Failing Startups or the Curious Case of “Zombie Startups”

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.