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.