Startup Accelerator Fail: Most Graduates Go Nowhere | Hacker News Reader

Startup Accelerator Fail: Most Graduates Go Nowhere

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161 pointstltjr58 comments

Exits are a stupid test for what they're trying to measure here. By that standard, Airbnb and Dropbox are failures.

Exits are a reasonable test for investments made, say, 10 years ago. But none of the incubators are that old yet. So the right way to judge them is by the valuations of the startups they've funded. Unless the venture business as a whole loses money, that will be a lower bound on the eventual exit numbers.

Then you don't need to measure fuzzy stuff like "VC perceptions" either. Each incubator has a single score: average valuation. The last time we calculated ours (for the Forbes incubator rankings: http://www.forbes.com/sites/tomiogeron/2012/04/30/top-tech-i...) it was $45.2m.

You could still screw up e.g. in the case where a company hasn't raised money for a long time and whose last post-money valuation is 1/10 of what they could raise at now. But you won't screw up as badly as if you just measure acquisitions.

How about median valuation?

The trouble with median valuation is that even for the most successful incubators it will approach zero, because I doubt any of us are going to have a success rate over 50%.

One thing that is interesting about looking at both mean and median is getting a feel for the shape/variance of the returns.

One huge winner could randomly happen in an otherwise low-quality program and that incubator would appear higher on rankings forever after that unjustly since the result is very much not reproducible. In other words measuring by average could mask getting lucky.

"One huge winner could randomly happen ..."

One would think that. The article states that 45% of programs have not had any graduate that raised venture funding. That boggles my mind. But this data helps explain the uneasy feeling I get when I see niche accelerators following a cargo cult mentality.

Hmm. But isn't that getting at the point they're making here?

You'd hope not, because that would be a silly point to make. No reasonable observer expects the majority of any portfolio of startups to succeed.

But VC investing is a hit-driven business. One big hit, like a Dropbox, funds all the rest. Unless you're really good at picking horses, you'll have the same median as everyone else.

That's why I liked dan shipper's (rather timely) blog post the other day about choosing to build a sustainable business instead of swinging for a homerun, and striking out.

If you're an entrepreneur, this is indeed the way you want to be thinking. But these are investors discussing outcomes for different startup creation vehicles. If you're an investor, you need to focus on the skinny tail of the outcome distribution, if only because it's where the liquidity is.

While I applaud his motivation, what he's suggesting is an intrinsically unsound way to go about it. A startup = a chemical reaction with extremely high activation energy. In such circumstances, the best thing you can do is get one or more catalysts. YC or any other VC/incubator is just a catalyst to lower your activation energy & let the chemical reaction happen sooner/faster. Without the catalyst, the reaction will most likely not happen, period. Whether you get a catalyst or not, you most definitely don't want inhibitors in your reaction. "Holed up in Philly for $650 a month working 14-hours a day" - that's a bigtime inhibitor right there. Why not spend $6500 in sv and work 8 hours a day - its a lot more sustainable, that $6500 comes out of some vc's pocket in exchange for equity, nobody's burnt out and everybody's happy. Let the capital markets work in your favor. Don't handicap yourself.

Why not spend $6500 in sv and work 8 hours a day

Because your VCs will go crazy if they found out you were only working 8 hours a day. I've interviewed with both TechStars and YC startups - and they've told me that 55-60 hour work weeks are the norm. Damned if you do, damned if you don't.

But success for purposes of a median is a low bar. It's half your companies having any valuation at all.

The whole point is that a very great fund will still have 60%+ with valuation of 0, and that's completely ok.

Median is arbitrary. Why not 90th percentiles? Profit pays the bills.

What about comparing the 85-95 percentile companies? Is there any point to comparing the companies that have modest success?

Isn't measuring by average valuation a little dissonant with how the valuations play out? If startup valuations follow a power law, and most of the money is made from a few successful exits, wouldn't it make more sense to judge incubators by say, their top 10%, while also showing the total number of startups for comparison?

If you're measuring them as investors, you want the average, because if (as all these incubators do) they invest roughly the same amount in every startup, then average is money out divided by money in.

Even saying it is about the average valuation doesn't take into account the age of the accelerator. This is the real problem I see.

What is the average valuation of each class after the same time period? For example, the first class of YC vs. TS vs. SC vs. etc. after 1, 3 and 5 years?

This would show us the speed of growth of each accelerator compared to other accelerators when they were the same age. Even if YC has a higher average valuation now there might be an accelerator out there that has better valuation growth, but it is hidden because we are comparing baby apples to apples almost ready to harvest (sneaky apples to apples reference).

So yes average, but average comparing apples to apples.

Oooo... time for an apple :)

Yeah, actually, come to think of it the right metric might be valuation divided by age in years.

What about the founders? They don't have the liberty of hedging their bets, so for them it can be a raw deal.

Here is the slideshare on the project.

http://www.slideshare.net/dgiluz/accellerators-in-us-and-eur...

No mention of the 10 VC's that I can find.

If the startup is profitable and self sustain itself, does it count as success or failure?

To the algorithm they use in this study, it counts as a failure unless the company is public, which is my point here.

To investors, whether an investment is a success or a failure is indeterminate till the company either goes out of business or returns the capital invested.

when the company is profitable and has valuation, the investors can sell their shares. If the investor makes a profit by selling their shares, will it count still count as failure? It is possible that the investor can lose money, even if the company goes public, right?

I don't understand what you're asking. Can you try again?

Lets say an investor puts 3M for 30% of the company. 1-2 years later, X is profitable and valued at 30M. Now, if the investor sells their 30%, they will make 9M. That is 6M in profits.

Is this considered as success? It is not an IPO or big acquisition. But, the investor can make money by selling their shares.

Is this something the investors consider doing?

In practice it is very difficult to sell shares of a private company.

"self sustain" is a complicated concept

It can mean "ramen profitable" or something slightly better (like it can pay the rent and the founders a small salary)

Either way, not good. You don't need a home run, but you need something that can "fly for itself""

Getting there is tough, most startups are like making a rock fly

Assuming it's actually making good money not just breaking even, its true valuation will be high (though it can't be measured using the 'latest round' method)

I think their metrics of success are silly (zero discussion of revenue, only caring about VC perception, etc.), but the other conclusions don't surprise me.

What I've noticed from copy-cat incubators and accelerators is that they incorrectly observe what YC is and apply something very different. Many of these programs are more like a class, with structured lessons and methods to success. Attendance might as well be required. YC is more like college: you get out of it what you put in to it. "office hours" are named that way for a reason.

Independence is a strong part of being an entrepreneur. Of course inexperienced entrepreneurs need help, but having no experience at all is an indicator of probable failure. I can only imagine this is amplified when the mentors and investors lack real startup experience.

It also needs to be said that the fallout from failed incubators in smaller cities can be negative. I've heard stories of damaged relationships, investors picking "favorites" and turning groups against each other. Unfortunate stuff.

> ...incorrectly observe what YC is and apply something very different.

Heh.

I once captured an employer's engineering methodology (from memory) thusly:

- misunderstand the problem

- exclude domain experts and stakeholders from decision making

- make decisions

- don't tell anyone

- (post mortem) identify nonparticipants to scape goat

- repeat

Is it me or was this guy writing to support his investments? He said only three incubators are worth joining: two that he has a vested interest in, and, and, and that other famous one.

Yea smells fishy. I've never even heard of that third one excelerate. Sounds like he's casually trying to bring his two investment accelerators on par with YC by mentioning them in the same sentence, but without any direct comparisons.

Not really a secret[1]:

Peter Thiel: Do Y-Combinator companies follow a power law distribution?

Paul Graham: Yes. They’re very power law

[1] http://blakemasters.tumblr.com/post/21869934240/peter-thiels...

Perhaps a corollary could be that incubators also follow a power law distribution?

Not sure if others share the same view, but I view many startup accelerators as startups themselves -- heck, nearly the entire industry is a startup. We should assume that startup accelerators themselves can fail.

The Y-Combinators and TechStars are the Tier-1 players in this space, but that's only getting their members to reach funding -- certainly nothing about exits.

Evaluating accelerators should be akin to evaluating venture capital firms -- return on investment. Last I checked, I think VC firms were down over the past ten years, yet I don't see anyone calling them failures.

"I view many startup accelerators as startups themselves"

That is why they started the http://incubatorincubator.com/ Incubate your incubator...

Idea: Form an accelerator for accelerators. SeedJerk.com is available.

Report author:

"It takes years for companies to get traction and get an exit."

"There were not enough exits to evaluate"

Yet RWW concludes "startup accelerator fail" and "a lot of accelerators are just spinning their wheels."

Here's another hypothesis: The lack of exits reflects the fact that most accelerators are themselves only a few years old, and it takes a longer period of time to build a successful venture and achieve an exit.

And the author was somehow able to conclude that YC and the two accelerators his firm invests in are all at the top.

Isn't that kind of the idea? It's a high-risk investment and most startups aren't going to go anywhere.

Sure, but if _none_ of these second tier accelerators are producing _any_ successes, let alone any A rounds, it makes sense to question whether there's really any reward in participating in one at all.

Agree with maxko. Basically he outlines the 3 major benefits of joining an accelerator program. He then questions whether many of the accelerators can deliver all or any of those 3 stated benefits with a relatively depressing outcome.

The quality of these incubators is going down but it is still not so low that I can be accepted (I'm half joking).

Anyway, the key for successful incubator is that they have strong team - with experience, knowledge, and connections.

What I noticed that majority of these second-tier incubators have only connections (ex-Googler, ex-Facebook, ex-bubble-company) but they do lack other two.

Most VC's perform miserably, financially speaking, with the profits piling up at the very top firms. Why, then, would it be surprising to see that most accelerators fail to produce notable results? It's basically the same business, and the same things contribute to success.

I have such a hard time with these studies that view everything through the lens of venture capital. What a horrible metric for sustainable business creation.

How many accelerator companies are breakeven, steadily growing businesses? Isn't there something to be said for stable ground? Cash positive, lateral expansion into markets and positions leveraged on traditional debt sources?

The richest guys I know started out 30 years ago and built on strong fundamentals, not on "demo day funding requests" and "exits".

Too many young entrepreneurs are clouding their judgement by aligning their decisions with those of VCs and articles like this.

Given the exponential returns possible from just one big exit, the bar for success is not that most companies do well but just a couple. It would seem odd then that the accelerator would invest in the others, but since there is relatively little information available at the time of funding, it becomes a numbers game. Given that the instincts of the accelerator are good, there is no reason not to invest in as many companies as possible to catch a few stars in the net. To the outside world however, it looks like a bunch of failures.

This is a tough one, some of the second string accelerators could be failing because of the applications they are getting.

It becomes and chicken and egg problem, to get good mentors and attract investors they need to get good founders involved. To attract the good founders to an extent you are going to need good mentors and access to a strong investor network that the founders benefit from accessing in conjunction with the accelerator. Or alternatively a far better equity deal.

Interesting to see a number around the rate of accelerator graduates that go on to raise venture funding (45%) but what would be more interesting is to compare this number to number of new companies overall that go on to raise venture capital.

I would imagine this number to be substantially lower than 45%, which would seem to turn 45% into an argument for accelerators and not against them.

There's only two great accelerators- YC and Techstars. The falloff after that is ENORMOUS, even just going to #3, #4, and #5.

If you go out of the top 5 accelerators, you're dealing with everyone who wasn't good enough to get into a respected accelerator. Doing an accelerator that isn't in the top 5 is a mark of incompetence- it filter for the desperate who couldn't

a) Get into YC/TechStars

b) Build the business on their own

using the exits as one criteria to judge the overall startup accelerator program and labeling it as a failing attempt is premature.

Even in the article Gilani says "takes years for companies to get traction and get an exit".

I think the success of these programs will depend on who the accelerator program is, type, region and other factors, but for sure it is too early to draw conclusions.

Something about "throwing spaghetti against the wall" where its not ideas but instead engineers.

I mean its not the accelerator doing the hard work.

RWW has just posted a stark counterpoint to this article from another guest contributor. http://www.readwriteweb.com/start/2012/06/is-there-a-better-...

Are incubators the new investment banks? How will this play out when crowdfunding becomes legal?

a seasoned pro once told me that the natural fate of startups was failure -- the idea being is that if you can fail quickly you can go on to the next thing and apply your wisdom. and not for nothing the guy who said this was paul graham...

If they get there faster then the acceleration is a success.

Most companies go nowhere.

How is this surprising?

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