Why 2017 Will Be Hard For Accelerator-Backed Startups

High profile top-tier accelerators like Y Combinator and Techstars have certainly popularized “the accelerator route” as a springboard for company inception. But the massive proliferation of accelerator programs has played no smaller role in driving this trend: new acceleration programs – whether generic ones, corporate sponsored or vertical focused – have popped up by the dozens in every ecosystem. Thousands of companies are now graduating every year.

A quick mapping of accelerators since 2005 reveals that almost every big city in the USA now has at least several accelerators:

Startup accelerators in the US since 2005

Boom, Then Bust

Despite this apparent 11-year startup accelerator boom, 2016 has seen more than a few accelerators shut down: Techstars San Antonio, co.lab, Surge are just three examples.

Additionally, it now seems like the number of funded accelerator-backed companies is contracting. Fundraising data shows a sharp decline in the number of accelerator-backed startups that have received funding in 2016: a 29% drop compared to 2015, 19% compared to 2014. This follows the first decline in funding round growth rate for accelerator-backed companies in 2015.

The go-to reason for explaining this drop has to do with the dataset: it takes time for industry data aggregators (such as Pitchbook or Mattermark) to collect and process data after financing rounds have been completed and filed, so datasets don’t yet include all the funding data for the year.

But the decline is just too sharp to be explained by this factor alone.

Why Accelerators Have Been Decelerating

Now that the startup accelerator ecosystem has matured, several trends are emerging that impact companies that graduate from such programs:

  1. Many of the accelerators that have popped up over recent years are corporate accelerators. While some of these accelerators provide some value to some companies, they’re driven mainly by the interests of sponsoring corporate entity, which revolve around sourcing innovation and technology scouting. That means that the companies they pick aren’t necessarily (and in many cases aren’t) VC-fundable. I wrote a post on why this is sometimes the case with bank-sponsored fintech accelerators.
  2. Like many other elements in the startup ecosystem, such as VC returns or startup outcomes, the value of startup accelerators is power law distributed. This is due to brand recognition that comes with first mover advantage for some of the best accelerators, and the network effects inherent in the community around these accelerators (investors, advisors, talent, etc.) Just take a look at the following chart. It shows how much money was raised in total by companies of each accelerator:
  3. As these trends become pronounced, attendance of many “long tail accelerators” is becoming a negative signal for investors. They view the decision to join such accelerators as either a bad business decision (selling equity for little value in return) and/or as a sign of past fundraising difficulty that led to joining the accelerator as a fallback.
  4. The areas where many of these accelerators are started don’t have an established early-stage investment community, at least not yet. After several cohorts, it’s clear that this creates fundraising friction for companies, leading to the accelerator’s business model to become unsustainable.

These trends might be a cause for concern. But accelerators aren’t going away any time soon. Enough of them still provide – and will continue providing – enough value for enough companies. Still, these trends suggest that we’ll be seeing more accelerators shutting down or pivoting to different business models in 2017.

(Thanks to my partner Jonathan Friedman of VCPOV for the feedback!)

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