Tag Archives: accelerator

The most compelling reason why you should join an accelerator

Over the last 10 years there has been a dramatic growth in accelerators. While incubators such as ideaLab (Bill Gross, Los Angeles, 1990’s) had existed during the previous bubble, the absolute number of new age accelerators has gone from zero to over 300 in the US alone and from 0 to over 1000 worldwide. At the same time while, the number of early stage (less than $2 Million and company < 2 years old) deals have gone up significantly as well.

Growth in Seed Round Financing
Growth in Seed Round Financing

The chart above from Benedict Evans shows the growth in seed rounds, which indicates that the number of early rounds have increased relative to $3-6 Million rounds.

At the same time, the average amount of money invested in early stage rounds is going down. That makes sense since it is cheaper to build an early stage company and “try to find a product market fit”

Size of Early Stage Rounds
Size of Early Stage Rounds

There are 2 charts missing from this deck. First, how many of these early stage deals are going through accelerators and what is the size of the deal for companies going through accelerators versus those that are not.

Fortunately, thanks to folks like CB Insights and Mattermark, we do have access to that data. I will upload the charts in a few hours / tomorrow since I am running late to my meeting this morning.

1. Accelerator funded companies make up 13% of the total number of seed funded companies, and have been steadily rising. Obviously from zero in 2005 to 13% of total seed funded deals in 2015.

2. Accelerator funded companies raise 20% more in the seed round than non-accelerator companies.

Finally anecdotal data from Microsoft accelerator companies over the last few years alone, I can infer that accelerator companies have 25% better survival rate than those that did not go to an accelerator after the first 2 years.

How did we get this information?

We got over 250 applicants in the first cohort (Sep 2012), 450+ in the second (Mar 2013), over 600 in the third (Aug 2013) and over 1000 in the fourth (Feb 2014) in India alone. Of these, we picked 10 in the first, 12 in the second, 13 and 15 in the third and fourth cohorts.

We then tracked the remaining companies. Of them 5, 3, 11 and 13 got into other accelerator programs such as GSF, Tlabs and Kyron.

Of the remaining startups, 31%, 14%, 22% and 12% have shutdown. That compares to 20%, 10%, 22% and 0% so far.

So, if you are part of an accelerator program, you are likely to get more money, survive for longer and likely to get funding versus not.

Those are the biggest reasons to join an accelerator.

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Why accelerators focus so much on “Pitch Preparation” than operating plans

Josh at First round capital is usually attributed to the quote:

As I always say, there’s nothing like numbers to f*** up a good story.

Here’s the rub though, the story is not as simple as that. That’s not the reality.

Here’s a better way to think about numbers and funding, actually.

Story and Numbers
Story and Numbers

See the 2X2 Matrix above. The easy cases are when you have good numbers and story (funded) or if you have poor numbers and story (not going to be able to raise money).

If you have good numbers (traction, growth, revenues, users, etc.) but have a poor story, you are much likely to not get funded.

If however, you tell a good story and have poor numbers you are more likely to get funded than the person with good numbers.

That’s not just a hypothesis, that’s the truth outside the valley.

If you go to Chicago, Bangalore, Boston or Berlin, the entrepreneurs show great numbers – likely in revenue, but their funding prospects in the valley and locally are slim.

The reason for this is that as investors most of us are fooled by slick, great PowerPoint slides more than we are jazzed by 3 layer Excel spreadsheets.

So, if you want to raise money, even if investors tell you to master your numbers, I’d first master your story more than your spreadsheet.

Which is the biggest reason most accelerators focus on “Pitch preparation”, more than “Operating plans”.

That’s not the case with what I advocate at our accelerator, but I have tried that for 3 years and failed constantly to help great companies with good strong numbers to get funded.

The problem is that in the absence of funding, most entrepreneurs judge accelerators by “connections to investors”, knowing that they cannot force and investor to put money, but they can give the entrepreneur more “at-bats”.

If, as an accelerator, you want to give strong introductions to investors, you are going to likely send an email with a short pitch or at best a deck. You wont send a spreadsheet with numbers.

So, getting the story is more important than showing strong traction, but all else being equal, I’d recommend doing both.

That’s also the reason why you hear stories of “entrepreneurs from Google or Facebook” raising “seed funding just on napkin drawings”.

My advice to entrepreneurs, is that you have to master both to guarantee funding, but if you have to make a choice (a poor one, but that happens), focus on getting you story right.

That’s poor advice, actually and dangerous, for some entrepreneurs, but that’s the truth.

 

A data driven approach to dispelling the myth that planning for #entrepreneurs is “old” school

There is an ongoing meme that keeps popping up ever so often among tech entrepreneurs and gurus. That the “business plan” is dead and there is actually no sense in planning at all.

After all they say “Hands-on Entrepreneurial Action is all that is required to create a Business”.

I have enough curiosity to keep finding out which of these truisms are valid and which are not. Fortunately I also have a position that allows me to try these experiments given that I run an accelerator program.

TLDR: This is absolutely false. Poor or any planning is better than no plan at all for over 80% of startups. In fact, the earlier the stage of the startup, the more is the value of that planning.

Here is the data:

Over the last 3 years, I had the opportunity to identify, select, coach and help 87 entrepreneurs for over 4 months each. I spent about 1.3 hours per week with each entrepreneurial team. In the last 3 years, and in 6 cohorts, there have been a total of 4834 applications we have received and reviewed. Of these my team and I have talked to about 450+ (about 10%) and have met with (for atleast 15-30 min) about 250 of these entrepreneurial teams. A total of 87 of them made it into our accelerator and that’s the sample size. Of these, 89% were from India, and 11% from the US.

There are between 10-12 sprints we run at each of our 4 month acceleration programs. Customer development, technology, product management, design, go-to-market, sales, partnerships, and others. One of the sprints we also run is called the “Operating plan” sprint. I instituted this after the first cohort, when I learned that most investors did not care so much about the “demo day pitch” as much as what the company was going to do with their investment for the next 12-18 months.

So, I put together an operating plan template. Think of this as your blueprint for execution. It would spell out what you were going to do to hire, sell, develop, fund and grow your startup. I put together a template as well to help the companies think through the plan.

It stems from your top level goal first, which depending on your stage could be – get product shipped, get customers to use it, increase usage, drive sales, increase revenue, etc. The only constraint I put was to ensure that you had one goal only. Not 3 or 5, just one.

Then you want to tie in various parts of your company to achieve that one goal.

If you had to hire engineers to build product, then that needed to be spelled out. If that then requires funding, you need to spell that out as well and so on.

So each operating plan will end up having 7-9 sub “plans” for product, development, hiring, sales, marketing, funding, etc.

This planning cycle begins in the 3rd month of our program and lasts 2-3 weeks for the entrepreneurs. During this time, many entrepreneurs are busy trying to get funding and meet investors, which means they tend to have little time for “all this other planning stuff”.

Which makes for a perfect experiment with a control group and a treatment group.

In the last 5 cohorts, I have asked and then politely urged all the entrepreneurs to participate actively in the operating plan sprint. But 50% of the cohort would get another 30 min pep talk from me on its importance.

I’d urge them over a lunch or coffee the importance of doing the plan.

I would not discourage the others from doing it, but the other group I did not spend the 30 minutes with on taking the operating plan seriously. Some of them took it seriously without my urging and cajoling and most ignored it.

Now that I have the data for 3 years, I can confidently tell you that just the act of putting together an operating plan – however poor it is, increases your chances of funding and raises valuation.

I went back to the data to look for my own biases and see if the ones that I urged were “somehow better suited to raise funding and be successful regardless of my urging” anyway, and I think I have no way to really check that at all, but I am confident that the sampling error, if any, was minimal.

Of the companies that I did the extra selling to, 69% of them raised funding within 6 months of the accelerator, compared to 31% who did not.

Even the companies that took the operating plan seriously and put what I consider a poor plan, beat the ones that did not take the operating plan seriously at all by a margin of 20 basis points.

I totally understand that funding is a weak (and only one) measure of achievement (and not of success), but I also realize that it is the metric most entrepreneurs judge an accelerator by.

So, the bottom-line is this.

If you want to achieve any form of success, creating an operating (or business) plan, even if it is poor, is better than not having one at all.

A comparison of early stage private company startup databases

If you are an early stage investor (Venture Capitalist, Angel investor or other Seed fund), there are now a host of databases which claim to have the information required to scout, identify and track startups. There are 2 open data sources – Crunchbase and AngelList and 5 known new age companies – Datafox, CB Insights, Mattermark, Tracxn, Rocket Companies and Owler.

Crunchbase and AngelList have proprietary data (which they have open sourced) that’s entered by the startup founders and “followers” of the company.

The rest of the systems have either used public API’s or crawling to build their database of startups from sources such as Crunchbase, AngelList and LinkedIn etc.

All of these systems have almost identical pricing ($399) for a single seat per month. Owler claims to have a free tier and CBInsights has priced themselves even more than these solutions.

All except Datafox have given me some form of limited access to their data for evaluation purposes.

All these solutions are looking to replace the expensive Venture Intelligence reports or Reuters data or other private databases from yesteryear’s or become the “Bloomberg” terminal for private companies similar to what’s being used by traders and investors for publicly listed companies.

The mega trend that’s important for the story: The benchmark for a good stock to buy was a “ten bagger”. A company that if you invested $1 would return $10 in relatively short period of time (2-5 years) as initially quoted by Peter Lynch.

What’s happening in the private markets is that due to the onerous regulations, Sarbanes Oxley law and other paperwork associated with being public, tech companies are staying private longer. So they are becoming multi-ten baggers before they go public. Companies like Facebook, Twitter, Uber and AirBnB, may do well as a public company, will no longer be a 10 bagger post IPO (or highly unlikely) but are obtaining large valuations from seed rounds to Series D or E.

So, many investors are looking to invest earlier into these companies. Data from companies listed above will be very useful for these investors, to make decisions on investing.

All these systems have a fairly similar UI and have almost identical data. for the 3 sectors I wanted to track – Internet of Things, Consumer Internet companies and B2B Enterprise software companies. I am sure you will have better value for the arcane categories. There is not much of a difference in their data since they all seem to obtain data from the same sources. Except Tracxn, I dont think the others use manually curation to track or manage their database.

There are 3 top things I looked for when evaluating these systems:

1. Comprehensive nature of their data: Most are fairly similar and you may get a 10% variation in companies from one system versus another.

2. Capability to export and do analysis manually: There’s not much of a difference here as well.

3. Their analysis, reporting and intelligence platform:All of them are in version 1 of their analysis modules, so right now there is a tremendous lack of sophistication on their data analysis.

Most peers in other companies and a few Venture firms I know, use more than 1 system and pull that data into their own CRM system.

I wont be able to really recommend one system over the other. They all do the job for a beta / version 1 system pretty well and right now, Datafox has a good visualization engine as does CB Insights. CB Insights has the most robust system, but in all 3 cases had the least # of companies of the other 4. Tracxn claims to have analysts that are curating their data, but I dont see the impact of that on their database.

There is still a lot of #opportunity in #India for accelerators & early investors #startups

Yesterday, 12 shortlisted companies from a very large list of applicants, presented to our Jury panel of entrepreneurs & investors for Batch 5 at the Microsoft Ventures Accelerator. This time we exceeded the total # of applicants by a significant number given how mature the program is and how well we have gained acceptance in the Indian startup ecosystem.

Of the 12 companies, 4 were very early stage, (think 2 founders and a dog, back of a napkin), 4-5 of them were at product / prototype and the remainder were at revenue.

Except 3, all the others were still bootstrapped. Meaning they had no funding or support from any accelerator, investor or corporate fund. The funded companies, had just (fairly recently, less than 3 months ago) raised money.

If we were to expand the pool to the final “top 50”, we saw fewer than 15% of companies were supported in some way by an institution meant to support them.

I keep hearing from the press, other entrepreneurs and investors that India is “saturated” with accelerators, investors and angels and we are in an “accelerator bubble”.

That cannot be farther away from the truth.

While not every company that pitched yesterday necessarily will yield a large outcome for institutional investors and 2 or 3 are not even angel investment ready, the remaining 50%-60% are. And, the ecosystem is not yet supporting them.

Some of these companies will go on to become fairly large. Will any of them become “Unicorns” – I cant say for sure. There will be a few (2-3) winners though.

The next time someone says we have too many accelerators or angel investors, you should point them to the fact that there are over 1200 product companies looking for funding in India, which have over $10K in revenue. Over 50 of them are doing more than $500K in revenue and still happily bootstrapped either because no one knows them or the founders dont want to accept money the investors gave them with the terms they offered.

We are still in the land of opportunity.

What should you expect from an accelerator?

I have written previously about how to evaluate accelerators and choosing the right accelerator since there are so many of them these days and also about what the goal of an accelerator is.

I wanted to share somethings that entrepreneurs should expect from an accelerator from a perspective of a startup founder. I think the best thing that has happened is that so many accelerators have opened in the last few years. Similar to eCommerce companies in 2010-11, I expect many to close or shut down within the next 2-3 years.

There are 3 top things an entrepreneur needs according to me:

1. Access to customers: Whether it is beta customers for feedback, early adopters for providing traction (paying customers) or larger customer for growth, startups thrive on customers. Depending on the stage of your company, if an accelerator does not help you get customers, they are not doing their job. That’s the first lens I would adopt to judge accelerators. If you have access to customers, you can practically write your own destiny. If all the accelerator does is provide advice on getting customers but does not provide introductions to customers, or have customers be ready to adopt and review your platform, you are not going to get much traction or be “accelerated”.

2. Access to talent: In India, for startups, good development talent is hard to get , marketing & sales talent is harder and design talent is extremely challenging to get on board. If your accelerator does not help you with talent sourcing or provide talent in house to help you tide these critical areas when you need them most, you should run away. I have heard the notion that the graduates of the accelerator will help you, but entrepreneurs helping other entrepreneurs by providing time  is not very sustainable. Most of the very successful startups and their executives are extremely busy. While a sense of pay-it-forward does exist, its just not sustainable is what I have found. There’s no substitute for dedicated people to help you with development issues, help you with User experience and design (mockups, wireframes, HTML/CSS development and information architecture) or marketing talent to roll up their sleeves and run campaigns.

3. Access to capital for growth: While I am personally not a big fan of funding as a metric for accelerators to gauge their success, capital is nonetheless needed to grow and thrive, especially in India, where most founders are not serial, successful entrepreneurs or those that come from a “rich family”. So look for an accelerator that provides you an extensive and wide set of investors from seed to early stage and from venture to growth. If all the accelerator does is “showcase you in front of several investors” but does not actively nudge investors to help take a closer look at your company, I dont think they are doing their job.

There are several other things that matter which include a support system of the existing entrepreneur network from their previous batches, access to meetings internationally that possibly help get some global exposure, and a great space to work from, besides other things. However if you dont have access to customers, talent and capital, there’s no value in joining an accelerator.