How Incubators Speed the Start-up Process
A Special Report by Adam Bluestein and Amy Barrett
Initiatives such as Y Combinator in San Francisco and TechStars in Boulder, Colorado, provide more than just funding.
David Cohen, who launched TechStars in 2006 after founding three technology companies, says he was always frustrated with the relationships he had with angel investors.
Most start-ups don't need much money to get going. But that doesn't mean they don't need help. That's where so-called seed accelerators come in -- outfits like Y Combinator in Silicon Valley; the aforementioned TechStars in Boulder, Boston, and soon Seattle; and the Capital Factory in Austin. A mashup of angel investing, speed dating, and geek camp, most seed accelerators adhere to the same basic model: A group of seasoned entrepreneurs and investors selects a few founders with sound business ideas; hands over a little cash and a place to work for a couple of months; and provides lots of hands-on coaching, strategizing, and butt kicking in exchange for a modest equity share in the company.
David Cohen, who launched TechStars in 2006 after founding three technology companies, says he was always frustrated with the relationships he had had with angel investors. "Most angel investors have a couple of coffee-shop meetings, write a check, and then cross their fingers," he says. "At TechStars, investors and mentors actually work with the companies for three months. At the end of that time, you've become part of the team -- and you know whether or not you want to invest more."
About 70 percent of TechStars's alumni have gone on to raise angel or venture funding or reach profitability without outside investors. Of the 150 or so start-ups launched from Y Combinator since 2005, about a dozen have been acquired in multimillion-dollar deals, including Reddit (acquired by Condé Nast), TextPayMe (acquired by Amazon.com), and Divvyshot, a photo app acquired by Facebook.
There are a couple dozen seed accelerators around the U.S. We could use a whole lot more. The key to getting started is a great group of mentors to draw people in. Though most seed accelerators focus on Web or mobile-device plays, the model could be adopted for other kinds of businesses. The only requirements for the model to work, says Cohen: "It needs to be a business where you can make very meaningful progress in a short period of time and where mentorship is a key missing ingredient." Indeed, it's easy to imagine an accelerator in every industry hub: a fashion incubator in Manhattan; a consumer products accelerator in, say, Cincinnati; or one churning out advertising start-ups in Chicago.
Capital investment can be minimal: At the Capital Factory, 20 mentor/investors chip in $5,000 apiece for each year's fund, and the office space is donated. Because just one class has graduated, it's too early to say whether the economics of the Capital Factory work, says Joshua Baer, the program's managing director. TechStars, which has been around a little longer, "is profitable and sustainable," says Cohen. "But that's not really why we do this. We do it for the opportunity that it creates and for the impact on the entrepreneurial ecosystem that it enables."
Bottom Line Investors, entrepreneurs, and city officials need to get on the accelerator bandwagon.