The Sole Purpose of a Startup Accelerator Should Be Making Money

If you’re running a startup accelerator or thinking about it, and your primary goal isn’t to make money, be very careful. Money drives everything. It makes the world go ’round.

Entrepreneurs might not start companies with the sole purpose of making money, but ultimately that’s the yardstick of success. Other things are nice, and important (having fun, changing the world, disrupting an industry, creating jobs), but it all comes down to whether or not you make money.

Angels invest knowing they’ll likely lose money, but unlike accelerators, they come in and out of the startup ecosystem, have lots of flexibility in terms of what they do and when, and they’re using their own money. I believe a great number of angels invest for fun and to help fellow (and typically younger) entrepreneurs. They’re giving back to the community. And as long as they can individually afford to do so, that’s fantastic. When things are booming, like they are now, they participate a great deal. When things are crashing, they’re able to pull back and adjust their risk. Accelerators that are committed to running for a few years don’t necessarily have that flexibility.

Accelerators raise capital from others and therefore have an obligation (just like venture funds) to demonstrate returns. If they can’t demonstrate returns, will backers continue to support them? The one exception might be an accelerator funded by a venture fund, because it’s using its own capital to create a “division” that’s focused on super early stage acceleration. In that case the motivation may not be money, it may be deal flow for the venture component of the business. That has risks as well though, because the venture fund won’t invest in every company inside its accelerator, and the negative signalling can be tricky.

Accelerators definitely have other benefits beyond making money. One of the biggest ones is helping to build the startup ecosystem (wherever the accelerator is located). There are definitely benefits to having accelerators in individual cities encouraging and driving entrepreneurship, and helping startups get onto more solid ground than they would have otherwise. Accelerators have positive effects beyond just the startups they fund; being promoters of a city/area, running events, building a brand that attracts attention from outside investors, etc. But what’s the likelihood of this being sustainable and growing (it takes more than a few years to build an ecosystem!) if an accelerator doesn’t make money? How long can it stay funded?

The best way to build a startup ecosystem: Make money. Incidentally, I believe this is true for accelerators and for individual entrepreneurs and startups.

A focus on anything but making money is a disservice to everyone involved.

How long will the people running the accelerator stick around if they’re not seeing a return? Altruism for the community isn’t enough to sustain most people.

How long will entrepreneurs keep participating in accelerators that don’t impact their odds of making money? If the startups that emerge from accelerators aren’t successful, people will question the value of the accelerator itself. And if the accelerators can’t attract the best entrepreneurs, they’re not going to succeed.

I absolutely believe in accelerators as a key part of a startup ecosystem, particularly in cities where there isn’t a density of activity. Accelerators help spur that activity, they create deal flow (for other investors), encourage entrepreneurship, etc. But if they can’t make money, they won’t survive.

Many accelerators use “capital raised by graduating startups” as a metric of success – and it’s definitely great to see companies leave accelerators and be in a position to raise capital – but it’s not the ultimate measure of success. Most companies raise money and fail. In the absence of exits (with successful entrepreneurs then re-invigorating the community through help, funding, etc.) a startup ecosystem can’t grow on top of itself. Accelerators are great for building the startup ecosystem, but I don’t believe they will survive and achieve that goal without being successful financially.

July 29, 2011 Posted in Startup Accelerators by

  • http://MainStStark.com Jeff ‘SKI’ Kinsey

    >> A focus on anything but making money is a disservice to everyone involved.<<Well said.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    Thanks Jeff. :)

  • http://www.techentrepreneurship.com Helge Seetzen

    Couldn’t agree more and would in fact expand a bit: The sole purpose of a *any* business should be making money. That’s why it’s called “for profit”.

    An Accelerator that puts “fluff” over dollars not only does a disservice to its stakeholders, it will likely influence its portfolio companies in the same direction and thus screw them up as well.

  • http://blog.homestars.com bsharwood

    Totally agree. There are, however, some accelerators and incubators who are looking to make money from government assistance. I think accelerators, incubators, angel networks goal should be to make money from building and growing the entrepreneurs they help.

  • http://www.facebook.com/profile.php?id=72600771 Kenneth Seville

    Is this a response to something?

  • http://www.instigatorblog.com Benjamin Yoskovitz

    Everything I write is a response to something – an experience, feedback from people, my own crazy thoughts …

  • http://www.cheapsheds.com.au/ Adam Borzy

    I don’t actually get what you are pointing about this blog. Wondering!! - Garden Sheds

  • http://profiles.google.com/bryanadams Bryan Adams

    Not sure I agree.  I’m in an accelerator right now, and I’d nitpick a few points …

    (1) “How long will the people running the accelerator stick around if they’re not seeing a return?”

    I can only speak about the 3-4 accelerator directors that I’ve met with, but they’re generally not in it solely for the money.  They’re actually more like startup founders themselves: they want to make money, but they’re on a larger mission (helping entrepreneurs, building a geographic community, working at a job they love).  It’s not altruism, exactly, but it is something south of a pure ROI play.  Now, obviously they can’t burn huge piles of cash indefinitely with no hope of return, but I would answer the above question by saying “quite a while.”

    (2) “In that case [venture-backed accelerators] the motivation may not be money, it may be deal flow for the venture component of the business. That has risks as well though, because the venture fund won’t invest in every company inside its accelerator, and the negative signalling can be tricky.”

    Again, I don’t claim global knowledge here, but the folks involved in the VC-backed accelerators / incubators that I’m familiar with understand the signalling problem.  I asked this straight out of one incubator director (who worked at a late-stage VC) and he said, simply, that they viewed the funding for the incubator as a way of supporting entrepreneurs in the hopes of building long-term relationships (i.e., direct quote: “We may not fund the startup you do while you’re here, but if we get to know you, maybe we fund your second or third startup.”)

    I do think you have a point that there are a *lot* of new accelerators, and if some of them aren’t profitable *and* aren’t contributing to the second- and third-order goals, then there could be some accelerator contraction in the future.  I just don’t think that considering accelerators as an asset class does the organizations justice.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    Bryan – thanks for the comment.

    (1) I think very few people start an accelerator as a pure ROI play – the economics just aren’t good enough. And I don’t know what “quite awhile” means, but if it’s less than ~10 years of sustained activity focused on building the ecosystem, helping the community, etc. it’s not going to have the impact they want without generating results (i.e. returns).

    In my case with Year One Labs, I’m very pleased by the results in terms of non-monetary benefits: We’ve helped encourage the community, convinced people to move to Montreal to get their startups going, run events in a co-working space, etc. Those are all GREAT things – but not sustainable long-term without generating results.

    (2) I don’t disagree that VC-backed accelerators can help build long-term relationships with entrepreneurs. And it’s great to say, “We may not back this startup, but we might back a future one…” but what about the current one that the founders are working on that the VCs don’t back? That’s the one most entrepreneurs will care about, not a future one. I don’t make a huge deal out of this, because I think everyone is cognizant of signalling issues and is dealing with those issues. The reason I pointed it out was to make the point that a VC-backed accelerator may not be in place to earn monetary returns; it’s goal may be primarily (at least) to create deal flow.

    (3) Accelerators provide lots of benefits beyond returning money, no question about it. But why wouldn’t we consider it an asset class? People’s appetite for “community building” will dissipate considerably if they put money year after year into something that (a) doesn’t drive returns, and (b) doesn’t drive sustained community building.

    My biggest argument is that WITHOUT returns there’s NO community building. There is temporarily, when everyone is in the honeymoon period, but after that it’s about results, not soft stuff that disappears when the accelerator(s) disappear.

  • Supporter

    No question, accelerators have no choice but to make generating profits their over-riding objective. But it can’t be easy running an accelerator, especially these days…. seems to me that at least four things are required to generate cash, let alone profit:
    1. deal flow.
    2. a material stake (including follow-on rights) in funded companies so that the accelerator’s position isn’t diluted out of existence during subsequent funding rounds
    3. timing of exits of funded companies… accelerators can’t afford to wait too long for returns on their portfolio. Cash is king, for funders and funded.
    4. repeatability. Knock off steps 1,2&3 continuously, which increases the chances of producing a return above and beyond less risky alternatives for the accelerator’s stakeholders. (And, presumably, to pay some amount of income to those who run the accelerator, before returns on equity materialize.)

    I salute the gang at Y1L and really want them to succeed. But in a market featuring an abundance of accelerators, getting decent deal flow (let alone steps 2-4) must be highly challenging. 

    All I can say is hang in there, and bonne chance!

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  • http://about.me/bradleyjoyce bradleyjoyce

    Do you have any actual data to support your arguments? I would be really interested to hear about an accelerator that failed because they took a different approach.

    Here in Dallas we have http://www.techwildcatters.com. As I understand it, early on in their formation there were some discussions about making it a non-profit and a collaboration with the city of Dallas.

    Ultimately, they chose a for-profit model and there has been little to no involvement from the City.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    The government assistance won’t last if it doesn’t create results. That’s what I’d be concerned with in any attempt to build a sustainable ecosystem.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    Bradley – The accelerator model as it stands right now hasn’t been around long enough to do any real postmortems as far as I know.

    In the late 90s/early 2000s we had incubators that exploded because their value was primarily on administration: office space, bookkeeping, ancillary services. They didn’t provide the type of mentorship that entrepreneurs really need. That’s been fixed (to a large degree) now, which is great. But if I was looking into the future, I’d predict a shrinking of the accelerator market as a result of them not being financial sustainable or scalable.

  • http://twitter.com/syedmuddassar Muddassar shah

    If you are running an accelerator or start to think about it, and your main goal is not to make money, be very careful. Money drives everything.  easy going room mate

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  • http://www.facebook.com/susan.m.kuhn Susan M. Kuhn

    Agree 100%.  1000%

  • http://www.facebook.com/susan.m.kuhn Susan M. Kuhn

    You are 1000% correct.  I ran programming for a SBA funded, highly regarded education/incubator nonprofit that went out of business when our 5-year grant ended.  Making money never overtook the grant-seeking mentality.  Even though we created substantial entrepreneurial revenue, we didn’t manage the place for total self-reliance.  We believed the grant would keep coming because we were so deserving.  

    Also — note that the USAID funds BDS (business development services) in developing countries.  Its model is to create a local ecosystem in which entrepreneurs pay for services.  That comes after many years of failure of ecosystem growth when the funding remains external. 

  • http://www.facebook.com/susan.m.kuhn Susan M. Kuhn

    One more thought:  If we had leveraged the power of online learning and mentoring…we may well have thrived instead of folded.  I see so many people succeeding in this model, and creating that elusive ecosystem of mentoring and ongoing learning.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    Susan – Thank you for commenting. As someone on the front-lines of “government sponsored economic development” it’s great to hear about the challenges and that the results are inline with my expectations. Well … not “great” because things failed, but …

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  • David Cohen

    Accelerators are no different than any VC activity. Eventually, if you don’t make money you’re going to fail. This is mitigated early on by star power and hype. TechStars has already showed positive returns for the first few funds on a cash basis for our investors, with much remaining upside. And indications are its just getting better. But still, it’s not *why* we do it. The second order effects matter much more.

  • http://www.instigatorblog.com Benjamin Yoskovitz

    David – Thanks for stopping by and commenting. I’m glad to hear TechStars is showing positive returns on the first few funds, and generally people remain and are growing more enthusiastic about the opportunities and the model.

    And I agree that making money isn’t genuinely the sole reason for starting an accelerator (there have to be better ways to invest money!) but as you point out: If you don’t make money, you fail. I think that’s a big point that a lot of people are genuinely missing as they try to figure out their model, whether to do an accelerator or not, etc. They’re caught in the hype of accelerators, without really addressing the core issues around whether it’s sustainable or not as a good investment. Without that fundamental piece – your ability to help entrepreneurs, give back, etc. – is cut off at the knees.

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Ben Yoskovitz
I'm VP Product at GoInstant (acq. by Salesforce).

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it).

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