Startup accelerators need to behave more like investors

Accelerators are still a relatively new type of startup investor, most of them having little or no record of returning money to their own investors, especially outside of the US. Seed-DB, a database of seed accelerators and their companies that tracks exits of accelerator graduates, lists only around 20 exits from non US-based accelerators. The leader is Seedcamp (UK) with seven exits; Nxtp.Labs (Latin America) and FounderFuel (Canada) are tied second with three exits each (disclosure: Nxtp.Labs is an investor in Fundacity). The non-US total number of exits is lower than Techstars or Y Combinator have each.

US-based accelerators dominate the whole list and there are good reasons for that. First of all, their graduates have the best access to later stage investors and corporate buyers, which are often other well-funded startups, although in that case the exits are often talent acquisitions, called acqui-hires, which usually return peanuts to investors, if anything at all.

There is however another factor in play. It usually takes a lot of time before a successful exit can happen and US accelerators are simply the oldest. Y Combinator was founded in 2005 and Techstars Boulder in 2006. London-based Seedcamp was founded in 2007.

Recent years have seen a huge growth in accelerator numbers outside of the US, as it has become much easier to start up and scale from anywhere in the world. At Fundacity we focus on emerging startup ecosystems (which is basically anywhere outside of the US), speaking with many of these accelerators on a regular basis. So far their focus, understandably, has been on selecting and accelerating startups. It takes time to find a niche, build a brand and develop the ability to attract the best startups. In the meantime however many startups have already graduated from their programs, some more successful than the others. As the portfolio of graduates mature, accelerators’ LPs will be increasingly interested in seeing returns on their investment. The question “How are you making sure my investment portfolio is growing?” is and will be asked more and more often.

One could argue that accelerators are limited in their ability to impact the growth of their portfolio. The first limitation comes from the structure and value of their investment. Almost all have convertible notes that usually give them right to less than 10% of equity. As a result, they have no board seats and often no explicit right to information. Another limitation is related to their modus operandi, which requires accelerator staff to deal with many administrative tasks such as managing office space, coordinating mentors, organizing Demo Days, etc. That leaves less time and resources available for mentoring, which is largely “outsourced” to external mentors anyway.

Indeed, making the right connections is where the accelerators can add the most value to their startups. This is even more true in emerging startup ecosystems, where accelerators often act as local startup hubs, which means they can usually easily get in touch with people who can help their portfolio startups. They do that very well during the acceleration programs, but that support often ends after the Demo Day, even though the needs of these startups remain largely the same. All of them welcome introductions to potential mentors who can help the startup grow operationally and to investors for capital necessary to execute.

It sounds very reasonable and I am sure you think this is something that must be happening. Well… The first step for accelerators to be able to help their portfolio startups grow is to actually know how they are doing. Unfortunately, the communication line after the end of the acceleration program often breaks.

(Not) staying in touch

At Fundacity we regularly speak with accelerators from around the world and ask them about how satisfied they are with knowledge about their portfolio startups. We started asking about it during the customer development process for our portfolio management tool for accelerators. The message was very clear – “we think it’s very important to stay in touch but we don’t really do it well enough.”

Actually, on the scale 1-5, the usual answer we get is 2 or 3 and that usually sounds quite optimistic. No wonder, it’s not easy to keep in touch with startups after they graduate from acceleration program, which is due to the combination of available resources vs. ever increasing number of graduates. Let’s expand a bit on this point:

1. Focus and resources. The key accelerator activities and resources are focused on the following process: selection, acceleration, presenting startups during the Demo Day. Then it starts again. All of these activities are operationally time consuming and require immediate attention due to clear deadlines. As accelerators need to control costs, they usually have no additional resource dedicated to keeping in touch with portfolio startups, so this task is pushed down the list of daily priorities. We sometimes see a junior associate, or even a marketing person, performing this role.

2. Large number of graduates. Depending on the program, one cohort comprises usually 10 to 20 startups. For a 2-year-old accelerator this can mean even 50+ startups to deal with. Even though there are reporting tools available on the market, there are rarely used. First of all, many accelerators simply do not recognize portfolio management important enough to spend money on, so they end up relying on email communication and Excel to record the information. As collecting and formatting information this way is very time consuming (e.g. there are different formats of updates, need to send reminders to slackers), it usually ends up not being done well and provides limited actionable insights.

No wonder that accelerators also encounter pushback from founders, who do not see the much sense reporting to accelerators about their progress if they receive no value in exchange. All this leads to situations where updates are rare, not consistent and depend too much on founder good will, rather than on habit and mutual benefits. It shouldn’t be a surprise to hear stories how accelerators found out in the media that one of their startups raised additional capital.

There are however many good practices in that space and the accelerators that break this cycle are the ones that will benefit the most. We will describe how it can be done in the next post.