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.

Efficacy of Accelerator Programs for Startups

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A common conception among entrepreneurs and founders of early stage startups is that by participating in an accelerator, their idea will be work out and are assured funding from investors.

However, although there has been some truth to this conception, it is not always true. Rather, we need to ask ourselves, just how efficacious are these accelerators programs for the idea or business I want to start or grow? How will an accelerator help me through the process of starting my business? We can answer some of these questions from the results of a recent study on accelerator programs in the United States.

Results:

1. It’s not the idea that matters as much as the quality and effectiveness of the team.

This means that you could have the best startup idea in the world and still fail because the right team was not able to carry it through. Essentially, a team that works well together will be more successful.

2. The reputation of the accelerator program provides legitimacy for its startups in obtaining investor funding.

Accelerator programs who have developed a reputation for graduating great companies (Airbnb, Dropbox, Zendesk) have provided these companies with an enhanced reputation among investor eyes. For example, a VC is more likely to schedule a pitch from a top accelerator program over other applications because the VC knows that well developed companies, with a proper legal structure, product testing and market validation, have typically come from accelerator programs.

3. Accelerators help startups recognize and exploit opportunities through mentoring and peer feedback.

With guidance from the accelerator resources, entrepreneurial teams could be prompted to search in their areas or industries of expertise, or knowledge pooled from the expertise of mentors and peers. In this sense, it is the mentors that assess the nature of the opportunity and decide if the expected or perceived value of the opportunity is worth pursuing and exploiting.

For more results, stay tuned for the next article!