Some 500 people have signed up to test Benjamin Reece's service to help indie filmmakers distribute their movies and merchandise online, a business he began working on six months ago. Reece and his co-founders now hope to get a working version of the software running, with the help of mentors and peers over the next seven weeks in Launch Pad Ignition, a startup accelerator in New Orleans. His company, Kinio, will work alongside five other startups, attend weekly pitch sessions, and network with veteran entrepreneurs and investors. "It's this huge pot of resources that are just dropped in your lap," says Reece, 28.
Since the first accelerators, which put small groups of entrepreneurs through intensive training, appeared in the mid-2000s, entrepreneurs and investors in dozens of cities have adopted the model. They're typically geared toward Internet startups that can build products fast and cheap. David Cohen, co-founder of TechStars accelerators in Boulder, Colo., and three other cities, estimates that there are now 110 programs globally that use similar methods, most less than two years old. Bloomberg Businessweek has found some 50 accelerators altogether seeking more than 500 startups for their programs this year.
Unlike traditional business incubators, in which companies can share offices for years, accelerators are structured like camp sessions designed to turn inchoate ideas into prototypes or market-ready products in a matter of months. "Between where you come into the program and where you leave, there should be an exponential level of growth," says Kerry Rupp, managing partner of DreamIt Ventures, a four-year-old accelerator in Philadelphia.
What began as an experiment in seed investing is maturing into an established model being replicated by universities, economic development groups, and venture firms. TechStars and Boston accelerator MassChallenge are among the partners in Startup America, a White House-backed campaign announced in January to support high-growth companies. Along with the Kauffman Foundation, TechStars is developing a common application entrepreneurs can use for several accelerator programs at once.TechStars also formed a network with 20 affiliated accelerators in January. "We got a lot of calls over the last four years from people saying, 'How can we do what you've done in Boulder?'" Cohen says. His response: "Why not take what TechStars is and just open-source it?"
More Help Than Funding
The programs combine small amounts of funding with large amounts of help. Accelerators typically invest $25,000 for a 6 percent ownership stake. Selected startup teams (most accelerators favor groups over single founders) work with experienced entrepreneurs as mentors to build their products and learn business skills such as marketing and managing cash flow. They're expected to learn from peers as well. The programs conclude with a pitch day during which teams show off their products to potential angel or venture investors.
Accelerators also confer a pedigree that can help startups get buzz, clients, or funding. Investors Yuri Milner and Ron Conway in January offered a $150,000 convertible loan to all new graduates of Paul Graham's Y Combinator, one of the highest-profile accelerators.
Some investors question how the model will hold up in the long term. Bob Okabe, a Chicago angel investor who funded a Y Combinator startup, says accelerators may not be as successful in communities that lack the deep bench of entrepreneurs and investors that exists in the Bay Area or Boulder. "The success of TechStars and Y Combinator has caused a lot of people in a lot of communities to see if it could work for them," he says. "It's unclear to me whether you're going to have that same quality of participants."
Building Entrepreneurial Communities
TechStars' Cohen predicts that there might be as many as 400 or 500 accelerators globally before the herd thins to about 100 that are sustainable. Cohen says TechStars succeeds financially: Of 39 companies seeded in its first three years, six were acquired and 27 are still active, according to the TechStars website. The successful accelerators, he says, will be those that focus on building entrepreneurial communities rather than simply investing. "Those that look at it as a pure financial play," he says, "are going to be in for a rude surprise," he says. New York is home to at least a half dozen accelerators, including outposts of TechStars and DreamIt. Owen Davis, founder of NYC SeedStart, runs a 12-week program that pairs digital media startups with corporate partners such as Comcast (CMCSK) or TimeWarner (TWX). Davis questions if "there are enough good companies to fill all these programs," even though he received 250 applications for five spots.
Accelerators fill a knowledge gap for startups that need the expertise and connections that a venture firm would provide, even if they don't yet need million-dollar investments. "In the IT arena, where the costs of creating a company have come down so dramatically, a lot of entrepreneurs will forgo venture capital financing," says Mark Heesen, president of the National Venture Capital Assn. He says that because of competition, VCs are under pressure to demonstrate that they add value beyond deep pockets.
Occipital, a TechStars alum that makes iPhone apps, didn't raise outside funds beyond the accelerator's small seed round. Still, the founders could consult veterans such as Cohen while they negotiated to sell one of their apps to eBay (EBAY) last year. Jeff Powers, Occipital's co-founder, says companies like his "don't need millions and millions of dollars. They just need a helping hand."