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Acceleration (and Incubation) Needs an Alignment Check

Written by Capria Admin
April 9, 2015

Entrepreneurs are eager to get their businesses rolling. These entrepreneurs are increasingly looking to incubators and accelerators to jumpstart and drive their company and the overall entrepreneurship ecosystem forward. Unitus Ventures’s Speed2Seed program is taking a look under the hood to better understand what makes the best accelerators thrive and win. We’ve found that incubation and acceleration programs are incredibly nuanced and are constantly innovating in a dynamic ecosystem. A preliminary conclusion of our work is that it’s vitally important to consider how these entities align their incentives and motives to give entrepreneurs the push they need to get started and get their businesses moving.

About Speed2Seed

We recently launched our Speed2Seed program in partnership with USAID’s PACE Initiative, which seeks to improve the accelerator and incubator ecosystem initially in India, and then globally over time. In 2014, we estimated that in India, only 5% of incubator graduates and 25% of accelerator graduates were able to acquire the funding they needed after graduating from their respective programs. This is well below the average in more mature ecosystems like the United States, where the incubators and accelerators are known for churning out strong businesses with high success rates. Chasing the momentum of incubation and acceleration in the US, the concept has spread and taken root throughout the world’s entrepreneurial ecosystem.

 

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As we set out to research the global ecosystem in search of best practices, we found it difficult to source quantitative data for our purposes. We partnered with Village Capital, who focused on this issue within the impact incubation and acceleration sphere in their Bridgng the Pioneer Gap study in 2013. With our current collaborative effort, we’re developing a broader and deeper perspective on the incubation and acceleration ecosystem, backed up by data. Currently, we’re reaching out to over 250 of the top incubators and accelerators around the world to develop a strong and well-rounded sample.  A number of the best have already signed up. Some examples: TechStars Seattle, 500 Startups, Oasis 500, JFDI.Asia, Chinaccelerator, Straight Shot, The Icehouse, University of Chicago NVC, Global Social Benefit Institute (GSBI), Passion Incubator, 9 Mile Labs––and many more.

Issues with Current Nomenclature and the Ecosystem

One of the biggest issues we’ve found is the nomenclature. The ecosystem––and we don’t use the term ecosystem lightly––is very nuanced and is rapidly evolving. Often times there is self-categorization of a program as an incubator or accelerator and from our perspective, we don’t think that these simplified terms can keep up with the pace of innovation and hybridization in the ecosystem. To grasp at this problem, we have defined some archetypes for our own purposes that distinguish between programs an entity may incorporate, rather than defining the incubator/accelerator organization itself. Seen below, the four programs include: (1) co-working spaces that provide physical working space and community, (2) startup academies or incubators that focus on developing entrepreneurial skills and education, (3) accelerators that focus on getting businesses to generate more revenue, and (4) hyper accelerators that focus on hyper growth (feeding directly into the VC ecosystem).

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It’s important to note that this diagram reflects the role and primary focus of a variety of different programs that we’ve identified. The blue area does not necessarily reflect an entrepreneur’s path through the ecosystem (though it could). Instead, it reflects the proportion of entrepreneurs in each section of the ecosystem. For instance, a startup academy, or incubator, can serve a wide range of entrepreneurs, but accelerators and hyper accelerators must be more selective of their participants in order to accurately align their program’s focus on revenue and high growth with the needs of the entrepreneur.

We have seen more and more programs that are vertically integrated.. Some offer co-working spaces, as well as an incubation programs focused on skilling and entrepreneurship education, and some also include accelerators that focus on generating revenue and growth. There are many entities that operate a seed investment sidecar fund to provide graduates with risk capital. It’s a very complex and nuanced ecosystem that has been rapidly developing and evolving in the past few years. With all of these rapid and quick-paced changes, it’s important to take a step back and ask, what factors will distinguish winners from the rest of the pack?

Aligning Incubator and Accelerator Incentives and Goals with Entrepreneur’s Ambitions

As far as we’ve been able to find, there hasn’t been much dialogue about the importance of financial or reputational alignment between an entity and the participants going through its programs. As we’ve progressed in the development of the Speed2Seed program, we believe that this is an important discussion to have. Further, the concept of alignment applies to all forms of entities from traditional, impact-oriented, academic, for-profit, non-profit, revenue-focused, skills & education-focused and everything in between.

The question is, how does an entity create and maintain alignment with the goals and aspirations of entrepreneurs and businesses going through its program? In other words, how can an entity’s success become a direct link to the success of its participants?

We’re finding that a significant number of the top performing for-profit accelerators take equity in their participants (typically in exchange for a small investment), and there seems to be some correlation between graduate’s future success (e.g. acquiring follow-on funding and business survival) and taking equity. There are even hybrid models out there that take equity. We’ve even seen some entities that are 100% funded by sponsors and they STILL take equity. Why?

We believe it’s because these accelerators are willing to make a big bet on the success of their entrepreneurs/businesses going through their program. That decision is going to influence  other factors and variables that contribute to an accelerator’s (and in turn the entrepreneur’s/business’) success. They’re essentially putting themselves in the passenger seat next to the entrepreneur and saying, “Hey, if you crash this car, we’re both going to get hurt; if you win the race, we win too.”

That said, a for-profit model partnered with equity won’t work for every program. For example, if the program’s goal is to increase education and skills for a wide-range of entrepreneurs, taking equity is unlikely to be beneficial. In such a complex ecosystem, it’s important to make sure a program’s goals align with its entrepreneurs’.

Our big question is: How can an incubator or accelerator align its financial and reputational success with the success of its entrepreneurs? This question should especially resonate with the impact community, as we look forward to discussing at Sankalp Forum 2015 in New Delhi.

 What do you think? I want to hear what you have to say.

  • Have you seen best practices in aligning entities with participant success?
  • What have you seen that DOES NOT work?

Are you an incubator or accelerator interested in participating in our study? Please reach out.

Email me, alexp [at] usf [dot] vc (yes vc not com) if you have any thoughts about any of the above––I look forward to hearing from you.

 

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Unitus Ventures, a leading venture capital firm in India, is joining forces with its US affiliate Capria Ventures, a Global South specialist, to operate with a unified global strategy under a single brand, Capria Ventures.