First published in the Financial Times on 16th October 2012.
Some projects are bound to be short-lived but the overall winner is entrepreneurship
Do accelerators produce better start-up companies? And what are they anyhow?
My first real engagement with such initiatives was more than 10 years ago, when I became a partner in a business in the City of London called Metrocube. It managed two buildings housing new-tech and media companies. At heart we offered serviced office space, but mainly appealed to start-ups that liked to work alongside similar entrepreneurial businesses. Sadly, the bursting of the dotcom bubble did for Metrocube, which we sold; but the model demonstrated how start-ups benefit from being part of a community of strivers.
Our company could have been labelled an incubator, which is apparently different from an accelerator. According to The Startup Factories, a report published by Nesta last year, accelerators make a pre-seed investment for equity, and develop cohorts of start-ups rather than individual companies, which move on after a short period of intensive support. The declining expense of technology – hardware costs have fallen by a factor of 100 over the past decade – means companies can be started with little capital.
To update myself, I’ve visited two such centres in recent weeks to try and understand the phenomenon.
I dropped in on the London version of Wayra, operated by Telefónica, the Spanish telecommunications company. In its “academy”, in a building in central London, Wayra hosts 16 very early-stage projects selected from more than 1,000 applications. Each receives €50,000 in backing and space for six months; in return, Telefónica takes a 10 per cent stake. For Telefónica, it is a form of research and development. For the entrepreneurs, the scheme provides capital, mentoring and a buzzy place to work. The businesses I saw were digital and run by young tycoons in the making. Telefónica has 12 such facilities around the world, with more than 170 groups of founders trying to create the next Facebook.
My second port of call was in Cambridge, where Edward Atkin, who made a fortune selling Avent, the babycare company, is ploughing back some of his riches into a manufacturing complex called ARCC. He hopes to nurture British designers and makers, and is targeting teams from the Royal College of Art, which has a world class reputation for training industrial designers.
Probably the first accelerator was Paul Graham’s Y Combinator in Silicon Valley. Since 2005 it has fostered almost 500 start-ups, including big successes such as AirBnB and Dropbox. After three months of being hot-housed, each team must make a pitch to investors on Demo Day to raise further funding. According to the founders, the value of the portfolio of companies that Y Combinator has hatched is in the billions of dollars. Other well-known players include Techstars, in locations ranging from Colorado, New York and Seattle in the US, and Seedcamp in London and Europe. Again, many of their alumni have raised later rounds of capital, and the legions of start-ups they breed grow every year.
This method of building new companies at warp speed is fascinating. The philosophy is to try lots of different ideas, fail fast, and pivot if something does not work. I like the sense of urgency, the work ethic, the high-pressure environment that helps drive rapid progress, and the incredible opportunities to network and cross-fertilise. The emphasis seems to be on backing lots of pure start-ups with very small amounts of cash, mainly run by very young founders.
However, in general, I think start-ups take a long time to become viable – years not months – so trying to achieve so much in such a concentrated period of time feels unrealistic. Yet tech companies are much more scalable than traditional enterprises, and world-beaters such as Google have proved that you can grow by creating online traffic – and let revenue follow afterwards.
There are now an estimated 123 accelerator programmes around the world according to www.seed-db.com, a database of seed companies, and the proliferation of new ventures shows no sign of slowing. Some veterans think many will close, just as many of the projects they incubate will fail. But all this frantic activity will surely boost entrepreneurship, stimulate jobs, and – in the long run – create wealth, so it deserves applause.