Accelerators are not VCs: how should they approach portfolio management?

In the previous post we suggested that startup accelerators should behave more like investors, noticing that many of them could do a better job helping their portfolio startups. Just to summarize, the root of the problem is that they often lose regular contact with their graduates after the program. As they stop receiving regular updates about the progress of these startups, it means they simply cannot help even if they could. The main reasons for not staying in touch regularly are:

  1. Securing a successful exit for portfolio startups is simply not one of the key objectives for many accelerators, especially those backed by public or corporate money.
  2. The operations of most accelerators are focused on the… acceleration process – collecting and reviewing applications, acceleration program, organizing demo day – all of which are very time and resource consuming. As a result, insufficient resources and attention are usually devoted to following what happens with the graduate companies.
  3. Most of the information gathering process is done with tools that were not designed for this particular purpose (email, Dropbox, Excel). It makes managing the process time-consuming and inefficient, each time more so with the ever-growing number of graduates. By the way, we recommend you read this post, even though Fundacity was not mentioned there yet as a solution. (We are working hard for Marcin to revisit;)

Are only the accelerators to blame here? You could argue that it is in the founders’ interest to update their investors too, right? Yes, but think of the cost/benefit analysis they are likely making. Why would they spend time preparing regular updates to their investors if this information is given little attention and rarely acted upon? OK, let’s see how this situation could be improved.

The right focus: are all accelerators investors?

Not all accelerators are judged primarily on the number of successful exits.

The classic accelerator model involves taking a great team with promising idea, giving them office space, enough cash not to worry about such trivial things as food and accommodation, equipping them with knowledge, mentoring and contacts to grow their business during the duration of the acceleration program and then presenting them to investors on demo day. For all of that, an accelerator takes usually 6-10% of startup’s equity (most often in a form of convertible note) hoping for a nice return on investment when it becomes the next big thing.

However, in the last few years the accelerator business model has been evolving quite a lot. One clear trend is that now there is much more vertical specialization, a topic we covered in one of our earlier posts. Take Startupbootcamp as an example: they run a network of accelerators focused on FinTech (London), Internet of Things (Barcelona), Smart Transportation and Energy (Berlin), etc.

Another interesting trend has been an emergence of corporate and government funded accelerators. Unlike privately funded startup accelerators, which look to make money on exits, the primary objectives of those are often different.

Government-funded acceleration programs, especially popular in Latin America, are created to attract talent and promote technology entrepreneurship among their young populations. To become more attractive to founders, these programs often don’t take equity in the participating startups, which means they have no interest in their success post graduation. However, even if they do, the long-term benefits for the funder (growth of equity in startup portfolio) are not aligned with the incentives for the administrators of such programs. These are often private organizations, such as university incubators, that have no equity in participating startups, which means their main interest is in maintaining the flow of money to the program. As a result, their focus is limited to managing startup selection, distribution of funds, delivery of the acceleration program itself and, last but not least, making sure it looks good to the public, now.

Corporate accelerators vary in their approach to acceleration programs, but their general objective is to engage with startups to boost internal innovation and stay in touch with latest trends in technology. The successful exit of a graduate of their program is not necessarily crucial to meeting these objectives. At the end of the acceleration period, the corporation behind the program is thus likely to either acquire the startup, or simply lose interest in its future.

Just to summarise – as long as return on investment is not the primary objective of entities that fund accelerators (LPs), they will not focus on it either.

The right focus: accelerators are not VC funds

Accelerators need to rethink how they can best deliver value to portfolio startups.

Even if portfolio growth is one of their key objectives, accelerators have two types of limitations that hinder them from helping their portfolio startups as well as VC funds can do. 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. The second reason is lack of sufficient internal resources that can be involved to deliver valuable support. Much of accelerator staff focuses on administrating the acceleration process and mentoring is often “outsourced” to external mentors.

Throwing into the mix a large and fast-growing number of graduates, it is clear that accelerators cannot apply the VC model for portfolio management. They simply have no capability to provide active engagement at high level of detail. What kind of model should they apply then?

We argue that the accelerators should be focusing not on rocket growth of their portfolio startups, but rather on increasing their chances of survival by helping them secure the next round of funding. Then VCs can take over and do what they are supposed to do. Aren’t demo days supposed to achieve that? Well, we all hear stories about those amazing demo days: excited media trying to identify the next big thing of the batch, investors queuing to talk with the leaders of the Google/Facebook/YouNameIt of tomorrow. The fact is that only absolutely top accelerators (mainly in the US) can organize such events. Most of demo days outside of big tech hubs don’t end up with immediate investment offers and the interest and attention of investors is not easy to maintain – there are just so many sources of deal flow these days. So, the next day most of founders go back to basics: coding, hustling and growth hacking (or so they think;).

The main focus for accelerators should be to thus help their portfolio startups raise funds after Demo Day. How to do that? They needn’t do much more than what they are doing now:

  • Match mentors with graduate companies, not only the current batch;
  • Present all startups to investors and potential clients at regular events;
  • Collect startup KPIs relevant to raising the next funding round;
  • Increase the likelihood of connections by promoting all their startups via social media, events, workshops, or in a newsletter send to accelerator’s stakeholders; and
  • Never stop thinking about portfolio startups.

The key is simply shifting focus from the current batch to all startups in the portfolio. There are some good examples out there. Take hub:raum – a Berlin-based incubator backed by Deutsche Telekom. It is in fact one of their main objectives to take their portfolio startups to another round of funding. As an incubator they don’t have cohorts to showcase during demo days, so instead they organize so called Investor Days. They invite selected current participants, as well as graduate companies, to present their progress and give them chance to meet investors.

Another example is SixThirty, a FinTech accelerator based in St Louis. As some of their graduates leave St Louis after the program, Matt Menietti, the accelerator’s Venture Partner, makes sure he knows very well what they are up to. He asks them to send regular updates, with the focus on information and metrics relevant specifically to fundraising.

We will cover how to set up reporting from portfolio startups in the next post. Stay tuned and don’t be shy about sharing this post on social media if you liked it 🙂


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