Have Accelerators Reached Saturation Point?

by Foley & Lardner LLP

A few weeks ago, I attended the ribbon-cutting ceremony for the new MassChallenge accelerator space. There were hundreds of people there, including the founders of TechSandBox, an accelerator in Hopkinton, MA, and Smarter in the City, an “inner city” accelerator in Roxbury. Foley & Lardner is, of course, deeply involved with many accelerators in Boston and elsewhere, including MassChallenge, LabCentral, Techstars and Plug and Play. We also work with companies at many other accelerators, including the PayPal Start Tank, the Canadian Technology Accelerator, the Hult International Business School accelerator, and so on. Many of these new accelerators focus on a particular niche, whether a specific industry, a specific location, or a particular business or financial model. Some take equity from each company, while others, such as MassChallenge, do not. Some offer space, connections and mentorships, while others also provide price money or seed capital. Of course, some of them deliver on that promise better than others.

It’s amazing that each of these accelerators is able to attract suitable companies. This is especially significant, given that accelerators must renew their portfolio of companies within a very short cycle: once or twice a year. In contrast, venture and angel funds hold onto their portfolio companies for a number of years.

I wonder. Can there be a sufficient “inventory” of startup and early stage companies to fill the pipeline for all of these accelerators? Are there enough sponsors and mentors to go around? Will the quality of mentorship suffer as quantity increases? Is there enough available financing, whether angel or venture, to provide the graduates of these accelerators with a reasonable path to success?

A bit of history is in order. During the last emerging company boom in the dot-com era, incubators were the fashion of the times. With the bust, most of them crashed and burned, as did many of the companies that they hosted. Are we seeing a similar phenomenon with accelerators which, bluntly, are a slightly improved version of the old fashioned incubator model?

Innovation is a fantastic thing and the buzz and excitement of entrepreneurial energy fostered by all of these accelerators has generated a vibrant ecosystem in Boston and elsewhere. More and more large companies and service providers have realized the value of startups and have stepped in to support, financially and with human resources, these emerging companies. Previously ignored markets have been discovered. Whether it’s Roxbury, Worcester or Springfield – or even Maine, New Hampshire and Vermont – new geographic areas are being harvested for exciting companies. For the first time, media, retail and nextgen manufacturers have found supporters in the Boston ecosystem and, indeed, many companies are capitalizing on the convergence of heretofore separate marketing and technologies.

Yet, there is a fly in the ointment. The supply of resources to accelerators could become exhausted. After all, there are only so many companies willing and able to provide sponsorships. And there are only so many individuals willing – and capable – to act as mentors. At the same time, greed, buoyed by entrepreneurial and investor enthusiasm, have encouraged some entrepreneur/promoters to push the economics of accelerators beyond currently accepted, and reasonable, parameters, asking for more money and resources from investors and sponsors and returning less. Most importantly, graduates of accelerators will find that the angel and venture markets have not yet caught up with the increased demands of the ever-growing universe of accelerator spinouts. Indeed, today there are fewer early-stage venture funds, with much less capital, than before the 2008 crash. The lack of adequate financing may then start a vicious cycle: fewer sponsors and supporters will see a pay-off for their money and labor, fewer will be willing to make a commitment to accelerators, and fewer new ventures will see accelerators as their route to success.

Is this doom and gloom scenario an inevitability? Is it just another manifestation of the economic cycles that we seem to go through again and again? Let’s hope that this is not the case. Let’s begin a discussion about how to preserve the vibrancy, energy and job creating value of accelerators and avoid falling into the same traps that closed off the innovation economy during the downturn of the last economic cycle.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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