Pedal To The Metal: Seed Accelerators

Before the terms ‘startup’ and ‘bootstrapped’ had been invented, my first company was a bootstrapped startup. I stumbled along on some basic business principles (sell for more than you buy) and a lot of instinct. I was very fortunate, and continue to be fortunate, to have picked up some great mentors – actually it was they who picked me (I still have no idea why).

Today I think that fresh entrepreneurs know that they don’t know, although they don’t necessarily don’t know what it is they don’t know. They don’t need much except a place to lay their hat, some dineros, and a helpful word or two. And so the seed accelerator was born.

Accelerators are not incubators (and if they are, they should just call themselves that). Incubators are like they sound – nice warm, cozy, coddling environments where you can spend a couple of years spending government grant money.

(As an aside, I realise that I have been using far too many chicken similies in these last posts, but since I tend to write in the morning, it has absolutely nothing to do with me being the least bit hungry. Although I did have eggs for dinner last night. Hmm.)

Accelerators are like they sound – high-octane, intensive full-on programs that end before you realise it. You go from the start line to the finish line and you don’t look back. And just as in car racing there is a support team to coach you, guide you, and even help search for the bucks.

Although there are many, the three best known programs are Y Combinator, Tech Stars, and Seedcamp. Nominally these are seed funds, but their real value comes from the professional mentoring, networking, feedback, and exposure that the founders acquire.

Does this complicate the angel/seed space? Super-angels on one side, seed accelerators on the other, VCs catching up – what’s a poor multi-millionaire to do?

What is clear from this picture is that there is a lot of seed money out there, chasing not enough startups – i.e. the market favours (good) entrepreneurs. Angels who have sufficiently rich networks will be able to preview and participate in preferred deals (or they could just sign up for Angel List and let the deals come to them).

This begs a question – with all this seed money (supply) outstripping good companies to invest in (demand), is there a seed bubble? This has been asked more than once, so let me give you my answer up front: no.

Let’s start with: what’s a bubble? (Here is the educated answer.) In short, when the asking price of an asset – or worse, when buyers bid up the price of the asset as a class – far exceeds its real (“intrinsic”) value to the extent that there are no more buyers who can afford to purchase that asset, a bubble is created. This is true for situations where the market sustains only one order-of-magnitude of purchasing power (residential real estate, dot.com stocks, cocoa beans, uranium, tulips (you have to go way back to find a tulip bubble)). But is this true for markets where the price/value of the asset can increase by several orders of magnitude (think art) and the class of purchasers changes as well (think really rich people)? I suggest you find somebody who knows what they are talking about to answer that one. My guess: it doesn’t hold true.

Startup valuations don’t scale linearly, each step of the way we expect there to be a logarithmic increase in the valuation of the company – hundreds of thousands, millions, tens of millions, hundreds of millions. Angels, who play in the millions-valuation arena, typically don’t play in the leagues above. It is precisely this ecosystem of buyers with greater purchasing power that makes the whole seed scene possible.

Elias Bizannes (“Frequent thinker, occasional writer, constant smart-arse”) takes the seed accelerators to task as “a terrible loss making business in the medium term”. He has been answered in the comments by no less than the Daves McClure and Cohen that he really has no fiscal basis for his assertion.

Let’s come back to what seed accelerators are and where they fit into the scheme of things. On a pure investment basis accelerators invest little cash and take little equity, i.e. they have a small stake. Instead, the accelerators are “investment multipliers” who enable angels to get in on deals they otherwise would not be able to (the so-called “Demo Days” which are open to the investment community at large) and groom companies to be sufficiently mature and polished to be worthwhile candidates for super-angels and some VCs. The accelerators see returns that make sense given the size and stage of their investment (Bizannes used this spreadsheet to support his claims, I interpret the (minimal) data somewhat differently) and the number of companies in their portfolio each cycle.

If you look at accelerators only in terms of their net financial return on investment, you don’t see the real picture. The primary beneficiaries are, of course, the entrepreneurs, but the circle of secondary and tertiary beneficiaries is much larger: employees, service providers, users, investors, and communities as a whole. Building better, smarter and funded startups benefits us all, so keep the pedal to the metal.

About those super-angels – next time.

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5 thoughts on “Pedal To The Metal: Seed Accelerators

  1. I’ve never doubted the value of the seed accelerators, and in fact my two previous posts say how valuable they are for the industry. What I’m highlighting, is that these groups look more like philanthropic efforts than investments to get super-normal returns.

    What has surprised me however is the reaction: not only are people confirming this point by saying “I miss the point”, but the lack of rational response to counter my argument. Some of the investors who felt attacked by this are reacting in emotive “you don’t get it” conversations on Twitter, without using any evidence of hard data or even mention of the Black Swan Theory which I’m well aware of but purposely didn’t mention. We even had the founder of TechStars admit in the comments, that the focus isn’t on the return and “…I agree that it will not work for everyone on an economic basis alone, as it has for us” (which is what I’m pointing out as the real issue).

    Either way, you wrote one of the few thoughtful posts and that I enjoyed reading and agree with. I just hope you paid more attention to the detail, including how you spelt my surname wrong twice 🙂

  2. As Paul Graham and Dave Maclure often say, very few people have real data to judge accelrator program performance, I would recommend anyone interested to check Jed Christiansens thesis and followup Techstars’ Dave Cohen, who is incredibly open source, but since this whole thing started in 2005 jury will still be out for a while

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