Do we need Startup factories? Notes on NESTA’s round table on European acceleration programmes

In my mind there is no question that to help build a pipeline of grown ups, finish ups and speed ups, there needs to be a healthy pipeline of ambitious, healthy, well-connected startups.

Can ‘startup factories’ help provide that pipeline of businesses that will be taking the stage at the BLN Growth Forum’s of the future?

First, the bad news. In the nineties there were incubators. On the whole, they were a very bad ting and lots of people have got confused about the difference between incubators and accelerators.

At one point in 1999-2000 there were over 50 incubators active in London alone. I worked for one, (bEurope, which managed to create and fund a single business, Investis, which still runs very successfully today. bEurope, like many others, ran out of money as the business model depended on getting funding for each of the business that it incubated and the investor appetite for early stage investments evaporated in the dot com crash). On the whole, incubators were a bit of a disaster and the ones that had raised the most money had the hardest to fall, even if their founders were somewhat cushioned from the crash as they had managed to raise funds with management fees that provided some succour from the drop – remember Brainspark or Ant Factory anyone? There were a few reasons that they created so little value: many of them didn’t have a clue what they were doing or actually know what incubators should do; investor appetite for any sort of early stage investment disappeared; the best companies didn’t go to an incubator that was taking often significant equity for a range of services and space of variable quality.

So why are ‘startup factories’ or accelerators going to be different?

I think the principle reason that the next wave of accelerators have a much higher chance of success is that the market has changed – significantly – and incubators and accelerators use very different models.

It costs far less to start a web business (and most accelerators focus on web or at least digital businesses). The gospel of Saint Eric the Lean has been spread widely. A lot of the old bull shit about startups has gone (arguably replaced with the excrement from different bulls). Very few founders will be beguiled into thinking that the one thing that they need to be successful is to be bought under the wing of an investment banker who has raised a startup fund and set up an incubator. The web has opened up conversations among founders across the globe and young company founders are incredibly aware now of what they need and the type of support available to them. If they are not, they deserve to go to one of the *irony alert* special incubator/accelerator programmes somewhere set up and run, usually at public expense, by an agent of a regional development agency or similar because that will solve all of the problems of the region’s innovation and entrepreneurship.

Let’s consider what some of the best accelerator programmes can do and ignore the fact that when accelerator programmes are seen to be successful, a swathe of copy cat, me-too programmes will spring up. (Anyone want to bet £50 that there will be three times the number of accelerator programmes in Europe within three years?).

For the sake of argument, lets use the examples of top accelerator programmes provided by Tech Cocktail as part of research undertaken for the Kauffman Fellows programme. By their own admission, the methodology applied in the US does not really apply to European accelerators as they simply haven’t been around for long enough but this gives a reasonable view of some of the programmes with the highest potential.

Criteria:

• Has to be, ‘for profit’
• Has to be fixed term programme
• Has to take equity
• Should not charge start ups for office space or services they don’t want or need

This is the top 8, in order, according to Tech Cocktail.

1. Seedcamp

2. Startupbootcamp Spain / Tetuan Valley

3. Startupbootcamp Denmark

4. Springboard

5. Openfund

6. NDCR Launchpad

7. Propeller Venture Accelerator Fund

8. Startupbootcamp Ireland

This is a reasonable list of potentially high quality programmes across Europe even though the methodology is essentially indefensible. (Arbitrary weighting of highly qualitative variables applied to early stage programmes is inherently crazy even though the end result means most of the decent programmes appear).

Who benefits from these programmes?

NESTA’s report, ‘The Startup Factories’ identifies a number of beneficiaries:

• Angel Investors – reduce need for due diligence, reduce cost of discovering new companies, network with other founders and investors.
• Venture Capital Investors – Improve deal pipeline, get first sight on new technologies, network with investors and company founders.
• Large Technology Firms – talent scouting for new employees, new customers for platforms and services, brand association with innovation and entrepreneurship.
• Other startup founders – Talent scouting, supercharging their network, meet customers and later stage investors.
• Service Providers – New customers.

From what I hear from talking to people in all of these groups, the benefits are a little less well defined. I have italicised the ‘benefits’ that people value least and in bold the ones they value most:

• Angel Investors – reduce need for due diligence (angels always want to do due diligence even if a programme offers them the opportunity to see momentum in a business), reduce cost of discovering new companies, network with other founders and investors (the best programmes are filled with the kind of people that want to hang out together and do business together).
• Venture Capital Investors – Improve deal pipeline (the best investors virtually always see the deals they want to see, others, not so much), get first sight on new technologies, network with investors and company founders (See above for angels).
• Large Technology Firms – talent scouting for new employees (most startup founders are running away from big companies), new customers for platforms and services (most want customers, now or in the future. Microsoft Bizspark, Amazon Web Services and others all run programmes to support startups as the technology decisions made at an early stage of a businesses life tend to stay with them for a long time and this is a low cost way of supporting startups and locking customers in), brand association with innovation and entrepreneurship.
• Other startup founders – Talent scouting, supercharging their network, meet customers and later stage investors.
• Service Providers – New customers (this is a longer term goal for most advisors – servicing startups is a very expensive business for the best advisory firms).

Additional set of beneficiaries not mentioned in the report:

• Management and investors in the programme itself. Benefits here can come from a number of different fronts – investors want to make their money back of course but there are also lots of other things that they get out, from a sense of ‘putting something back’ to having their angel activity managed and supported. Creating and supporting the development of a successful accelerator programme is also one of the few ways that an angel investor can become recognised on a global scale. The Klein family, very well known in London and a few other places before Seedcamp for example, have now unquestionably earned a seat at the global angel high table.

In my view, the biggest beneficiaries of the best accelerator programmes are first time founders are served particularly well by the best accelerators:

• They bring people together to push each other on at an early stage.
• They offer a good grounding in the basic fundamental building blocks of business.
• They supercharge network with connections to outstanding and accomplished entrepreneurs, investors and advisors.
• They hold founders to account, both via the accelerator, and via their peers in the programme.
• They can provide access to people who can help specialist founders think about things they don’t know about – a coder needs to understand more about product management for example.
• They validate the business and the idea.
• They give founders confidence and profile.
• They offer founders access to talent that wants to work in startups.

So back to answering the original question:

‘Can ‘startup factories’ help provide that pipeline of businesses that will be taking the stage at the BLN Growth Forum’s of the future?’

My view is that the best ones can do some extraordinarily powerful things, particularly for first time founders and I have no question that a significant proportion of the alumni of such programmes will be the business leaders of the future. The only danger I can see is that the notion becomes so popular that accelerators of variable quality spring up everywhere and confuse the market with crap-ccelerators. In a market where startup founders can share information across continents incredibly easily though, it is likely that the best ones will still be easily identifiable.

Now, any entrepreneur worth anything will appreciate the rule of ‘ABC’ (Always Be Closing).

This would therefore be an entirely appropriate time to point out that we are running our second BLN Growth Forum on 5th July in Cambridge. This is a meeting for the leaders of some of the fastest growing technology driven businesses in the UK. We are also very pleased to be bringing the leaders of the next generation of high growth businesses to the forum through our relationships with Springboard and Seedcamp. We think that the alumni of those programmes represent the best of the new generation.

http://growthforum2011.thebln.com/

Nice one NESTA. A really worthwhile event that took the conversation well beyond expectations.