Why Incubate when You Can Accelerate?
Over the past several years, new companies have been bubbling up out of American business schools, corporations, and garages at a dizzying clip. In fact, a record 898,000 businesses opened their doors during 1998, according to the U.S. Small Business Administration. So, naturally, entrepreneurs and investors alike have come up with a way to cope with the tremendous pace of growth: They have decided to speed things up a bit.
Appropriately dubbed "accelerators," a relatively new breed of private equity financiers -- who also serve as business consultants, strategic advisers, and even confidants -- is helping fledgling companies get their products and services to market as quickly as possible. In many cases, these accelerators have condensed a process that would have been spread over five to seven years, into less -- often much less -- than one year.
"Speed has always been an extremely important element in investing," says Tucker Twitmyer, a managing director at Katalyst, a business accelerator based in Radnor, Pa. "Creating more value faster is a tremendous benefit to the entrepreneur as well as the investors. The key is making sure you create long-term, sustainable value because that's the name of the game. We're just trying to get there faster."
So What's the Rush?
Not long ago, companies seemed perfectly happy to be incubated rather than accelerated. During the late 1980s and early 1990s, small-business incubators provided cozy homes for early-stage ventures, providing a place to work along with some back-office touches such as a receptionist, a fax machine, and maybe a conference room for important meetings.
"Incubation was the traditional term, but the industry has grown far beyond that idea to the point where we're seeing financial backing being packaged together with marketing services, technology consulting, public relations, human resources support, and recruitment," says Arie Schinnar, a Wharton professor who has taken leave of absence to serve as a partner in E*Entity, a business accelerator that he created with the cofounders of Web advertising firm Flycast Communications, Richard L. Thompson, and Lawrence G. Braitman (see related story).
These days, investors and entrepreneurs, motivated by the land-rush mentality of the Internet, are scrambling to claim their turf before someone else beats them to it. An accelerator may be an individual, a small band of professionals with different areas of expertise, or a big consulting company -- firms such as McKinsey & Co.; Booz Allen & Hamilton, and Bain & Co. have recently jumped into the game. Typically, an accelerator will trade its contacts in the professional and financial communities -- people such as accountants, lawyers, marketers -- for an equity share in the company. The payoff for acceleration is potentially huge.
"Now more than ever before, there is a tremendous opportunity to grow an enormous company in a much shorter time frame," says Twitmyer, of Katalyst, which also has its own venture capital fund. "And the advantages of doing so are hard to ignore." Twitmyer points to the meteoric rise of Breakaway Solutions -- an e-business solutions provider in Boston -- which went from concept to initial public offering in nine months and two days. The company was financed in part by venture capital heavyweight Internet Capital Group and was "accelerated" by Katalyst.
Jack Newberg, one of the founders of Pennsylvania Private Investors Group (one of the nation's first angel networks) has been a venture capitalist for more than 25 years and began serving as an accelerator long before the term came into vogue.
"It's extremely important to hurry a product to get to the market and grab your share of space because if you dawdle, someone will slip right in past you," he says. "That's a fact." Newberg holds out as an example Half.com, the online marketplace that he says had a "concept that could have easily been picked up by others" but that "quietly and effectively built its space." The company was recently purchased by eBay for some $300 million.
More than Money
Besides advocating speed, many accelerators stress the value of assistance that often goes far beyond the strengths of most entrepreneurs. "The whole concept of acceleration is not just providing real estate but providing mentors, consultants, and professional assistance with aspects of running a business to which many young entrepreneurs would have had little or no exposure," says Newberg, whose recent investments have included high-tech companies in Asia and Europe.
For entrepreneurs, such guidance can be critical. "I had no idea how to compensate people that I was bringing onto my team, and I didn't know the first thing about structuring a debt offering," says Ravi Hariprasad, founder of Boston-based CyberTrak Systems, which has developed a system for locating lost or misplaced laptop computers.
"To me, the ideal accelerator is not someone who is going to do the work for you -- because no one can match the passion, drive, and enthusiasm that you, as the entrepreneur, have for your concept," says Hariprasad, who dropped out of the University of Pennsylvania's medical school during his fourth year in order to pursue his business. "They're holding the flashlight while you're running. I think of an accelerator as an enabler. They'll work at your velocity and allow you to progress as fast as you're able to, but they're not going to drag you along at their speed."
Hariprasad touts the advantages of combining his vast network in the engineering community -- particularly at the Massachusetts Institute of Technology and Cornell University -- with the diverse entrepreneurial network of his accelerator, Paul Morin, a principal in Borghese, Morin & Co. "If the relationship is not symbiotic between the accelerator and the entrepreneur and the entrepreneur and the professionals and investors we bring together, it's not going last," says Morin, who was previously director of the Wharton Small Business Development Center.
Morin says that both accelerators and entrepreneurs must go to great lengths to ensure that they are making the right choice when deciding on such a close partnership. "The entrepreneurs must believe in you because they're really counting on you, and as an accelerator you have to believe in the company," he says. "When I evaluate a company, I look at the same things that an angel investor or a traditional venture capital firm would look at -- good management, a technology that is proprietary and defensible, and a large, growing market. And I always need to see an entrepreneur with an indomitable spirit -- someone who can will a venture to succeed."
Accelerators and entrepreneurs agree that the recent stock market volatility -- and particularly the beating taken by many technology-related companies during the second quarter of 2000 -- has taken some of the froth out of the private equity market but seems to have done little wide-scale damage. "For those of us who really believe in our companies, the stock market shakeout has been a great thing," says Katalyst's Twitmyer. "Solid companies are still getting funded, but the companies on the margins are struggling to attract investors, but that's not necessarily a negative development.
"Our criteria for investing our human capital and financial capital haven't changed as a result of the developments in the equity markets, nor will they," he says. "The companies that move rapidly to fill gaps are going to succeed."
All materials copyright © 2000 of the Wharton School of the University of Pennsylvania
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