Why Many Accelerators Fail Globally ?

Most accelerators, including the majority of the Tier-one, are still cash negative. That is a concern given that most of them are for-profit and measured on the Return On Investment (ROI).  The main reason for the poor outcome, in my view: most accelerators replicated Y-Combinator’s model, while failing to assess its biggest dependent and adapt the model to their geography.

The Secret Sauce – High Quality Deal-Flow 

Accelerators, in my view, are a key ingredient to any startup ecosystem: They provide mentorship and early stage capital. They screen and qualify startups at scale. They take small but high risk. Most of them provide a centralized environment that benefit entrepreneurs and investors.

The single most important factor for the performance of accelerators is high quality deal flow (aka startups). Admitting 16 startups into program requires screening 500-1600 startups, assuming a 1%-3% admission rate, which is a typical benchmark for top-tier accelerators.

Hubs like Silicon Valley, New York, Tel-Aviv, London and Berlin, for example, hold enough activity to target such numbers but many accelerators exist outside of these hubs: Mardid, Amsterdam, Santiago, Singapore, Hong Kong, Dublin and Taipei are just a few of the locations where accelerators emerged.  

Adapting YC’s model to emerging hubs

YC was established in 2005. While quality and quantity were on its favor, given its locations, market education was still required to get YC to its current brand and returns.

Most of the hubs mentioned above still lack the required qualities and quantities. Some of those markets are still missing key ingredients such as access to follow-on investment.   Given that, my experience has led me to the belief that accelerators in those geographies should focus on market education vs. high returns.

Adapting YC’s model – Chile, Taiwan and Africa

The government of Taiwan has recognized the potential contribution of startups and small businesses to its economy and has setup an incubation program inside the Institute for Information Industry (III). The goal of the program is not to generate returns but rather educate the market, generate a certain buzz together with other parties (disclosure: Yushan Ventures, one of these parties, is a VC firm I’m on the board of).

In a similar way the Chilean minister of Economic Development has established Startup Chile , an incubator providing $40K to 300 startups who are admitted to the program. The goal: educating the market and building awareness.

A final example is MEST, an incubator based in Ghana that supports the development of software companies in Africa. MeltWater, a SAAS based company, operates MEST and my guess is that they are not doing that for the financial returns.

New mission calls for a new structure

In summary, in most geographies a for-profit accelerator will not be able to generate the expected returns, mainly due to lack of high volume deal-flow. Long-term parties such as corporations, the public sector and some wealthy (philanthropic) individuals should step in and use the accelerators as a platform for market education and awareness. Doing so will drive startup volume and quality in the long-run that will justify investments for the sake of financial returns. 

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About shanishoham

After 14 years of General Management and incubating/scaling new businesses & organizations for enterprises (established a $55M mobile business and a $100M/400 employees global division), I became an investor Today I’m a board member/mentor with 5 incubators & micro-VCs and involved with many other private & public incubators around the world. I also founded a VC firm named 2020 and I'm a member with a number of angel groups so i get to see & work with many startups, innovation centers and other parties across the ecosystem. I’m an alumnus of the Stanford Graduate School of business - Sloan Master in Management program, a 10 months intensive program for 57 carefully selected experienced Executives and leaders from all around the world.

4 comments

  1. toelg

    Hi Shani, I very much agree with you observations. We operate an incubator at the Namibia Business Innovation Centre (NBIC) which follows a more traditional model – mainly as we also support non-IT startups. I personally like the accelerator models YC, Techstars or Startup Bootcamp in Europe apply – mainly for speed and fast results. We were looking into applying the model for our entrepreneurs in software / mobile apps and faced the same issues you are raising:
    1. Deal flow – Namibia only has 2.1 million population, hence you would need to cover all of Southern Africa to achieve a sufficient flow of proposals. In our case we would work with partner organizations we have already in the neighboring countries. We are running programs already to train entrepreneurs, software developers and even to motivate people to think about starting their own companies.
    2. Funding – especially follow-on investments. We lack business angels and VCs, so similar to your experiences in Taiwan, Chile or Ghana we need to create a VC structure ourselves – either through government, national banks or international organizations.

    • Naturally i’m not surprised.
      I think that partnering with neighboring countries is a great idea. Incubators that are building a large ecosystem around them tend to be more successful.

      As for VC funding, in countries like Namibia, in my view, the government needs to provide incentives to investors in the form of co-investment or tax benefits. There are just too many risks and uncertainty for financial investors to step in without the government’s support.

  2. We are involved in the Finnish goverment sponsored Vigo acceleration program (www.vigo.fi) which is a public-private partnership.

    It would be great to hear others experiences at Shani’ Linkedin forum he opened. Please join us there !

  3. Mark Jaster

    It is true that the problem of deal flow in accelerators in smaller or less advantaged economies is critical to success and that the rates of the current process are against them, but I don’t think that means that discarding ROI goals is the answer. What needs to be done is to address the glaring problem of the model’s process inefficiencies and let this elevate ROI to sustainable levels. As Shani points out, the current process’s funding rates of 1% – 3% will never sustain the model in these markets. But those rates need not be taken as fixed, they are the by- product of an entirely ad-hoc and non-optimized process. That’s what needs to be changed for the model to create economic success in these markets, and it can be done.

    The current accelerator model only works for a market in which there is a large surplus of raw material (business concepts) and ready access to markets. It transforms these advantages into economic value by concentrating value-creation infrastructure in the accelerator. Typically even deficiencies in market access and instrastructure can be solved by picking the right markets (that’s exactly why accelerators typically target electronic information markets in the first place), but for the model to be sustained in less advantaged markets the front end of the flow still needs to be re-engineered, and the selection model optimized, to increase process yield. This CAN be done and really must be done in less advantaged markets or the accelerator will not survive. First it means being much more strategic on the front end than is necessary in advantaged markets by focusing on insights into the needs of healthy markets (wherever they exist) and then sharing this information with the local innovators to improve the quality of their ideas. And second it means being willing to optimize the selection process objectively which probably means addressing its human elements through more scientifically proven decision processes.

    I am doing this at both of the key points of the innovation process through new quantitative methods in needs research and by leveraging scientifically proven decision processes that can optimize human judgment models. The new needs research identifies specific market growth opportunities that are awaiting better innovations to focus innovators on solving problems that already have markets ready to adopt them. And the new selection processes uses carefully chosen and trained experts to inform mathematical models of investment decisions to eliminate overconfidence, irrationality, and inconsistency of human decision models. It is my belief these methods will produce the deal flow yield that can make the accelerator model not only viable but an engine for economic growth in any market where skilled talent is available to create solutions. I would be happy to connect directly with any of the Stanford or general accelerator communities interested in applying these methods to their initiatives. Mark Jaster, Stanford MS Engineering, Innovation Consultant.

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