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.