Over the last decade or so startup accelerators have been a great source of inspiration, education, connections and capital for new companies. Y-Combinator, the granddaddy of them all started on March 11, 2005. Since then, just this one accelerator has churned out over a thousand new companies
Unicorns like Uber, DropBox, and AirBnB got their start in accelerators and now they have valuations rivaling high-profile companies that have been operating for generations.
Today, most anywhere in the world, you can throw a stone and hit a startup business accelerator. They come in a variety of flavors from government sponsored to organizations with a very specific industry focus. Even companies like Target, Coca-Cola, and Intel have started their own accelerators to focus on company ideas high on their priority lists.
It seems like everyone is getting into the startup accelerator game lately… But why haven’t there been more than a handful of success stories? With thousands of companies going through these programs several times a year, you would expect a new batch of innovative, fast growing, money-making companies to pop up every day. And all of them changing the world in interesting and compelling ways.
But that hasn’t happened…
And here’s why…
To better illustrate the problem, pull out your smartphone and push whatever magic button needed to get it to light up. Consider for a moment all the Apps and features on your phone and how your life has changed for the better because of the modern marvel you hold in your hand.
Now consider how much use you would get out of your smartphone if there were no GPS, music, video, or valuable services like EverNote, Open Table, and Fandango? What if only people with your same smartphone model could text or email you? What if all those financial services like credits cards, banks and brokers were not available on your smartphone?
Then your smartphone would be about as useful as that original cell phone you could have bought back in the 1980’s. They referred to those 1980’s era phones as bricks. They were far from the marvelous devices we use today. Basically all they did was make and take voice calls.
The big difference today is the smartphone ecosystem…
It’s the smartphone ecosystem that is really the power and convenience of these devices and why there are over two billion smartphones in use today with a projected three billion by the end of the decade.
Without the ecosystem your smartphone would be nearly useless and nowhere near the essential tool it is today. A real brick might be more useful in some situations.
The same goes for Startup Accelerators…
To get more companies to real success, startups need to be developed in a solid entrepreneurial ecosystem with all the features, benefits, and support only a complete ecosystem can provide. Without it, startups wither and disappear. Their chances of success are about as likely as excitement over a new smartphone that only makes and takes voice calls. Give me the real brick instead. The monthly service plan for a brick cost less and there is no battery recharging required.
Many, if not most, startup accelerators act and smell like the real thing at first look but when you dig around they usually do not have a real functioning entrepreneurial ecosystem. Startups jump into the accelerator then in a few months nothing happens when the program is over and the next batch of founders are waiting at the door. True success is just out of reach unless they are lucky. And luck is not the basis of a good business plan.
Before you google “entrepreneurial ecosystem” and get intimidated by huge graphics that look like something NASA would use to plan a mission to Mars slow down… All it really takes is four things to build a functioning Entrepreneurial Ecosystem.
And… flashy crowded office space in a city center or on a university campus is not on the list. If the accelerator you are considering does not have all four of these elements locked in place, then walk away. Run if you can.
If you are an investor looking for the next big thing. Look elsewhere because without these four elements the best business idea and team in the world will evaporate when the money dries up. And it will dry up because there is a very low probability that a company can get to positive cash flow without these four essential elements.
What are the four essential items for an Entrepreneurial Ecosystem?
1) Motivated Entrepreneurs – This seems pretty basic but if the people who have to make the startup company really work are not totally committed there is no chance of success. If the company founders do not have a burning desire to change the world with their product or service, then when dark nights come those entrepreneurs might just slip out into the shadows.
Sure this is about work ethic but a great way to determine startup founder motivation level is to ask questions like, “Why this company now?”. If the answer is sort of vague and weak then what will hold this company together when (not if) a crisis arises? Look for answers that involve logical idea origin stories that show the founders deep commitment to the what’s at the core of the company.
Most of the time the startup’s first idea will collapse under the pressure of market forces, technology realities, and target user demand level. Faced with this situation motivated entrepreneurs roll up their sleeves, double down their efforts and pivot their idea until it works. Failure is not an option for motivated entrepreneurs. They find a way.
2) A Solid Network – This entrepreneurial network is far reaching and includes fellow founders along with quick reliable access to all the people, equipment, services, and resources needed to reliably start and run companies. Access to other founders is at the core of this network. Talking with someone who has traveled the startup path and survived is essential.
Quick access to everything a founder needs today and in the future can quickly build a bridge over any business roadblock. These resources can be things like patent attorneys, tax accountants, contract manufacturers, public relations experts, computer equipment suppliers, real estate agents, business development specialists and more. Whatever might be needed has to be available and ready to use at the click of a button. There is little time to completely determine who might be right for the project. The resources in this network are sensitive to startups and know how to quickly get things done right at the lowest possible costs with the most impact.
3) Mentors – This is actually where the entrepreneurial ecosystem can be made or broken… The initial Mentors who help founders establish and build their companies are essential. No founding team knows everything. In fact, it’s what the founders don’t know that will derail their company. Or worse the founders will make age old mistakes and waste precious time and money going down paths that seasoned business professionals could help them avoid. Why spend months trying to get to an important potential customer when it turns out the person is your Mentor’s twenty-year golfing buddy? Why waste money on a marketing campaign that your Mentor tried a year ago and fell flat? Why go it alone when someone who has been down this path and solved these problems many times in the past can be there to advise and guide you?
There are three key components to effective mentoring and all three are required:
(1) Appropriate Mentors tailored for the startups – These are seasoned professionals perfectly matched to the exact needs of the startups. Don’t expect a Mentor with twenty-year’s of senior management experience in Corporate IT/Security Systems to be an appropriate Mentor for a founding team developing the next big meal replacement snack food for overscheduled teenagers. Not a match. Just a waste of time. Either find the right Mentor or the startup company should not be included in the accelerator program. No matter how great the team and product concept appear. Get the right Mentors.
(2) An organized rigorous Mentoring system – Mentoring is not just a few casual meeting over pizza, a Power Point assisted lecture, or a weekly phone call when convenient. And it is definitely not a frantic eleventh hour panicked phone call when things are going south fast. Mentors and Mentees must be kept to regular meetings with stated goals and objectives for each meeting followed by a clear list of tasks and responsibilities. Without the structure and accountability component it just will not work. There are many online cloud-based systems that can be used to manage Mentor/Mentee interactions. But a cheap spiral bound blank notebook can do the same job. Just so both Mentor and Mentee know what is expected, who is responsible, the deadlines, and the date/time for the next meeting.
(3) A receptive respecting Mentee – The Mentee/Mentor relationship is probably the most significant element determining the success or failure of the startup. Assuming the correct Mentor/Mentee match has been made the founder must manage the Mentee/Mentor relationship. No one knows the business better than the founder. Don’t think you have all the answers. In reality founders barely have any answers. In fact, it will be a struggle to just come up with the questions. You can always spot a company that has failed to use their Mentor. The startup company wastes time and resources dealing with the wrong business elements. Their startups appear flawed and ragged around the edges. Usually the right Mentor can help the startup cut through time-wasting unimportant items and polish the company so it is ready to get to the next level.
4) Investors/Money – The oxygen for any startup is investment capital. The money to fund the early days when risk is high, the cash to expand from the founding team once the concept is proven out, then the money needed to scale quickly… All essential. All provided by investors who know the risks and are excited about funding startup companies. No money. No ecosystem.
The best investors to fund startups are former startup company founders who have made some money either from company profits or a sale of their company. This is the sustaining part of the ecosystem. As long as profitable successful companies are being created there will be former founders waiting in line to fund the next round of bright shiny startups. Without this reflow of startup capital new companies will wither and dry up. If former founders will not invest in new companies then why should other outside investors, angels, venture capital Funds, or banks?
Somewhere in the entrepreneurial community former founders and other risk hungry individuals must be identified and cultivated. Bring them into the ecosystem early. Maybe even when the Accelerator teams are being evaluated for inclusion in the program. The earlier these investors are brought in the better. Once the startup companies have grown to a point where additional funding is needed an array of investors already acquainted with the company should be the first ones contacted. Without this essential reflow of capital from the entrepreneurial community the ecosystem will not be sustaining. Eventually it will collapse when the initial narrow sources of capital run out.
I have never seen a thriving Entrepreneurial Ecosystem or startup accelerator without these four components. The only way we will see the next Uber, DropBox or AirBnB is if more solid entrepreneurial ecosystems are established. More shared office space, and army of smart well-intentioned university professors, government programs, and large corporations hunting for the next things will not be enough with these four essential elements.