The Corporate Accelerator Program Flood – A Blessing or a Curse?
Starting a startup company is becoming an increasingly attractive career choice for graduates, although most startups will eventually fail. Depending on how failure is defined, according to Harvard Business Professor Shikhar Ghosh, we can expect 70-80% of startups end up being a failure. Startup Genome data suggests that 75% fail within the first two years – with or without venture capital backing. CB Insights finds that failed startups typically shut down 20 months after their last funding round having raised a median of USD 1.3 m. The top reason for failure: no market need for the product.
Accelerator programs are the “new MBA” for startup founders trying to identify the most promising startups and to help them succeed – hopefully mitigating the risk of failure. The role model for accelerator programs are large programs, such as US-based Y Combinator. 72% of their startups raised money after demo day (the final event of the three-months-program) and, as of May 2013, 37 startups have a valuation higher or have been sold for more than USD 40 m (ca. 12% of their startups not counting their last 2012/13 classes). The latest statistics including their winter 2015 class are impressive: 842 startups since program launch, total market cap of over USD 30 bn, total money raised USD 3 bn and, most interesting, birth of four unicorns (private companies valued over USD 1 bn, e.g. AirBnB) with a total number of startups valued at over USD 100m: 32.
The accelerator model has been copied around the world and has also been picked up by corporates as part of their innovation strategy. Looking at those Corporate Accelerator Programs (CAPs) in Germany we can identify 16 by end of 2015, a number which has quadrupled in the last three years. The programs concentrate in Berlin – however, Munich represents a strong second place as the local CAPs benefit from their proximity to the corporates’ headquarters.
With the number of CAPs also the number of graduated startups is increasing – we count 334 by the end of 2015. However, it is by far not easy to be accepted to a program. For instance, ProSiebenSat.1 Accelerator claimed to have more than 300 applications to their sixth batch, while only five have been accepted – roughly a 2% acceptance rate (in comparison: “Ivy League” universities like Harvard or Princeton accept about 6-7% of their applicants). While we can find a multitude of different business models among the CAP startups, there is a clear bias towards e-commerce (11%), marketplaces (13%), consumer app (15%) and software-as-a-service (16%) models.
The duration of the programs is typically three months and includes mentoring, workshops or presentations by internal and external experts. Typically, for the program duration, a workplace for the team and a small funding ticket of ca. EUR 25 k is granted (to cover the costs during the program). Eight out of the 16 CAPs ask for 5-20% in the startup’s equity in return.
Based on our data analysis, the performance of CAPs in Germany is not yet promising from a financial perspective
8% of the CAP startups founded in 2013 or before are inactive according to their website. Besides the many unreported cases and “zombies” (startups that are being kept alive although it doesn’t make sense), CAP startups seem to outperform the 75% of startups that fail within two years
We can identify 33 CAP startups, which account for a total of USD 300 m in venture capital funding (source: Crunchbase), i.e. only 10% of the startups manage to raise venture capital with an average of USD 9 m
Lighthouse examples of startup success cases are still missing, e.g. large exits or high valuations – however, the CAP ecosystem is still young
If the CAPs do not perform financially, what are the corporates’ expectations in respect to their CAP’s performance?
The selected examples of Hub:raum, Wayra and ProSiebenSat.1 Accelerator (all taking equity from the participating startups) show that value growth is only one element in their strategy – soft factors, such as partnerships, know-how, and human capital also count.
From the sample of German CAPs, we can identify two distinctive strategies: “Mass Accelerator” and “Super Strategy Accelerator”. Mass Accelerators are following the original role model of Y Combinator and have the goal to find and accelerate great startups. They are not necessarily biased towards certain business models or industries and take an equity share in the participating startups in order to participate in the value growth. If the startup has potential synergies with the corporate, even better but this is not their focus. Super Strategy Accelerators have a very strategic approach, ideally playing a role in the corporates innovation strategy. They accelerate only startups with synergies in respect to their current strategic initiatives. Of course, the financial performance or value growth of the startup is not in their focus.
Recently, some German CAPs have made some adjustments in their positioning in order to support their future CAP strategy:
a) Increased focus on corporate strategy – Wayra Munich
Although Wayra is “not the me too, but the me first” as Tanja Kufner, former Academy Director of Wayra said, they have to rethink. Wayra Munich recognized already in 2013 the necessity to change the focus of their business idea: They wanted to diversify the focus in to Machine2Machine (M2M) or Internet of Things (IoT), as there are so many companies from the automotive and IT-industry in Munich. With startups like mynudge (M2M) or Centersonic (IoT) they pursue this vison partially. By focusing on these two segments Wayra fits perfectly into his parent company Telefónica – a clear move towards the Super Strategy Accelerator model.
b) Strategic risk reduction – ProSiebenSat.1 Accelerator
In future, ProSiebenSat.1 Accelerator will focus on consumer startups, which are already in an advanced status and will accelerate their growth by advertisement. From now on, every later-staged startup gets EUR 500 k TV-advertising budget which they can reinvest in TV-Spots of the ProSiebenSat.1 Group. In parallel, venture capital partners like b-to-v, Earlybird, E.ventures, Lakestar and Holtzbrinck Ventures signed a partnership agreement with the accelerator. ProSiebenSat.1 clearly reduces its risk profile and therefore, this move seems to be part of a respective set of measure (for instance, the group has recently divested their company building arm Epic Companies). In addition, ProSiebenSat.1 accelerator will cooperate with the Axel Springer Plug and Play Accelerator to support new digital business models by consolidating their efforts (although the merger between the two groups was canceled).
c) Combination of accelerator and corporate venture capital – Hub:raum
Following up with startups in the CAP, Hub:raum decides whether the startup gets a seed investment from their investment arm. Therefore, Hub:raum can first push the early-stage startups and then invest and accompany the later-stage startups, if they find it attractive enough – a clear focus on financial performance and a more Mass Accelerator-like approach.
Given the performance of Corporate Accelerator Programs in Germany so far, a focus on the pure Mass Accelerator model does not seem promising. Best-in-class pioneer Y Combinator has launched with a long haul vision and has accelerated over 800 startups so far with some significant financial performance. This approach with its order of magnitude is clearly not what German corporates have in mind.
We believe that more and more German CAPs will move to the Super Strategy Accelerator model in order to support their corporate strategy more effectively. The accelerator program will be an integral part of the innovation strategy.
This study appeared first on the Strtg.io blog. About the authors: Alexander Mahr is the Founder & Managing Director of Strtg.io, Markus Dirr is a Business Analyst at Strtg.io.
