Accelerators Can’t Be Rung Zero of the Venture Capital Ladder

Monday Dec 17, 2012 by Allan Tear - Co-Founder & Managing Partner, Betaspring

An interesting thing is happening: accelerators across the globe are working at their stated goal of massively increasing the number of startups, while also making them more viable (increasing their “survivability rate”) versus the average startup on the street. For example, since summer 2009, Betaspring has accelerated 57 companies, and are on track to launch 30 a year.  45 of our startups are alive and growing.

Globally, accelerators have minted a couple thousand startups, and the tech press is starting to chatter about a “Series A crunch”.  Anecdotes and some statistics claim that many of these startups are raising a seed round, but are not “succeeding” at raising a Series A from venture capitalists. Enter predictions of collapse of the whole shebang. 

I think we are seeing this through the completely wrong lens. An old lens from our Pre-Cambrian startup era, before the global explosion of startups, and a lens that carries a dangerous mix of bad assumptions, measures, and conclusions. Here are some of the reasons I’ve heard in tech press and blogs for the “Series A Crunch”: accelerators create lazy, hand-fed startups; accelerator grads are small-idea feature companies; VC’s are dinosaurs and can’t adapt their approaches to accelerators; and accelerators will only work in the Big Three tech hubs.

Here’s what we’ve really got to confront: Venture Capital is INELASTIC. No matter how awesome and investable accelerators help these new startups to be, venture capital doesn’t have room for all of them.

You just can’t stuff more startups into the VC machine. Not because the money isn’t there, but because the rate limiting factor at venture firms is people. Partners to make investment decisions, sit on boards, and help their portfolio achieve exits. Yes, some VC’s are innovating, and working closely with good accelerators to make smaller investments earlier. But this doesn’t mean venture capital is going to fund more companies, just that they have more companies to look at and new ways to add value to the few they fund.

And every time we celebrate a big venture funding event or create an accelerator ranking report that measures venture funding as success, we reinforce that this is the “right” outcome for accelerators.

Which it is not.

Our sole purpose cannot be to serve as Rung Zero of the venture capital ladder. We will fail our founders, our investors, and the startup communities that we all care so passionately about. Our purpose is to create more successful startups, and since startups need money to grow (and to make mistakes, pivot, and wait for markets that take longer - always - than planned), our job is to help them get creative about where that money is going to come from.

Luckily, the cavalry is on its way. On the lead horse are angels, whose activity has increased dramatically as tech-savvy founders cash out and put their money back to work and angels begin to invest outside their home geographies. Fred Wilson of Union Square Ventures estimates that angel investing has increased 3-5x over the past 5 years to $10B, which feels directionally correct to me. AngelList is single handedly re-arranging access to angels, their decision-making process, and their ability to invest in a startup they may have never met in person. There is an internal logic - dare I say a game - to AngelList, and accelerators that work with their founders to master that game will do them a great service. 

Following close behind is crowdfunding. You can already see the potential of crowdfunding through the runaway successes on Kickstarter of physical technology startups like Pebble and Ouya, and games like Double Fine Adventure. Previously limited to donations or pre-sales, the genie in the bottle is about to be uncorked through the implementation of the equity crowdfunding portion of the JOBS Act. There has been lots of hand-wringing about the possibility of grandma losing her pension in a risky mobile app startup, which I believe is overwrought. As early advocates of the bill, we believe equity crowdfunding will not only increase the amount of capital available to startups, but widen the kind of startups that get funded beyond those that match venture return models. It enables new hybrid models of early stage funding across accelerators, angels, and the crowd. Accelerators must be the leads in mastering the emerging crowdfunding process. 

Finally, accelerators have to get a lot more serious about helping their startups hack early revenue (get “ramen profitable”), find strategic corporate investors, and unlock unusual sources of funding. For those who scoff at these dollars as being lower quality or “dumb”, consider that only 16% of the INC 500 fastest growing companies received venture capital. There is more than one way, and if accelerators want to maximize the success of their brood, it is time to widen our view.

So go ahead and celebrate a big name VC chipping in on a Series Seed, or that Series A led by a marquee venture partner. (We do!) Then let’s get back to the hard work of creatively expanding financing options for our startups, and mastering the new tools and processes to make it possible for these thousands of startups to actually change the world.

Allan Tear is co-founder and managing partner of Betaspring.  You can find this post, as well as other content on the Betaspring blog located here.  You can also follow Allan on Twitter (@allantear) by clicking here.

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