are currently open, just check out a single page: http://www.seed-db.com/accelerators/apply

I hope this will help accelerators better market their programs to interested startups, and it will help startup founders discover and apply to as many programs as they fit.

3- Funding over $X

Have you ever been curious how many startups have raised more than $X in funding, where X is a value that you care about? Well now you can. To get the information, use the URL in the form: http://www.seed-db.com/companies/funding?value=X where X is the funding level you care about.

For example, as of today there are 237 companies in Seed-DB that have raised >=$1million in funding: http://www.seed-db.com/companies/funding?value=1000000 64 companies have raised >=$5million and just 28 have raised >=$10million.

Finally, to see data on all the companies that have achieved an exit (currently 102 startups), simply check out this page: http://www.seed-db.com/companies/funding?value=exit

Please remember that the “H” / “M” / “L” letters next to the exit value column represent the Seed-DB confidence level in that particular value. “H” is reported/verified information, “M” is rumored value, and “L” is an educated guess.

Summary

Thank you for reading to the end of this post. I really value feedback; please send me a short note or comment below on what you liked, what you didn’t like, or what you’d like to see more of in this newsletter. And if you liked it, please forward it to a friend!

I’m pleased to say that Seed-DB now has three new features! Some of these come from direct feedback; others are features I’ve been planning to add for a while. I hope you find them useful.

Median + Average funding

Brad Feld got in touch with me to refer me to his post where he discusses the differences between average and median funding in venture capital. Brad’s post makes a lot of sense for Seed-DB, too. I had previously just listed average funding for the startups in an accelerator; I have now added a column for median funding of the startups in that accelerator.

There is a slight hitch in how this is implemented because some accelerators have very few startups with Crunchbase profiles. In these cases even the median figures would be inaccurate because only the startups with solid funding rounds were typically shown. So if a startup doesn’t have any Crunchbase funding listed, I calculate the median using a combination of Crunchbase profiles (where available) and the average funding per startup (for each company that doesn’t have funding shown).

The result of this is that median values are accurate where most startups in an accelerator have up-to-date Crunchbase pages. TechStars in particular excels at this. As usual, if you have questions or concerns about this e-mail me directly.

Application Dates now available

There are over 120 seed accelerators listed on Seed-DB; this is a lot of choice for entrepreneurs around the world! As of today, Seed-DB will highlight seed accelerators with open application windows and direct visitors to the accelerators’ application page. These windows can be entered well in advance. On the day applications open a bright yellow button will appear next to your accelerator.

Only a couple of accelerators currently have entries. If you’d like to add information on the application open/close dates for your accelerator, enter them in this form. (I’ll check this link periodically and add what is submitted.)

I hope this helps startups learn what programs are open for immediate application, and helps accelerators generate additional application/deal flow.

Significantly improved updating

While not directly visible by users, the automatic updating of startups and accelerators has been drastically improved. Most changes in Crunchbase pages should be reflected in Seed-DB within 24 hours.

I’m pleased to announce Seed-DB, a database of seed accelerators and the companies they have accelerated. I originally started assembling this data in the summer of 2009 as part of the research paper I wrote for my MBA thesis at the University of Cambridge: “Copying Y Combinator: a framework for developing Seed Accelerator programs.” Ever since, I’ve been keeping it up-to-date in a number of Google Spreadsheets.

Seed-DB puts all of the best information I have and puts it in a much more digestible format for easy viewing and comparison. I have integrated Crunchbase data to get up-to-date information on funding rounds, number of employees, and more. I believe that Seed-DB is the most useful and comprehensive resource on seed accelerators around the world.

Economic impact

One of the clear things that stands out to me is the economic impact of seed accelerators. Even though the data is far from complete for some programs, these are some key statistics as they stand today:

• >100 programs world-wide
• >1300 companies have been accelerated
• ~65 companies have already exited for an estimated $930million
• >3000 jobs created
• >$1billion in angel and venture capital funding raised

In particular, as the data becomes more complete I estimate that the number of jobs created could easily double. And as the companies mature and have exit events for investors, the exit values will be much, much larger. (Paul Graham has publicly stated that just the top 21 Y Combinator companies have a combined value approaching $5billion.)

Key disclaimers

Incomplete data

As hard as I’ve tried, the information on Seed-DB is NOT 100% complete. There are three reasons for this:

• Missing startups. Some accelerators have made it very difficult to find lists of startups that have gone through their programs, so there are many startups missing in less visible programs. Please contact me if you can provide me with any details.
• Missing data in Crunchbase. Many companies have not entered any information in Crunchbase. That’s where I get details on funding and number of employees, so if you want this information to be accurate please update it there. (If you run an accelerator, it would be ideal if you could encourage your startups to do this.)
• Missing accelerators. I believe I’ve tracked down all of the seed accelerators world-wide, but please let me know if I’ve missed some. Note that I’m using a pretty strict definition of a seed accelerator. I hope to eventually track other types of programs, too.

MVP

To use a buzzword, this is a minimum viable product. Reid Hoffman has been quoted as saying “if you’re not embarrassed by the first version of your product, you’ve launched too late.” Well, I’m at that point. There’s a lot that I still want to do, some of user-visible projects and tasks are on the roadmap, but what’s launching today is the core of my vision.

Valuations

Please note that while exits are often publicized, the price paid for most companies is NOT public. So for the vast majority of companies I’ve simply had to guess. I’ve put a confidence level by each guess, with the highest-level confidence reserved for the cases where the price was public or widely reported. These values do not come from any of the companies involved.

Final word

If you’ve made it this far, I’d ask you for three things.

1. Sign up to my seed accelerators newsletter. (It’s very low traffic, and I don’t share or sell e-mail addresses… ever.)
2. Send me feedback. I want to make this useful for startups interested in accelerators, people founding/running accelerators, and investors interested in companies from accelerators.
3. If you’re interested in collaborating with me on the technical side of things, please get in touch. I’m new to web applications, and could use an experienced partner.

Thanks for your attention!

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.