RIP accelerators?

We recently took the EF team away for our first retreat. It was a pretty simple affair, an Airbnb in a tiny village with board games for entertainment (Avalon and One Night Ultimate Werewolf mainly). While discussing the future of EF we got chatting about the future of accelerators.

The last couple of years has been a boom time for accelerators. There are now more than 60 of them across the UK, two thirds of which didn’t exist before 2010.

In most industries, there isn’t such a thing as first mover advantage. Look at Facebook or Whatsapp. But in the world of accelerators, Y-Combinator (YC), the creator of the accelerator model as we know it, has maintained global dominance for 10 years. And it doesn’t look like it’s going to slow down anytime soon.

For YC, global dominance means being able to select and invest in the very best startups. YC gets the best applications from the best teams and can therefore choose the top startups in the world, with every other accelerator selecting teams after them.

Any experienced investor knows that the majority of the returns will be in the top 20 percent of startups and so investing in the best really matters. If you look at the data, it seems to back this up. For example YC has had $2.3 billion of exits compared to the next best at $400 million (AngelPad) and even on average raised per a startup, YC outstrips other big names like TechStars; YC’s $6.6 million to TechStars’ $2.5 million.

So, if YC is dominant, does that mean all other accelerators are dead? Not necessarily. Accelerators need to think about two things; unique access to investment opportunities and providing value to the teams they work with.

Accelerators need unique access to teams

In the accelerator industry if you get to pick first, you get the best startups. YC is now able to pick the best teams in the world and it's choosing 200 of them every year. Every other accelerator has to close in on what's left.

At EF, we've come up with a new tactic of ensuring we get unique access to teams.

We invest in individuals and create teams from scratch, which allows us to access investments that nobody else can – without EF, the startups wouldn’t have existed.

In other words, we can get YC quality talent long before YC would ever be able to work with them.

Other accelerators are targeting particular niches. TechStars, for example, goes after startups that don't immediately want to be in Silicon Valley, while PiLabs is a new accelerator targeting the property startups alone.

Accelerators need to add value to the startups they work with

Many startups join an accelerator, and take their investment, as a way to speed up their development and ultimately increase their value. For accelerators, ‘adding value’ is highly demonstrable as startups that go through accelerator programmes should see higher valuations than those that haven’t.

There are many ways accelerators add value, but it’s relatively hard for them to differentiate between what the services provide. Almost all provide some combination of mentoring, office space, investor readiness, networking and a demo day. When the offer is so similar, it can be hard to tell which programme is best.

That’s why adding value and valuations post accelerator have become a proxy for success.

We’re seeing some accelerators innovate on the model. HAX in China provides hardware development space, The Bakery in London provides connections to big brands. At EF, we add value in two extra ways compared to the normal accelerator model - we select individuals and support them to find cofounders and we help them develop an idea from scratch.

So are accelerators dead?

In the short term, no, accelerators aren’t dead. There is continued interest from new players in the space, such as corporates and universities, who are setting up their own accelerators. There are also new investors flooding into the London startup scene thanks to SEIS and EIS tax breaks, which will continue to bolster the outputs from accelerators.

But, at some point there will be a rationalisation of accelerators and early stage support, likely influenced by an economic downturn. When that comes, accelerators that haven’t carved out a niche that gives them exclusive access to investment opportunities are going to suffer. If the returns aren’t there, investors aren’t going to want to get burnt a second time round.

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Copyright © 2015 IDG Communications, Inc.

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