Are accelerators failing startups or the curious case of “zombie startups” jumping from one accelerator to another

On Wednesday I had a chance to interact with 31 entrepreneurs in the IoT space at Plug and play technology coworking space in Sunnyvale. There were 10 companies in the Healthcare IoT area, 11 in the connected car and 10 in the home automation (IoT) space. Plug and play has 3 sponsors for their programs including Bosch, Johnson and Johnson and StateFarm, so the companies chosen were deemed a good fit for those sponsors to help them with innovation and startup scouting.

The interesting part that was very obvious to me when I looked at the list and later spoke with many entrepreneurs was that 19 of the 31 had gone to another accelerator program before this one. Of the 10 companies in the connected home space, 3 were from the Microsoft Accelerator itself. Of the 31 companies, 28 were outside the Silicon Valley, which makes sense (that they would want to move to the valley). Two that applied were from YCombinator as well, so, there were not just companies from tier 2 accelerators.

I asked the entrepreneurs why they felt the need to go through another 3-4 month program after they had been to one before.

The not so surprising conclusion is that for many (not all) companies, the 4 month accelerator model is largely insufficient. I did learn that most entrepreneurs did value the support, mentorship and advice provided by the accelerator program they were with before, but many had insufficient “traction” to justify a series A after their “acceleration”.

Of the over 3500 companies funded by venture capitalists in technology last year, less than 150 went through accelerator programs. Of them, nearly 50% were from YCombinator.

At the same time, over 1200 companies went through accelerator programs in the US alone last year. Of the over 1200 companies, 68% have gotten some form of funding (or about 800 companies) is the claim from the accelerators.

Which means about 650 (800 minus the 150 who secured VC funding) companies that “got funded” after an accelerator program, have not secured Institutional funding from a VC, but either from angels or from other accelerators.

If you look at the angel data from the US, of the over 4000 deals funded by angel investors in technology, < 5% or about 200 companies have been through accelerators before.

The result is that 450 companies that were claimed as “funded” after an accelerator program actually went to another accelerator.

Going back to the numbers above, if out of the 1200 companies funded by accelerators, about 450 (or 30%) went to another accelerator and 20% of them (on average) shut down, fail or close, then really about 50% of the startups from the accelerator programs or about 600 companies should be technically “funded” institutionally, but that number is 150. So, there are 450 “zombie” companies.

So the question is – what has happened to the “zombie” companies?

There are only 3 possible answers:

1. More companies have shut down that the numbers reported by accelerators.

2. Many companies end up becoming “cash flow positive” or “break even”, so they chose to not raise funding, but instead grow with “customer financing”.

3. More companies are “zombies” or walking dead – trying to raise funding, not succeeding, but not growing fast enough to justify institutional Venture funding.

I have my hypothesis, that it is #3 that makes up most of the “zombie” companies, but I’d love your thoughts.

If the measure of value that an accelerator provides (as measured by entrepreneurs) is funding, alone we are failing big time.

9 thoughts on “Are accelerators failing startups or the curious case of “zombie startups” jumping from one accelerator to another”

  1. Mukund, is it because most accelerators seem to prepare companies to ONLY deliver a better pitch? So, they pitch well enough to get into another accelerator, but haven’t built the right capabilities to withstand real-life conditions, which is what is expected of companies in line for next stages of funding.

  2. I think the nature of the word ‘accelerator’ has been diluted to mean different things so it’s not always fair to compare accelerators as apples to apples. There are huge gaps/variances in the programs, the objectives, and what’s offered. By the same token, accelerators themselves also celebrate it when companies are part of other accelerators – a type of positive market signal – and actively look to recruit these companies. Not a bad thing but at the end of the day, what’s important is for the companies themselves to be clear about what they’re looking to achieve with any program.

  3. Dear Mukund,

    Thank you for sharing your wonderful thoughts about accelerators. Actual facts and figures further authenticate these thoughts that I share with you for a while now. As we know, it always becomes a very sensitive conversation depending on the participants. We at the TiE Angels Group Seattle (TAGS) work with almost all accelerators in the northwest. It is an integral part of the ecosystem. At the risk of making some of my friends unhappy, I have to completely agree with you that these time-constrained accelerator programs are not always the best fit for all startups. These might work for companies that are really early stage, companies that are still trying to learn and fill up voids, build a comprehensive business plan, or perhaps build that prototype where these programs can help. Depending on the accelerators, some bring in more value in terms of the appropriate mentorship and education. However, as you mention, many of these fledgling companies do not find the anticipated support and flounder. At that point, it becomes even harder for them to raise funds from angels and other organizations. Investors are typically presented with these accelerator graduated investment opportunities typically with a much higher valuation than what the accelerators invested at just a few months back, not to mention the equity share they take in these startups. Many a times there is not enough value built into these startups to substantiate these higher valuations. We at TAGS have 110+ accredited investor members and many have shared that they feel that they would in effect be working even harder and longer for these accelerators rather than for themselves.

    As we know, very well that every startup is completely different with specific and unique needs. IMO, this one-size fits all approach is rather difficult to work. IMO, we need a hybrid model where there are no such fabricated time restraints. TAGS members continue to build long-term relationships with startups and extend ongoing support as and when startups need the most. This support is way beyond a pitch clinic. I will not get into the details here, as I do not want to make it a TAGS promotion. All I will say is that such a model tends to work better, as we see ourselves not only as investors, but partners! We live this model. At the end of the day, it is more (all?) about the entrepreneurs of what they make of the opportunities and less about the accelerators!

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