Startup accelerators make sense in theory, but how effective are they at actually improving the economy or encouraging the growth of emerging businesses?
From one of the earliest known accelerator programs, Y Combinator, to the thousands of incubators now found throughout the country, most startup accelerators share a handful of common traits. Throughout the course of an “incubation period,” accelerators recruit a handful of entrepreneurs with great ideas or the makings of an emerging business and gather them in one open space for collaboration, work, limited mentorship and development. In exchange, the accelerator typically receives a piece of equity in that company. At the end of this few-month-long period, entrepreneurs are then cut loose, or sometimes the entrepreneurs compete for a special round of extra funding.
In theory, these programs encourage entrepreneurship by providing resources to emerging business leaders, and they help the economy by helping to
jobs and new buying opportunities. In practice, their impact is a little more complicated.
How Accelerators Purport to Help the Economy
Creating new entrepreneurship opportunities.
Some professionals with great ideas never take action because they don’t have the resources to start a business. Accelerators offer a hopeful alternative, offering nearly free space and possible funding to anyone with a great idea. This prospect encourages more would-be entrepreneurs to take a chance and see their ideas through, driving entrepreneurship and business creation in the region.
Aggregating startup funding.
Accelerator programs also make it easier to secure funding. Entering a program and/or an objective competition within the program can open the door to funding that might take months of hard outside work to secure. Plus, with the basics like office space covered, startups have more time to focus on developing the core of their business.
Creating more jobs for the region.
Theoretically, accelerators create more companies, and more companies means more jobs for the area, which then stimulates the economy with greater employment and more spending. However, this prospect relies on the idea that startups, once out of the accelerator program, have a higher chance of succeeding in the real world. This isn’t always the case. In fact, about 45% of startup accelerators have yet to produce a single entrepreneur who successfully raised venture funding after the process.
The Potential Drawbacks of Accelerators
Limited mentorship and few ongoing opportunities.
During those few months of acceleration, entrepreneurs have wide access to resources and contacts, but one-on-one mentorship opportunities are generally quite limited. Furthermore, once those few months are over, entrepreneurs are hung out to dry. If their companies aren’t ready to stabilize, they will collapse. If they need more help, more direction, or advice, it’s unlikely that they’ll get it from the accelerator — they have a new batch of entrepreneurs to tend to. The conclusion here is that accelerators are good for short-term help, but do not offer long-term assistance to entrepreneurs that they sorely need.
Accelerators are specifically designed for turnover. Every few months, one group of entrepreneurs is dispatched from the program while an identical number of new entrepreneurs are ushered in for an identical cycle. The types of mentors working for accelerators and the cyclical nature of the program make it so that the advice, resources and environments available are identical from one entrepreneur to the next. Since every business and every entrepreneur would require an individual approach for the best results, this could severely limit accelerators’ potential impact on individual businesses.
Lack of sustainability.
Several accelerators have received nationwide attention and have remained successful for many years, but the nature of accelerator programs leaves them vulnerable to decay. Offering office space, guidance and funding to dozens of new startups every year takes a significant influx of capital, and all these programs receive in return are small stakes in unpredictable, unstable new companies. Considering the explosive growth in accelerator programs, it’s no wonder why so many experts predict that the majority of accelerators will ultimately fail.
The Data Factor
Complicating all of these potential upsides and downsides is the fact that only a limited amount of data is available to us. Seed-DB is a fantastic, free resource that collects detailed information about the relative success rates and overall size of accelerators around the world — but even this information doesn’t tell us key factors like how the accelerator made a difference in the startup’s potential growth, or how a particular exit made an impact in the accelerator’s regional economy. On top of this, several hundred accelerators don’t even report their data to the public.
Without the numbers necessary to form insights about the true impact of startup accelerators, it’s difficult to say whether they’re a positive, neutral or negative force in the context of a regional economy or entrepreneurial landscape. To be sure, there are dozens if not hundreds of successful entrepreneurs today who attribute their success to accelerator programs and hundreds of enrolled entrepreneurs grateful for the opportunity. But with the lack of sustainability for the programs, the lack of diversity and longevity of their mentorship programs and the difficulty of measuring “true” economic impact, one has to wonder whether there’s a better type of program out there.
Mr. DeMers is founder and CEO of AudienceBloom, a Seattle-based content marketing and social media agency.