Tech Accelerator Definition

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Defining accelerator programs

This novel approach to new venture funding and development combines strands of angel investing, venture capital (VC), and incubation into a condensed program. It has been replicated not only in the US, but globally. In the ten years since Y Combinator’s founding, the number of business accelerators has grown to over 300 worldwide (Cohen and Hochberg, 2014). As of this writing, Techstars now operates its accelerator program once each year in seven cities in the US, one in London, UK, and one in Berlin, Germany. The founders of Techstars later founded the Global Accelerator Network in 2010 to serve as a platform for standardizing a model of success by connecting accelerator programs with their members, mentors, investors, founders and strategic partners.

Among startup entrepreneurs, the appeal of accelerator programs has become increasingly popular because of its reputation for a fast-paced development process, access to funding, network of experts and alumni, and high-quality guidance over a short period of time – typically three to six months. Although a formal definition of accelerators has not been published in academic literature, a number of independent researchers or organizations (Christiansen, 2014; Cohen and Hochberg, 2014; Miller and Bound, 2011) have consistently used the following features as comprising an accelerator program:

  • An application process that is open to all, yet highly competitive
  • Provision of pre-seed investment, usually in exchange for equity
  • A focus on small teams not individual founders
  • Time-limited support comprising programed events and intensive mentoring
  • Cohorts or ‘classes’ of startups rather than individual companies

Conceivably, accelerators resemble incubators, which also assist the development of small businesses or startups. Nominally, incubators provide office space in addition to business support and guidance, with the average incubator program lasting approximately 33 months, and potential connections to an investor network. According to an expert interview with the President Emerita of the NBIA (2014), accelerators are clearly different than incubators. This study assumes this difference as a given; the approach to accelerators is neither exclusively an incubator nor venture capital model, but a hybrid with distinctive elements from both (Dinah, 2014).

With this model gaining traction around the world as a new model for funding early stage startups, two fundamental questions need to be asked, namely, what explains the existence of these accelerator programs and how do they work?

First, the gap that Paul Graham identified in 2005 touches upon a systemic issue in practicing entrepreneurship, which is that it is difficult to successfully start a new company and receive help and support in early stages of the startup process. These accelerator programs seem to not only accelerate the startup process, but also help them to overcome the probability of failure to a larger extent.

Second, with the proliferation of accelerator programs across the globe, one wonders, how exactly does the model accelerate the startup process? How does it modify the startup process in such a way that more companies survive and thrive? These are some of the questions that this research seeks to answer.

Pioneering Tech Accelerator Programs

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Pioneering Tech Accelerator Programs

In 2005, Paul Graham serendipitously founded “the first of a new type of incubator”. Inspired by Harvard computer science undergraduates, he offered to invest in a handful of Harvard student startup ideas and mentor them through a summer program close to campus. Graham had always wanted to do angel investing, but found something inadequate about the state of venture capital and angel investment at the time. Graham believed that “investors should be making more, smaller investments, they should be funding hackers instead of suits, they should be willing to fund younger founders, etc.” (Graham, 2012). Thus, Graham deduced that the most efficient way of being an angel investor was to advise and mentor the group of startup teams synchronously, or in batches, during the summer. Together with his partners Jessica Livingston, Trevor Blackwell, and Robert Morris, the first program was held in Cambridge, MA during the summer of 2005. They named this program Y Combinator.

The success of the first Y Combinator (YC) program surprised Graham and those close to the program. Graham knew that what he had created would resonate in the entrepreneurship community on a national scale and that it could transform investment and incubation models for developing early-stage startups. He moved the program to Mountain View, CA to be closer to a larger density of technology startups in Silicon Valley, so as not to miss the opportunity to be the Y Combinator of Silicon Valley. Today, as of this writing, Y Combinator runs two programs per year for a three-month period, has an acceptance rate between one and three percent, provides an initial $120,000 in seed funding in exchange for a 7% equity stake in the startup, and culminates in Demo Day where the startups pitch their ideas to an audience full of potential investors. They have funded over 800 startups, including the now renowned Dropbox, Airbnb, Reddit, and Scribd.

As Graham anticipated, the Y Combinator model was adopted by a host of other wealthy individuals and organizations around the United States, most notably, Techstars, AngelPad, and 500 Startups have been recognized as best practice accelerator programs. This new model of investing in and incubating startups was termed a business accelerator or seed accelerator by popular sources because the programs target startups in the seed phase, or initial phase, of financing and development, and it accelerates the startup process (i.e. idea generation, developing and testing the product, and securing resources) into just a few months.