Editor’s note: this is the first editorial contribution from Jon Bradford, one of the co-founders of Tech.eu but also managing director of Techstars London and a world-renowned expert on startup accelerators.
Rather fittingly, it was published from the first ever Accelerator Assembly being held in Madrid today and organised by the European Commission in partnership with a number of stakeholders from all over the continent.
Like moths to a flame and with cyclical predictability, corporates are drawn to venture capital with very mixed results. And with equal predictability, most will subsequently retreat in order to focus on their core business.
We are in an up cycle, but this time around corporates are not only re-engaging with venture capital but have entered the accelerator market – with a wide variety of different models.
In Europe today, there are already plenty of corporate accelerators, and their number is growing; some invest for equity, others not, some imposing commercial preference rights, whilst others just sponsor.
It is critical to recognise that, unlike independent accelerators, there is a baffling number of formats – each subtle differences that could be harmful to a startup in the longer term. However, very few startups really understand this, being seduced by flashy coworking spaces and shiny logos.
Before we consider the value and challenges of running a corporate accelerator, it is important to consider the object of an accelerator. It combines a small amount of funding for equity with support through mentorship bounded within a short-term programme with founder-friendly terms.
So how do you evaluate a corporate accelerator? Taking each of the key elements of an accelerator, what are the potential pitfalls and consequences of a corporate accelerator versus a professional independent accelerator?
Ordinarily most startups require a small amount of funding to participate in an accelerator to keep the lights on, however unlike independent accelerators, a corporation potentially owning a part of your company can have a profound long-term impact upon the business.
– Tying your startup’s flag to a corporate’s mast can be commercially restrictive – and ultimately limiting the capacity of the business before it has even started. This is something that a later-stage company would consider very carefully – so why do so many startups at a pre-seed stage choose to ignore this?
– Other alternative accelerator models exist, such as that of Microsoft Ventures, which does not offer funding but doesn’t take an equity stake either. This might not initially appear appealing but could be much valuable in the longer term.
– The counter-argument is that shareholders will have a vested interest in your startup – but only if the shareholder is motivated and rewarded by building in value into your startup. An alternative model is the “Powered by Techstars” model or Startupbootcamp: it includes corporates without having them in your cap table while still having on board an investor with a long-term goal of realising capital value.
This is probably the hardest element to be quantify and measure – but it also represents singularly the most valuable and key differentiator for corporate accelerators.
– The background and expertise of the programme director, whilst ordinarily overlooked, is critical to its success. The director provides leadership, management and empathy with to the programme’s participants.
Startups benefit most when they feel they have a common and shared experience with a director who has historically been a startup founder that has been through similar trials and tribulations and successfully exited their own business.
Corporates have a mixed track record in relation to their appointments and a significant number have chosen to appoint from within their organisation, or second-rate startup advisors and consultants.
– How and what are the commitments that the corporate has agreed to deliver? What are the resources the corporate has agreed to provide that create an unfair advantage for the programme participants? What does the organisation provide exclusively to the programme attendees – staff, technologies or other resources? Are these opportunities ordinarily available? Finally, how committed is the corporate to the programme?
In general, the greater the cost of delivering the programme, the greater its commitment (and internal accountability). However, it should not be overlooked that unlike a professional investor who is committed to delivering a return to its LPs, a corporate can cancel their programme in an instance with a change to its leadership or a strategic direction.
– Finally, what is a corporate’s agenda – innovation or investor? This is overlooked and misunderstood by both the startups and the corporates running their programme.
For those corporates who have implemented an accelerator as an M&A strategy, they often do not appreciate the early-stage nature of the startups that ordinarily participate – many of whom are still trying to achieve product market fit and have little or no traction.
For the minority that attract later-stage teams either through their reputation or not accepting equity – which typically attracts that type of teams – this is viable option.
The real value of an accelerator to a corporate is the inclusion of an accelerator as part of their broader innovation strategy, which can also have a greater benefit to the startups participating.
The devil is in the detail, and sometimes startups overlook and ignore the exact terms and conditions the corporate accelerators require.
– The allure of getting access to a corporate may require a startup to agree to preference rights – both shareholder and commercial. Inexperienced founders and startups can often overlook the importance of these terms and do not appreciate their long-term implications.
These terms may ultimately restrict a startup’s ability to raise funds from external investors.
Even more worrying is that a number of corporates imply that these terms are applied consistency across all of the teams that participate – but they don’t. In fact, corporates often highlight successful programme participants who have negotiated away many of these terms.
So what happens at the end of the programme? Who’s got your back then?
– Corporates can be very fickle and subject to external market pressures from public markets. This can lead to sudden changes in policy and strategy and also changes in their corporate leadership. What can be flavour of the month, can quickly be cancelled.
For corporate programmes that take equity, do they have long-term structures in place to support their alumni in the long term – both practically to manage their investment – but also to provide ongoing support to help their participants beyond the 13-week programme?
– As a startup, who has got your back? Are the programme managers incentivised to continue to provide ongoing support to their programme alumni?
For a corporate programme, many of their directors are reimbursed based upon solely upon the results of the programme because changes to staffing can be frequent. For those corporate programmes operated by professional investors, they have a longer-term motivation to create value to their founders and a return for their investors – from which they can profit.
What comes next?
Startup accelerators have only been around for the last eight years or so, and corporate accelerators have been around for a lot less.
Accelerators represent a low-cost alternative to a fully-blown corporate VC and are not likely to go away any time soon. It is the responsibility of startups to do their homework before blindly accepting an offer from an corporate accelerator.
But it is also the responsibility of corporates to carefully examine their accelerators to ensure that they are truly acting in their startups interests and consider alternative models.
It’s also worth asking this question: is there a danger of corporate accelerators, for which working with early-stage startups isn’t generally part of the core business, effectively pushing privately-run accelerators out of business as a result of market distortion? Is is worth it?
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