Part III: the Future of Ownership
Welcome to the third and final part of the Future of Acceleration series. If you missed Part I: the Future of Work (for Start ups), and Part II: the Future of Mentorship, be sure to check those out as in this last one I will draw on learnings from the first two segments.
At the end, as I wrap up, check out a practical guide about the questions to ask before you set up your own accelerator of the future!:)
So far we learned that the future of work will be fluid, with people coming together periodically in a predictable cadence; and that mentor/advisor networks are expanding, while cultural barriers (seemingly) are being broken down.
(A Side Note: a stark difference from our personal networks, according to HBR: https://hbr.org/2021/02/research-were-losing-touch-with-our-networks?_lrsc=04a0ea15-1de6-4056-bf91-983a4127eddd&cid=other-soc-lke)
The three trends that shape the future of acceleration are the following (I will come back to those at the end):
- decoupling of talent and location — leading to a fluid workforce
- decoupling of mentorship and location — leading to globally connected, locally effective mentors, and,
- decoupling of funding and location — as we will see in this part III, there are early signs founders should build ideas worth finding and money will find them.
Undoubtedly founders carry a disproportionate amount of the burden of growing a start up. Ownership structures should incentivize founders, reward early investors, and drive employee morale. These will have to be balanced with what the founders can afford.
Start ups that I surveyed have an average of 2.3 sources of financing. The primary source of funding is a combination of boot strapping / angel funding / and VC funding, with angel funding leading with 63% — hallelujah for the angels!
As secondary sources of funding, some start ups manage to win grants; and some founders keep a side hustle to keep the lights on. Some correlations exist between the types of funding founders received: e.g. if they received angel or VC funding they are less likely to be financed by a side hustle or grants. Interestingly, in 2020 more founders have had the opportunity to speak to international VC funds (increase by 35% vs the previous year). Whether a significant proportion of those deals are going through though is early to say, but at least there is an attempt at the decoupling of funding and location. Angels are staying local.
It is worth noting the new kid on the block: Revenue Based Financing. RBF is still very small as proportion of funding amongst start ups. But knowing a large portion of start ups fit the RBF-favored business models of e-commerce/SaaS/subscription businesses/DTC/marketplaces, I believe we will see this one grow. It is an easier, and more credible option to crowdfunding as well (this is worth a whole other post). This model is seen by founders as appropriate to supplement angel/vc funding in a non-dillutive manner. And knowing 60%+ of surveyed start ups raise angel funding; and 30% have VC funding; RBF has room to grow.
Since by definition start ups have to be revenue-generating when applying for RBF, and as it is informally known as “marketing expense finance”, this would be an interesting source of funding for marketing/growth-focused acceleration programs. Furthermore, there is an opportunity for specialist accelerators to pull RBF financing for their whole portfolio, optimizing operational costs.
The rise of such non-dillutive options is favored by founders. Almost half (44%) of the founders I surveyed say they would prefer to pay for an acceleration program in the form of direct cash, rather than equity. This is especially true for serial founders, or founders of post-revenue companies.
As someone put it, “On the structure of the financing the accelerator, it very much depends on the stage. Pre-revenue it’s hard to pay in cash, but post-revenue I’d prefer to pay in cash.”
Yet, funding remains the top reason by far (with 48%) why start ups join an accelerator — whether it is to gain it directly through the program and its network of investors; or to get a stamp of approval that validates the company and makes it investor-ready. With more programs out there (globally, from a few accelerators in 2005, there were 500 in 2015; this number has increased further with the rise of corporate accelerators and white labeled ones), funding has become cheaper: only a few years ago programs were highly extractive (with some taking 15% of equity at team & PPT stage); now they seem to have come down in terms to a more reasonable (from a point of view founder equity dilution) 4–8% equity, cited for a lot of 3–6 month programs. (In our Investor Readiness program modeling a cap table from scratch showed optimal bands for equity ownership by accelerators and early stage advisors in order to incentivize founders and keep them motivated.) Some programs even stretch the type of start ups they admit in favor of larger start ups, offering deals for smaller equity, practically acting like brokers.
Lowered equity stake in start ups might mean accelerators should reconsider the number of start ups they can and want to serve — do they need to become highly selective? Or can they serve more start ups, therefore placing more bets, with the same resource?
Going back to start up needs, everything else — like, finding technical talent, testing product-market fit; finding strategic mentors / advisors; securing clients / users, gaining access to operational perks (AWS credits / G Cloud credits etc..); gaining visibility / PR / credibility — is perceived as nice to have. While I didn’t probe much further into this (otherwise the research would take hours complete in stead of 20 min) my educated guess is that there is an air of commoditization of “advice” — business advice is cheap in big start ups HUBs; and perks are plentiful. Advice is valuable when it also opens doors. And angel investors typically fill that (at least mental) gap.
Having said all that, the next most sought thing is finding Product-Market-Fit but at 20%. Coaching start up founders how to determine their vision and product value, and how to run rapid experiments is indeed important and appreciated — but only after founders stop worrying about the funding.
Knowing who takes part in accelerator programs also explains this. Participation in the accelerator should be by at least one founder — according to 92% of the respondents; and it should involve all founders according to 56% of the respondents. Few founders mention they would send their employees to the programs, and would only do it once they need to scale and want to give employees extra training boost. Specialist coaching (e.g. sales) would do wonders for those early scale ups.
Lastly, the duration of the ideal accelerator program is 4–6 months. If we recall from Part I, founders were happy with traveling to a distant location for remote work for 1–2 months per year. This opens an opportunity to have hybrid programs where everyone meets on video for the introductory parts and then a special cohort meets in person to finish off. This might open the opportunity as well for tiered programs where some people always stay on video tapping into relevant content, while a core group does extra group and 1:1 work.
When it comes to the future of start up ownership from the point of view of accelerators, we see three things: with the rise of new funding models like RBF, the opportunity to speak to funders across the globe, and founders in favor of paying cash for programs, the time is ripe to match better start up business models and stage to the type and amount of funding they need.
To recap this Future of Acceleration series, let’s look at the major trends and what opportunities they bring:
- decoupling of talent and location — the liquid workforce:
✔️ allow founders from distant markets take part in accelerators in the start up HUBs of the world;
✔️ allow more start ups and more of their team members to participate in the programs;
✔️ make face-to-face acceleration participation a special bonding experience for teams.
- decoupling of mentorship and location — globally connected, specially effective mentors:
✔️ allow exposure to mentors around the globe;
✔️ offer mentorship from more specialized or senior mentors that founders didn’t have previous access to;
✔️ bring multiple mentors together on the same topic, sparking deep technical discussions.
- decoupling of funding and location — build something worth finding, from anywhere, and the (now cheaper) money will find you:
✔️ allow for funders to tap into under-served markets;
✔️ increase funding options and competition for stellar start ups, matching stage and business model to type of funding and for the right amount of equity/cash;
✔️ allow start ups to be based out of anywhere optimizing for team dynamics and company costs, not funding exposure opportunity.
While the accelerators of the future will look very differently depending on their purpose and the start ups they serve, in this extra bonus part I wanted to offer a guide to what to consider when building an accelerator. Also, knowing how many start up accelerators are there, and how direct competition is pushing equity rewards down (pushing certain models out of existence), I believe there will be a time of consolidation (like the resent trends in crowdfunding platforms). So, for the fun of it, if various types of programs had to be tied all together into a Acceleration Platform, I draw out a simplified structure of what that could look like.
Setting up an accelerator for the future: A guide
The accelerators’ value proposition for start-ups is to speed up their growth and development. In order to do this, you need to know why you are doing it, who are you doing it for, and what would be the most effective way to achieve this.
Whether you are a corporate, a VC, a university, a government agency, or an NGO, to figure out the best structure for the accelerator, I have outlined some questions to start with. The answers will swing widely depending on where in the ecosystem you sit in. That’s ok. The point of the following is to make you mindful of the context and objective, and how to translate that into the type of program and cohorts you need to have.
Start with the upstream, Who are your “LPs”, why are they “investing” in an accelerator, and what size and kind of returns do they want on the money?
- are you looking for 100x exit multiple
- or 10x exit
- or SaaS revenues?
- or none?
- in what time frame?
In a sample of accelerators analyzed by Nesta (2014), only 2.1% had gone through an exit of $5 million or more, and less than 10% generated revenues from equity returns or success fees charged to investors (GALI, 2016).
What is the Objective of the accelerator?
- 💸 — invest and get exits?
- 📈 — grow companies with predictable steady returns?
- 🤖 — gain technological advantage?
- 🌍 — foster regional innovation?
- 🏭 — bet on an industry segment for strategic advantage?
The above will determine the downstream decisions, such as, how selective of the start ups do you need to be?
- is this open to all tech/product SMEs (like WeWork Labs)
- do you need only potentially high growth companies (like a specialized accelerator, or a YC-backed company)
- or do you need a wide variety of companies within a specific sector?
What do cohorts’ structure look like to obtain that ROI?
- how many cohorts would you have to run per year?
- of how many start ups?
- and how many people from each start up could join? (admittedly, this one should always be infinite now!:)
Define who are your ideal start ups?
- are they young founders or seasoned entrepreneurs?
- how far are they in their start up journey? what stage are they in?
- have they raised money before? (implications for the cap table)
What mentorship would they need?
- do they need Business 101 knowledge?
- are they focused on running experiments?
- are they focused on marketing growth?
- are they coming only on investment?
Do you have resource for mentorship?
- do you have internal mentors to provide the mentorship?
- do you have a network of relevant mentors?
- how will you incentivize the mentors?
- how will you incentivize fellow start up founders to mentor each other?
What business model do the start ups pursue?
- SaaS? Marketplaces?
- E-Commerce / DTC?
- Hardware? Or IoT?
- If B2B, targeting SMEs or Enterprise?
- Tech licensing?
- AI-enabled (mixing software and consultancy elements?)
And a follow up, How fast do you expect them to hit the market? And how fast do you expect them to go from 10–100–1,000–1,000,000 users? (/10 if B2B)
- How long is their standard R&D period? (is there such thing as “standard?”)
- How long would it take to get to PMF? Do they have to educate the market?
- How fast would they be able to scale?
- How soon after do they need to begin international expansion?
What are alternative revenue streams that could be employed?
- mentorship fees,
- corporate sponsorships and partnerships?
The end of the day it comes down to three things:
ROI you are trying to achieve over a certain period of time = % of equity ownership you target to have (andIor revenue per start up you need to obtain) X # of start ups that will allow you to get there
And when you do it right once, you can do it again, and the flywheel of reviews, reputation, exits, and networks will set you up for the long haul.
The rise of global Acceleration as a Platform (not Program)
With so many accelerator prorgams globally, there is an opportunity to synchronize some of the mentorship, and serve even more start ups. If you were to tie in various start ups needs, and programs together in a global Platform, that could look something like this:
A topline overview of the layers:
Start up Community: ongoing platform with on-demand local mentorship (from mentors or other founders) or remote video sessions. Non selective, any product company can join and pay a small fee. Suitable for R&D heavy companies, where they can gain leads for grants.
Start up Program on Investment Readiness and Product Market Fit: from top mentors; for start ups who are selected and share a common ambition to build highly scalable companies. Heavy on homework and work group, building a tight cohort. This one is selective. Payment can be equity or cash.
Start up Bootcamps: 2 week rapid learning on digital marketing & growth; international expansion in specific markets; how to do partnerships with specific corporates; or a local offshoot of a global program; or other specialist topics. Not selective beyond having hit certain development marks, and suitable for RBF (or other contract revenue based financing).