What does the Dropbox IPO mean for Corporate Innovation?
- The first IPO for Y Combinator in 13 years of existence shows how hard it is for incubators and accelerators to be profitable as an investment play.
- By adapting the accelerator and incubator model, German Corporates together have set up more than 100 initiatives to foster startup incubation and acceleration with probably more than 5 times the amount of startups in the same time period as Y Combinator.
- Still, German Corporate Innovation Programs have generated neither one IPO nor one single unicorn.
- Heavily scouting startups and putting them into incubators and accelerators without owning a majority stake is not the solution for the corporate innovation problem.
- There’s a middle way between overnight successes and years of pumping millions into an accelerator — a company builder might be the answer.
Afew weeks back, Dropbox announced its upcoming IPO, a long overdue move for one of the most famous Y Combinator backed startups. What for many will be deemed as an absolute success, for others will be considered a cautionary tale for startup incubators and accelerators around the world.
A few facts: Y Combinator has been around 13 years and has backed around 10 Unicorns, among them Airbnb, Dropbox, Docker, Stripe, Instacart, Zenefits, Twitch, Machine Zone, Quora and CoinBase. But within the pool of their 1.500+ startups funded, Dropbox is the first of them all to go public. So far, 231 of all these startups generated 4.6B USD in Exits, but they raised 18B USD along the way.
While the numbers are mind-blowing, a quick math exercise will show that the average funding for each startup goes over 12M USD.
This means that the “best in breed” AAA program that shaped most accelerators and incubators worldwide and the one everyone looks up to is far from being profitable as an investment play.
Overnight successes don’t exist and if the first IPO for Y Combinator comes after 13 years of helping startups, well, it was an overnight success that was 13 years in the making. But what this news shows is that as a model for corporates to innovate, the accelerator program has proved to be too expensive and slow.
Y Combinator is not only the benchmark for startup hubs around the world: undeniably, most incubators and accelerators are a shameless copycat of their model. The promise to bring lots of startups together, pump millions for them to go from idea to incorporated company in a few months, let the network and the money do their magic, and in this way create a shiny portfolio of startups, caught fire everywhere. Corporations saw in this strategy their solution to stay innovative and relevant, opening their doors to startups and press.
But the last few years have proved that if this is not working for Y Combinator in investment terms, it’s also not working for its clones all over the world. Unless the sponsors of this avalanche of innovation programs measure their KPIs only in terms of PR and Marketing, the economic gains and the corporate innovations are really low.
We could identify currently more than 100 incubators and accelerators which are set up by German Corporations. Going back to the starting period of Y Combinator until today, around 400 programs have been run in the last 13 years. Assuming that each program has 2 batches each year with 5 startups in average, at least 4.000 startups must have been supported through corporate programs in Germany. However, we could not find one single IPO or unicorn within this huge amount of startups.
And companies are noticing that: in 2017, quite a few corporations switched gears and re-formulated their bet on having their own accelerators and incubators. The biggest example in Germany was Axel Springer’s Plug’n’Play, which, after 5 years of focusing on funding companies, decided to join forces with Porsche Digital. While Axel Springer is often named as the best practice in the German incubator and accelerator scene, with Runtastic and N26 having been part of their program, there are hardly any other success stories from other corporations.
In this joint reformulation of Plug’n’Play and Porsche Digital, the economic expectations were lowered and the focus shifted towards supporting digital innovations.
This should make us all wonder. The 12M USD in funding per company that the Y Combinator model produced seems not to work. Certainly, the money could easily be spent more wisely: what if, instead of putting that sum in startup batches, the money would be used in an offering that attracts entrepreneurs to build new digital assets for corporations? How much more could one achieve? By investing the money in minds with a proven track-record and putting them to solve your corporate pains, knowing that you fully own the end result, corporations undoubtedly have much more to gain.
The logic is overwhelming: rather than investing in a massive portfolio of 100+ startups that don’t create any financial returns over the years (by pumping money into an incubator or accelerator program) and having a minority stake in each of these startups, corporates would be better off taking the same amount of money and letting someone else build their portfolio of digital business and completely own the future returns of their ventures.
This is the solution that company builders such as GERMANTECH DIGITAL are offering by creating companies for corporations with the help of a network of great entrepreneurs from all over the world. The promise: a new company in 100 days. So far, they have come up with 3 funded products for EWE, one major German utility player, in record time. With this model, going for a company builder instead of for a branded accelerator program could significantly improve results.
All being said, let’s still celebrate Dropbox’s success story and IPO and raise our glasses to the big contribution that Y Combinator has had in shaping how startups are created and supported around the world. But looking at the bigger picture, all those who are in the business of real digital transformation and corporate innovation should also realise that PR and Marketing won’t solve the long-term problems that big companies face.
The incubator and accelerator models are not what’s going to make corporations survive the next decade and it’s time to face that hard reality. You can spend millions trying to make incubator and accelerator programs work, but maybe it’s smarter to rethink this model and not do what everyone else is doing without checking the numbers first.