MASSACHUSETTS INSTITUTE
OF TECHNOLOLGY
Start-up Development in Latin America:
The Role of Venture Accelerators
JUN 24 2015
by
LIBRARIES
Julian Andres Herman Rodriguez
M.B.A., Tuck School of Business, Dartmouth College (2006)
B.B.A, Ingeniero Comercial, Universidad de Chile (2000)
SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN MANAGEMENT OF TECHNOLOGY
at the
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
June 2015
2015 Juliin A. Herman. All rights reserved.
The author hereby grants to MIT permission to
copies of this thesis document in whole or in
produce and distribute publicly paper and electronic
in any medi im now known or hereafter created.
PI
r
Signature redacted
Signature of Author:
Juliin A. Herman
MIT Sloan School of Management
Signature redacted
Certified by:
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MA 8 201s
Deborah Lucas
Sloan Distinguished Professor of Finance
Thesis Supervisor
Signatu re redacted
Accepted by:
Stephen Sacca
Director, MIffoan Fellows Program in Innovation and Global Leadership
MIT Sloan School of Management
2
Start-up Development in Latin America:
The Role of Venture Accelerators
by
Julian Andres Herman Rodriguez
Submitted to MIT Sloan School of Management
on May 8, 2015 in Partial Fulfillment of the Requirements for the
Degree of Master of Science in Management of Technology.
ABSTRACT
Venture accelerators are entrepreneurial development instruments that help startups grow in their earliest stages. Accelerators have proliferated in the United States and
other developed countries despite the debate regarding their real value to entrepreneurs
and ecosystems.
New entrepreneurial development instruments are key to Latin America's
economic growth. Accelerators have gained traction in the region, and more Latin
American countries are implementing them to boost the success of local entrepreneurs.
Through a series of interviews with scholars, accelerator executives, venture
capital investors, and entrepreneurs, I explore the key strategies and characteristics of
successful accelerators and propose a set of design drivers to better adapt the model to
Latin American realities.
Thesis Supervisor: Deborah Lucas
Title: Sloan Distinguished Professor of Finance
3
ACKNOWLEDGEMENTS
To my thesis advisor, Professor Deborah Lucas:
Thank you for your constant encouragement, patience, and guidance throughout
the design and writing of this thesis. Your deep insights, sound reasoning, humor, and
great heart made writing this thesis a truly remarkable learning (and life) experience.
To my Sloan Fellows cohort:
Thanks for making this a year I will cherish for the rest of my life. Special thanks
to my partners in this wild ride that is writing a thesis: Thomas, Kan, and Isaac.
To Professor Fiona Murray and Dr. Phil Budden:
Thank you for inspiring me and teaching me that developing our region is not
only within our reach and but also within our responsibility.
To Alicia de Santola, Daniel Fehder, and Michael Leatherbee:
Thank you for your generosity and for letting me build upon your knowledge.
To Stephen Sacca, Mary Marshall, Marc O'Mansky, Lisa Monaco, and Cherie Potts:
Thank you for your patience and guidance in this thesis writing and this year in
general.
To all my interviewees:
Thank you for sharing your perspectives and contacts with me. I hope I have done
justice to your exceptional work and knowledge.
To my parents, especially to my mother:
Thank you for your efforts and for teaching me the value of hard work and quality
education. You truly are an inspiration and a role model.
To my sister, Maria Laura:
Thanks for all of your support and for being always there for me.
To my sons, Juliin Thomas and Bastian Marcel:
Thank you for reminding me every day what is the real purpose of my life.
To my wonderful wife, Alienor:
Thanks for your love, support, and patience. Thank you for continuing to walk
with me in yet another adventure, for your immense efforts during this year, and for
being my life companion. Looking forward to the rest of our life together.
Julian Andres Herman Rodriguez
Cambridge, MA, USA
May 12, 2015
4
TABLE OF CONTENTS
Page
INTRODUCTION ........................................................................................................
CHAPTER 1
DEFINING START-UPS AND INNOVATION-DRIVEN
ENTREPRENEURIAL ECOSYSTEMS......................................
8
10
CHAPTER 2
START-UP DEVELOPMENT INSTRUMENTS.............14
. 14
G ran ts .................................................................................................
14
Contests and Prizes ............................................................................
15
Hackathons.........................................................................................
15
Crowd Funding .................................................................................
15
Co-W orking Spaces ..........................................................................
Incubators...........................................................................................
15
University Technology Transfer Offices ...........................................
16
Foundries.............................................................................................16
16
Accelerators ........................................................................................
CHAPTER 3
LITERATURE REVIEW AND METHODOLOGY..........17
CHAPTER 4 ACCELERATORS ..............................................................................
A Brief History of Accelerators........................................................................
4.1
4.2
Key Stages in Accelerator Operations ...............................................................
4.2.1
Stage 1: Selection...............................................................................
4.2.2
Stage 2: Acceleration ........................................................................
Stage 3: Demo Day .............................................................................
4.2.3
Stage 4: Follow-on.............................................................................
4.2.4
4.3
Accelerators vs. Incubators...............................................................................
4.4
Accelerator Strategies ........................................................................................
M ission................................................................................................31
4.4.1
Case Study #1: MIT's Global Founders Skill Accelerator ........
Case Study #2: Harvard's iLab..................................................
Case Study #3: Y-Combinator ..................................................
Focus.................................................................................................
4.4.2
Case Study #4: SURGE Ventures.............................................
4.4.3
Geographic Scope ...............................................................................
Case Study #5: M assChallenge................................................
....................................................................................................
4.5
Rankings
4.6
Accelerator Value ...............................................................................................
Founders.............................................................................................
4.6.1
4.6.2
Ecosystem ..........................................................................................
Financial Sponsors.............................................................................
4.6.3
4.7
Key Criticisms of Accelerators..........................................................................
21
21
23
23
25
28
29
30
31
33
34
36
38
38
40
41
44
45
45
46
46
47
5
48
CHAPTER 5 ACCELERATORS IN LATIN AMERICA .................................
48
5.1
H istory and Environm ent...................................................................................
. 50
5.2
Key P layers .......................................................................................................
50
Case Study #6: Start-Up Chile.................................................
51
Case Study #7: Wayra...............................................................
52
Case Study #8: NXTP Labs ......................................................
54
Case Study #9: 21212 ..............................................................
Factors Influencing the Development of Accelerators in Latin America..........56
5.3
Limited Number of Latin American World-Class Universities.........58
5.3.1
Latin America has Fewer Entrepreneurial "Success Stories"............58
5.3.2
60
Case Study #10: Argentina ........................................................
Innovation in Latin America is Still in the Early Stages .................. 62
5.3.3
Venture Capital Companies and Strategic Exits are Limited ........... 63
5.3.4
66
Slow Development of Local Markets Affects Local Start-ups ......
5.3.5
67
Growing Pains Among Local Accelerators ......................................
5.3.6
DESIGNING A NEW BUSINESS MODEL FOR LATIN
AMERICAN FOR-PROFIT ACCELERATORS.........................69
Design Principle #1: Differentiate by defining and focusing on a clear
corporate and investment strategy - Avoid "Spray and Pray" .................... 69
Design Principle #2: Define an innovative value proposition to attract
. 71
the best m entors ...............................................................................................
Design Principle #3: Streamline term deals......................................................72
Design Principle #4: International partnerships..................................................73
Design Principle #5: Work with local governments to encourage investments
73
in innovation-driven enterprises .......................................................................
CHAPTER 6
6.1
6.2
6.3
6.4
6.5
CHAPTER 7
CONCLUSION .................................................................................
75
Appendix A .
Interview s...........................................................................................
79
References
............................................................................................................
. 80
6
LIST OF TABLES
Page
Table 4-1
Accelerators vs. Incubators...................................................................
30
Table 4-2
N FPA Players........................................................................................
33
Table 4-3
Key characteristics of MIT GFSA ........................................................
33
Table 4-4
Key characteristics of Harvard iLab ......................................................
35
Table 4-5
Key characteristics of Y-Combinator ...................................................
37
Table 4-6
Key characteristics of SURGE...............................................................39
Table 4-7
Key characteristics of MassChallenge .................................................
42
Table 4-8
MassChallenge Alumni Companies: Key indicators .............................
42
Table 4-9
2015 Accelerator rankings ......................................................................
44
Table 5-1
Key characteristics of SUP Chile...........................................................51
Table 5-2
Key characteristics of Wayra.................................................................52
Table 5-3
Key characteristics of NXTP Labs ........................................................
53
Table 5-4
Key characteristics of 21212.................................................................
54
Table 5-5
Research quality and university industrial collaboration.......................63
Table 5-6
Availability of venture capital ..............................................................
64
7
LIST OF FIGURES
Page
Figure 1-1
REAP IDE Ecosystem framework........................................................12
Figure 1-2
REAP IDE Ecosystem framework, with stakeholders...........................13
Figure 4-1
The four stages of accelerators ............................................................
23
Figure 4-2
MassChallenge market selection criteria ...............................................
43
Figure 5-1
Number of accelerators by country......................................................
49
Figure 5-2
Values of Latin American accelerators..................................................49
Figure 5-3
Competitive strategies for Latin American accelerators........................55
Figure 5-4
Number of universities in Top 500 in countries with accelerators ........ 57
Figure 5-5
Growth cycle of successful entrepreneurship ecosystems.....................60
Figure 5-6
Multiplier effect of local entrepreneurs in Argentina ............................
61
Figure 5-7
Number of patents per inhabitant...........................................................
62
Figure 5-8
Annual Latin American venture capital funding, investments, and exits..64
Figure 5-9
Deterrents cited by LPs considering investments in LACs ..................
Figure 6-1
Potential applications in the Latin America market...............................70
65
8
Introduction
"The Mentor-Driven accelerator... is part of the fabric that ties entrepreneurs, mentors and
investors together in a start-up community."
-Brad Feld, Founder, Techstars
"[Accelerators]are incinerators--forcash andfor peoples' careers."
-John Doerr, Partner, Kleiner Perkins
"El Emprendimiento en Latinoam rica: Muchas Empresas, y Poca Innovaci6n"
-The World Bank
One of greatest challenges facing Latin America is its lack of innovation. The
latest competitiveness reports show that the region lags behind the rest of the world in
innovation, with Costa Rica the highest-ranked country in the "innovation" pillar at
3 4 th
overall (World Economic Forum, 2015).
Innovation is one of the key drivers of productivity and economic growth (Romer,
1990; Acemoglu, 2008; Yu, 2014)-and a lack of innovation helps explain why the
region lags behind in development and competitiveness. How can we encourage
innovation in the region and jumpstart development? I believe start-ups are a key part of
the answer. They help boost innovation in an economy and nourish productivity (OECD,
2013). The most advanced countries demonstrate a strong correlation between a solid
base of innovative entrepreneurs, greater leverage of their scientific and technological
bases, and productivity growth (OECD, 2005).
9
Along the same lines, starting a new, innovative company is never easy. It is wellknown that the vast majority of start-ups fail within the first years of operation.' No
similar statistics are available for developing countries, however, given that start-ups face
additional challenges such as lower institutional development, corruption, and lack of
entrepreneurial skills, we can assume that failure will likely be more pervasive in
countries as well.
Over the years, a number of devices have been developed to help start-ups deal
with these challenges. Among them, a new phenomenon has emerged in the past ten
years: accelerators. These are organizations defined as "fixed-term, cohort-based
programs, including mentorship and educational components, that culminate in a public
pitch event or demo-day" (Cohen and Hochberg, 2014: 4). There is only limited
understanding as to the value of such accelerator companies, yet there continues to be
steady growth in the accelerator phenomenon. Key questions are beginning to emerge:
What drives this accelerator growth? Is there evidence that accelerators are adding value
to their "clients"? Are accelerators the right instrument for helping Latin American
companies to grow? What are the key considerations when designing a local adaptation?
For this thesis, I conducted research into the background and growth of the
accelerator phenomenon. Then I looked specifically at the Latin American market for
clues as to the feasibility and adequacy of using accelerator models in that region. That
enabled me to present key considerations for developing a successful accelerator model
for the Latin American markets.
1A
recent study by the Start-up Genome Report indicates that within three years, 92% of start-ups
failed. Of those that failed, 74% were due to premature scaling. See: <https://s3.amazonaws.com/Startupcompass-public/Start-upGenomeReportlWhyStart-ups_Succeedv2.pdf >.
10
Chapter 1
Defining Start-ups and
Innovation-Driven Entrepreneurial Ecosystems
There is no single definition of a start-up. Some consider every newly created
company as a start-up-even the most mundane "mom and pop" ventures-while others
consider only those companies that display technological or innovative characteristics.
According to the OECD, start-up businesses can be identified using two criteria:
-
Start-ups focus on performance, using terms such as "high-impact," "highgrowth," and "gazelles." The OECD defines high-growth enterprises as those with
average annualized growth greater than 20% in terms of growth in the number of
employees or growth in sales volume over a three-year period, with ten or more
employees at the beginning of the observation period. "Gazelles" are the youngest
of these enterprises, typically in existence for less than five years (OECD 2013).
-
In a few cases, start-ups are defined based on their innovation content regardless
of their market performance, e.g., start-ups that see a business opportunity in an
industrial application of scientific, technical, or process-related advances. Such
start-ups provide solutions to emerging problems, create new demand, and
develop new business models (OECD, 2013).
Even in Latin America there are different definitions of start-ups. The OECD
points out: "Argentina and Brazil focus on technological start-ups, and Chile concentrates
11
on promoting high-impact enterprises, while Colombia and Peru are designing
instruments targeting start-ups, meaning new businesses related to ICTs" (2013: 45).
This thesis focuses on understanding innovation development through new
business acceleration. For that purpose, I define start-ups as: Companies that aim to have
high impact or that are innovation-intensive, regardlessof their size or market
performance. By defining start-ups this way, I explicitly leave out new companies that do
not display the innovation-intensive characteristics needed to drive economic growth
(even though they may be relevant in terms of employment). However, I do consider
smaller start-ups that have not yet reached significant scale.
It is important to recognize that although innovation is important, it is not a
"silver bullet" in the sense that it does not offer a guarantee of increased national
development, nor is it absolutely essential to national development. Countries such as
Japan and China have reached advanced stages of development without relying solely on
innovation. I chose to focus my analysis on innovation-driven enterprises because
innovation is not hotly pursued in Latin American economies (further developed in
Chapter 5) although it is also the field most closely related to venture acceleration.
Another important definition for my research purposes is: What is an InnovationDriven Entrepreneurial Ecosystem (IDE)? An entrepreneurial ecosystem includes the key
elements that need to be in place in order for a start-up (as defined here) to be successful.
According to the MIT IDE Framework (MIT REAP 2015) (see Figures 1-1 and 1-2), the
key elements needed for an entrepreneurial ecosystem to be in place and have economic
impact are: innovation capacity (I-Cap), entrepreneurial capacity (E-Cap), a focused
12
economic structure of clusters, all founded on underlying institutions such as rule of law,
culture, etc.
MIT REAP IDE Ecosystem Framework
ECONOMIC IMPACT
FOCUSED CLUSTERS
Fig. 1-1. REAP IDE Ecosystem Framework
Source: MIT REAP, 2015
It is also important that in order to develop a successful ecosystem, there needs to
be a series of key stakeholders present. Such stakeholders can be entrepreneurs, risk
capital providers, corporations, universities, and the government.
13
Fig. 1-2. REAP IDE Ecosystem Framework, with Stakeholders
Source: MIT REAP, 2015
14
Chapter 2
Start-up Development Instruments
Over the past 20 years, there has been a major effort to develop new instruments
that can help create and scale start-ups. To frame this discussion, I have summarized the
key instruments most commonly used by countries and corporations: grants, contests and
prizes, hackathons, crowd funding, co-working spaces, incubators, university technology
transfer offices, foundries, and accelerators. The following exhibits provide greater detail
about each instrument, highlight their key policy objectives, the value each offers to startups (i.e., their value proposition), and provide brief but specific examples of ventures that
have successfully applied that instrument. Each exhibit below provides brief highlights of
the possible start-up development instruments.
Grants
Direct finance in the form of non-repayable awards, usually given by
governments & NGOs. Usually geared toward paying for specific viability
Definition
studies, business plan development, setup costs, prototyping, etc.
Ke Object
yes
Bridge the financing sources represented by angel investors/VC funds for whom
the inherent risk of the ventures might be beyond their investment objectives.
Foster development of specific types of industries and/or entrepreneurs that the
giving institution deems strategic to develop.
Value Proposition to
the Start-up
Sueessful Examples
Cash infusion, with limited strings attached.
No or limited loss of equity involved.
Access to mentors and networks (in selected cases).
Deshpande Center, Corfo (Chile)
Contests and Prizes
Definition
Company or government-driven contests aiming to solve a business issue, e.g.,
building a self-driving car, improving on a critical process
Key Objeetives
Value Proposition to
the Start-up
Successful Examples
"Crowdsource" sponsored innovation.
Develop entrepreneurial ecosystems & talent in particular market niches.
Identify recruiting talent for the sponsor.
Cash infusion with limited strings attached.
Public validation.
Longitude prize, DARPA, Ansari X prize, Netflix prize
15
Hackathons
Definition
Short-term efforts (days to weeks) aiming to solve a particular issue/problem
proposed by a sponsoring organization, e.g., helping to develop a new medical
device for developing countries.
Key Objectives
"Crowdsource" sponsored innovation with limited investment.
Increase sponsor awareness.
Solve civic problems, e.g., identify how to improve democracy.
Identify recruiting talent for the sponsor.
Value Proposition to
the M#4_1
Successfut Examples
Cash infusion with limited strings attached.
Public validation.
Angelhack, Techcrunch Hackathon, MIT Hack for Democracy
Crowdfunding
Definition
Key
O1jectives
Vabicrlposition to
the Stwat-np
Succbssful Examples
Classic crowdfunding provides access to seed capital at relatively low cost
According to OECD, funders can be compensated either by:
a) products and services: e.g., preferred offers on goods/services or special
acknowledgement of participation. Requires compensations that are attractive
to investors, which has proven to be difficult at times. OR
b) equity crowdfunding: lets funders recoup their initial investment or share in
future profits of the enterprise being founded. Regulatory challenges hinder
development around the world. Going forward, industry development could
come as implementation of the JOBS act lifting the ban on general solicitation
helps reduce some regulatory challenges. (OECD 2013)
Help companies have more access to seed capital through tapping a pool of
founders.
Validate venture viability and product demand.
Raise cash.
Kickstarter, AngelList
Co-working spaces
Deftion
Key tMjectives
Shared office space offered to start-ups at attractive prices.
For-profit: real estate play; identify teams & ideas at early stage
Not-for-profit: subsidize start-up costs; develop ecosystems.
Valhe Proposition to
the Start-up
Reduce setup/operating costs through sharing fixed office and support costs
with other start-ups.
Network with other entrepreneurs,
Successful Examples
learn from others' experiences.
CIC (Cambridge)
Incubators
Definition
Key Objectives
Non-fixed-term programs aimed at helping start-ups develop in earlier stages.
For-profit: identify teams & ideas at an early stage.
Not-for-profit: develop ecosystems; experiential
Value Proposition to
the Start-up
Successful Examples
learning.
Same as co-working space, plus: structured mentorship, greater access to
entrepreneurial ecosystem.
Harvard iLab Incubator
16
University Technology Transfer Offices
Definition
Key Objectives
Value Proposition to
the Start-up
Successful Examples
Take university research into the marketplace in a structured and efficient way.
Foster interconnections between academia and business.
Build companies through leading-edge research.
Leverage research that already exists and turn it into a business.
MIT TLO
Foundries
Definition
Key
Objecives
Value PropOa4tin to
the Stazt.Up
Hybrid between an accelerator, venture capital fund, and incubator. Specialize
in industry sectors/technologies.
Take more equity, give higher stipends.
Full-time staff that supports the start-up with UX, web services, back office, etc.
Invest in early-stage teams, accelerate their development through helping startups focus on their core business.
Same as incubators, plus: allows entrepreneurs to focus on their core business
Higher focus on entrepreneurs.
"Classes"
SucCessfut Examples
limited in size due to capacity constraints on foundry services.
Blade, Launch
Accelerators
Definition
Key Objectives
positOn to
Vab
the Startep
A fixed-term, cohort-based program, with mentorship and educational
components, that culminates in a public pitch event or Demo Day.
For-profit accelerators: Identify successful teams and products at early stage
Not-for-profit accelerators: develop ecosystems; experiential learning.
Same as incubators, plus: concentrate effort in a shorter timeframe, usually 2-3
months.
Funding.
Increase visibility of start-up to the ecosystem via Demo Day.
Access to alumni network of other start-ups that have passed through the
program.
Successful Examples
Y-Combinator, TechStars, MassChallenge
Given the variety of instruments, I chose to focus my research on accelerators:
what they are, their objectives, how they work, and the value they bring to companies that
have used accelerators successfully.
17
CHAPTER 3
Literature Review and Methodology
Literature on the accelerator phenomenon is scarce, due primarily to its relative
newness and limited availability of data (Fehder and Hochberg, 2014). In fact, owing to
these factors, the earliest date I could find for a formal and complete definition of an
accelerator (and the definition I use in this thesis) was 2014.2
There have been several efforts to survey the literature in more depth, which have
resulted in some interesting findings (Fehder and Hochberg, 2014). However, for the
purposes of this work, I will point out a few examples related to the value that these
accelerators provide to founders, ecosystems, and financial sponsors.
The literature has several examples of the value that accelerators give to founders,
but there is still no conclusive study that shows whether accelerators add value to the
founders in a consistent, measurable way. For example, Sandy Yu (2014) found that
accelerators help identify investment potential early. Among her findings were the facts
that accelerator companies raise less money, generally close down earlier and more often,
therefore raise less money, but appear to be more efficient investments compared to nonaccelerator companies.
Hallen, Bingham, and Cohen (2013) found that graduating from a top accelerator
program, such as Y-Combinator or Techstars, correlates with a shorter timeframe needed
As noted in Chapter 3: accelerators are "fixed-term, cohort-based programs, including mentorship
and educational components, that culminate in a public pitch event or demo-day." (Cohen and Hochberg,
2014)
2
18
to raise venture capital, exit by acquisition, and achieve customer traction as compared to
non-accelerated companies
Gonzalez-Uribe and Leatherbee (2014), who analyzed the effects on accelerated
companies that participated in Start-up Chile, found that they could not rule out the
possibility that participation in the accelerator has no impact on subsequent start-up
performance.
Eesley and Leatherbee (2014), who analyzed interactions between foreigners and
locals within the Start-up Chile program, found that the program was able to improve the
entrepreneurial behaviors of its target group of domestic entrepreneurs.
The literature that aims to understand the effects of accelerators in the ecosystem
is scarce, probably attributable to the complexity of isolating the effects in the ecosystem.
Regarding the value of accelerators to developing the venture capital ecosystem, Fehder
and Hochberg (2014) found that the arrival of an accelerator was associated with
...
an annual increase of 104% in the number of seed and early stage VC
deals in the metropolitan statistical areas (areas under study), an increase
of 1,830% in the total dollar amount of seed and early stage funding
provided in the region, and a 97% increase in the number of distinct
investors investing in the region. (p.3)
In my own search of the literature on the subject of the value of accelerators to
financial sponsors, I was unable to identify any study indicating that the "spray and
pray" 3 investment approach actually helps companies develop, or that such an approach
is valuable as an investment thesis. This area may be of interest for further research as the
body of knowledge in this arena grows.
3 The strategy of investing reduced sums in multiple companies is known in the investment community
as "spray and pray," given the fact that the investment is atomized in multiple companies where investors
do not have as much time to oversee each investment.
19
Given the limited body of research and empirical data available to conduct a
statistical analysis, I focused my methodology on developing case studies that represent
key strategies that accelerators are pursuing, their differentiating characteristics, what
seems to be working in the Latin American context, and what could be improved.
To develop the case studies, I interviewed over 30 key entrepreneurial ecosystem
stakeholders (entrepreneurs, scholars, venture capitalists, corporations, and government)
currently holding leading positions in the U.S. and Latin America.
Although the narrative approach I have taken has its shortcomings in terms of
empirical validity, given the exceptional selection of senior executives and scholars
interviewed, interviews enabled me to gain perspectives on what the key stakeholders
believe is most valuable or seems to work (or not) in the region.
During my interviews I followed a structured approach-with adaptations
depending on the stakeholder interviewed-centered on four key elements:
" Understanding the perspectives on the accelerator phenomenon in general
" Discussing the characteristics that make Latin America unique in terms of
entrepreneurial development
" Evaluating local accelerators from the perspective of the Latin American
region
" Identifying potential model adaptations
As data becomes more readily available, there will be numerous thoughtprovoking areas for further study in this subject, especially understanding the real value
that accelerators offer to the participants. Another interesting area of study would be to
gauge whether the equity stake that accelerators require when giving funds has any
20
impact on future performance. This also could be studied in the context of not-for-profit
accelerators and corporate-sponsored accelerators (defined in the next chapter) that may
have recently dropped their equity requirement, studying how that change has affected
the selection of companies and their subsequent performance.
21
Chapter 4
Accelerators
Before embarking on a discussion of other facets of accelerators, it is important to
put forward a definition of accelerators-a definition that is the underlying foundation of
this thesis research. I found the definition in the work of Cohen and Hochberg (2014):
Accelerators can be defined as fixed-term, cohort-basedprograms, including mentorship
and educationalcomponents, that culminate in a publicpitch event or demo-day (p.4)
This definition encompasses numerous key characteristics, which I will discuss in this
chapter.
4.1
A BRIEF HISTORY OF ACCELERATORS
The first accelerator on record is still the most prestigious today: Y-Combinator
(YC). Paul Graham, English entrepreneur, venture capitalist, and one of the four founders
of YC, said that "funding start-ups synchronously" was an important concept that helped
define future accelerators (YC, 2015). Graham thought that existing venture capital
models were "broken" and that "investors should be making more, smaller investments,
they should be funding hackers instead of suits, they should be willing to fund younger
founders" (YC, 2015). Originally based in Boston, YC's first pilot program was the
Summer Founders Program in 2005. After concluding this first program for
entrepreneurs, however, YC moved to Silicon Valley and is based there today.
22
Many of the key characteristics of today's accelerators were derived from that
first pilot (although not necessarily intentionally):
" funding relatively small amounts to early-stage start-ups on standardized terms so as
to fill a hole in the funding marketplace;
*
running programs just through a summer (i.e., about three months) because university
undergraduates were the target audience;
*
funding several start-ups together in a cohort because the founders wanted to learn
quickly about angel investing (YC, 2015).
In 2006, David Cohen and Brad Feld established TechStars, hoping to access the
cheaper equity that YC seemed able to access. While YC focused its operations in just
one location (Silicon Valley), TechStars decided to franchise its accelerator model to
other locations and companies. Today, Techstars defines the market for Corporate
Sponsored accelerators by working closely with corporations to develop their
acceleration capabilities ("Powered by Techstars").
Ten years later, accelerators have proliferated worldwide, with an estimated 160+
in 33 countries (Haines, 2014). A commonly used data source, "Seed-DB," indicates that
more than 4,200 companies have connected with some type of accelerator, resulting in
more than $7.2 billion in overall funding. Key indicators in a recent study by the Global
Accelerator Network, conducted on 75 members, found these results:
Accelerators Studied
Average Seed Fund
Average Equity Taken
%of participants that has exits or Follow-on investments
Average jobs created
Capital raised within a year
Source: Interview with Patrick Riley, CEO, Global Accelerator Network
75
US$24,000
6.3%
66%
6.7 Jobs
US$789,000
23
4.2
KEY STAGES IN ACCELERATOR OPERATIONS
Every accelerator has four distinct stages (see Figure 4-1) in the process that
characterizes their operations. The first three stages were present in all the accelerators I
studied. However, the fourth one, "follow-on" investment, is a recent phenomenon in the
industry.
Fig. 4-1. The four stages of accelerators
4.2.1
Stage I: Selection
The acceleration process starts with selection. It is through this that companies are
accepted into a program. The two elements of the selection process are (a) applications
and (2) evaluation.
(1) Applications
Most accelerator applications are done online. This helps organizations receive
applications from companies from anywhere in the world, and it also helps applicants
select accelerators that are tailored to their specific needs without having to circumscribe
their applications in a particular location.
On the application form, founders describe their business ideas and teams, and
answer questions that help the accelerator to better understand the business's motivations.
Questions might be: "Please tell us in one or two sentences about the most impressive
24
thing (other than this start-up) that each founder has built or achieved" or "Please tell us
about the time you most successfully hacked some (non-computer) system to your
advantage" (YC, 2015).
An emerging trend in the application process is the requirement to submit a 1-3
minute founder's video. This helps the selection committee better understand the energy
and ability of the founder(s) to express themselves in public-key traits during the Demo
Day stage.
(2) Evaluations
Applications are evaluated by panels of expert judges. The judges are either
partners from within the same accelerator, or external judges brought in specifically to
conduct the evaluation process. Whether internal or external, the key criteria by which
judges assess applications are:
-
Quality of thefounding team. According to feedback from my research
interviews, this is the key factor by which judges make their assessments. Teams
are measured not only on their specific technical domain expertise, but also on
their ability to work together as a team and their motivation to pursue the venture
going forward.
-
Idea potential. Accelerators look for companies that have the ability to scale fast
and that will fit well into their current portfolio of relationships/mentors/areas of
interest. A secondary criterion-not found in every accelerator-is the possibility
of testing the validity of the proposed concept without making an onerous
25
investment (e.g., the ability to generate a minimally viable product that can be
tested with users).
An example of an external analysis team at work is Start-up Chile (SUP). SUP
outsources the selection process to a US-based company called YouNoodle, 4 which
provides an objective evaluation of the merit of start-ups outside the context of the
Chilean economy. Entrepreneurs complete their applications through an open survey, and
then YouNoodle turns to Silicon Valley experts (3-4 judges per application) who evaluate
applications using three criteria: the quality of the founding team, the merits of the
project, and the impact it is likely to have on Chile's entrepreneurial environment. Using
the experts' judging sheets, applicants are ranked by multiple criteria that aim to measure
their business model adequacy (Gonzilez-Uribe and Leatherbee, 2014).
The competitiveness of the application processes varies depending on the
perceived quality and acceptance rate of the accelerator. For example, in 2014 YC
accepted less than 3% of applicants.5 Interviewees mentioned that other accelerators were
not as selective, especially government-sponsored organizations that consider ecosystem
impact as part of their selection criteria.
4.2.2
Stage 11: Acceleration
The core of the accelerator experience, and its value-add to participants, is the
acceleration stage. Here founders work on their companies to prepare them for Demo
4 See: <http://www.younoodle.com>.
5 See: <http://blog.Y-Combinator.com/yc-portfolio-stats>.
26
Day - the "graduation milestone" sought by all applicants. The key elements of this stage
are (1) mentoring, (2) classes, (3) co-working, and (4) networking.
(1) Mentorship
Given its strategic importance, acquiring a strong mentor is a key consideration
for applicants. Mentors are experienced professionals and academics, and mentorship is
frequently cited as a valuable aspect of accelerator programs, although it can vary
substantially among the programs. Some programs schedule meetings with up to 75
different mentors during their first month. Others may make introductions on an asneeded basis, while some simply hand entrepreneurs a list of pre-selected mentors
(Hochberg and Cohen, 2014).
Accelerators offer seasoned professionals mentors to help participants deal with
the challenges they may be facing. For example, if a founder has a problem, accelerators
will put the founder-participant in touch with other experienced founders, lawyers, and
consultants. According to FounderDating.org,6 the top ten topics that start-up companies
value most when seeking mentor advice are:
*
*
*
"
*
*
*
*
*
*
Fundraising
Digital Marketing
Business Development
Growth "Hacking"
Software Engineering
(Enterprise) Sales
UI/UX Design
Content Marketing
Data and Analytics
E-Commerce
6 See:
<http://founderdating.com/top-15-most-requested-advisor-expert-areas/>
27
My interviewees concurred that mentoring (and accompanying networking) is by
far the most valued service that accelerators offer to participants and the key
differentiator among programs. The most highly valued accelerators tend to have the best
mentors in the industry, whereas emerging accelerators struggle to find appropriate
mentors.
Most (if not all) mentors offer their services pro bono. Their value resides in the
networking opportunities they offer and their ability to identify companies that an
accelerator may want to work with. However, one problem with pro bono mentors is the
potential for conflict of interest between mentee and mentor. Some examples are: a
founder might feel pressure to buy follow-on services offered by the mentor; or through
the advising process a mentor might gather confidential information that could be used
later for other endeavors; or either party might claim intellectual property arising from a
mentorship suggestion. This is an open issue that has not been entirely resolved other
than by establishing strict rules of engagement and conduct between mentee and mentor.
(2) Classes and Workshops
Since most founders come from a technical background ("hackers," as they
usually call themselves), there are gaps in their knowledge of business and management.
To bridge these gaps, accelerators offer educational programs. Research indicates that in
addition to mentorship, education is a cornerstone of the accelerator program, and often a
primary reason why new ventures participate. Education from accelerators is often
extensive, including seminars on a range of entrepreneurship topics, such as unit
economics, search engine optimization, and term sheet negotiation. Seminars are usually
28
given by directors of the program or by guest speakers who can provide one-on-one
guidance after their talks (Hochberg and Cohen, 2014).
(3) Co-working
In most accelerators (YC being a notable exception), founders are asked to work
together under one physical roof. Through this process, an accelerator hopes to crosspollinate ideas between teams and help solve operational problems. For example,
founders help each other on UX/UI design issues or give advice on trusted advisors and
suppliers.
Fear of "copycats" within an accelerator restricts the sharing of best practices.
Participants may be less inclined to share ideas with others, given the fear that they might
be copied.
(4) Networking
Networking extends beyond the duration of a program. Upon graduation from the
accelerator, founders become part of the alumni network of that accelerator. Several
interviewees mentioned this as a key value proposition for a program, since peers can
serve as sources of introductions and contacts.
4.2.3
Stage III: Demo Day
Demo Day, when companies that have been "accelerated" are presented to the
investment society after finishing a period of time with an accelerator, is a key
differentiator of accelerators compared to other development instruments. During Demo
29
Days, founders "pitch" ideas they have been working on to those in attendance. Pitches
are no longer than ten minutes, with the goal of describing the business potential of the
founder's venture. Some pitches may include a working demo of the prototype, but this is
not the norm.
Accelerated companies who have not actively engaged in fundraising generally
meet new investors during Demo Day, and sometimes deals are closed immediately after
ending the Demo Day presentation.
Demo Days have become major events in the entrepreneurial ecosystems in the
cities where accelerators are based. For example, more than 2,500 people attended the
"MassChallenge Awards Ceremony 2014" (MassChallenge's Demo Day), which had
Massachusetts Governor Deval Patrick, Uber CEO Travis Kalanick and Google
Executive Chairman Eric Schmidt as keynote speakers. 7
4.2.4
Stage IV: Follow-on
Although not part of the customary stages of acceleration, which traditionally
ends with Demo Day, a new trend is vertical integration, in which increasingly more
accelerators are offering to their participants the possibility of opting for a second round
of funding, through their own venture capital funds, after finishing the accelerator
program. This trend is similar to the initial stages of vertical integration within the
industry. For example, SUP Chile, through its new fund SCALE, is offering US$100,000
7 See: <http://masschallenge.org/awards>. Accessed April 20, 2015.
30
(equity free8 ) to select companies that went through the acceleration process. NXTP Labs
has recently raised a US$30 million fund to invest in the companies they accelerate.
4.3
ACCELERATORS vs. INCUBATORS
A mistake often made when referring to accelerators is to use the term
"incubator." Given the shared nature of helping start-ups develop, accelerators and
incubators do have many commonalities. For example, incubators are designed to nurture
nascent ventures by buffering them from a possibly difficult environment, providing
room to grow in a space sheltered from market forces. In contrast, accelerators are
designed to speed up market interactions to help nascent ventures adapt quickly and learn
(Cohen and Hochberg, 2014).
In practical terms, accelerators differ from incubators on five important
dimensions, as shown in Table 4-1.
Table 4-1. Accelerators vs. Incubators
Duration
Cohort
Incentives
Educatiotal Program
Mentorship & Network
Development
Usually three months
Ventures enter and exit the
programs in groups known as
cohorts or batches
For-profit accelerators have
Most incubators are publicly
aligned incentives
owned
Often structured - workshops,
Limited - mostly fee-based
seminars and classes
services
Extensive
Limited
1-5 years
Rolling admissions
Source: Cohen and Hochberg, 2014.
8 Equity
Free: meaning the funds are offered in the form of a grant to the venture. The accelerator does
not require equity in return for the funds.
31
One of the key difference between accelerators and incubators is that accelerators
set fixed acceleration periods for start-ups, with defined application rounds-what I
defined as Stage 1 in the accelerator process. This stage results in cohorts of companies
being accelerated by the program.
Another key differentiator is that incubators usually do not offer structured Demo
Days, already noted as one of the key parts of the value proposition for an accelerated
venture.
ACCELERATOR STRATEGIES
4.4
To better characterize the accelerator market, it is important to understand their
corporate strategies. In this respect, three dimensions are relevant:
" Mission: the primary goal and driving force of the accelerator
-
Focus: degree of the accelerator's specialization in terms of industries served
" Geographic scope: geographies where the accelerator is physically located
4.4.1
Mission
The first strategic dimension has to do with the accelerator's overall goal and
driving force. Within this dimension, there are two sub-strategies: (1) not-for-profit and
(2) for-profit accelerators.
(1) Not-For-Profit Accelerators
National and state governments recognize the need for innovation-driven, focused
growth to jumpstart or further develop economies. Hence, not-for-profit accelerators
32
(NFPA) have risen as a potential solution for increasing entrepreneurship capability in the
ecosystem.
In addition, universities are increasingly shifting from their traditional role as
education providers and knowledge creators to roles as knowledge brokers and local
enterprise developers (Al Hokail, et al., 2014). All over the world, but especially in the
U.S., this has led to the proliferation of entrepreneurship education programs over the
past 20 years (Kuratko, 2005; Solomon, et al., 2002; Vesper, et al., 1997). Considering
these two effects, accelerators are an efficient medium to help jumpstart an
entrepreneurial ecosystem or to teach students the fundamentals of entrepreneurship
through an experiential learning approach.
The key trend that unites NFPAs-and also the main differentiator with for-profit
accelerators-is that NFPAs do not require an equity stake for their grants. An FPA will
take on average of 7-10% of a company's equity, whereas the NFPA offers its grant
equity-free.
It is important to note that I could not find any definitive studies as to whether the
requirement by an accelerator for equity in return for a grant has positive or negative
outcomes for the venture. On the one hand, having additional funds with fewer
requirements might seem like a common-sense benefit; on the other could, by not having
the equity requirement, there might be agent/principal misalignments that could reduce
the effectiveness of both accelerator and venture.
For purposes of this study, I assume that being "equity free" is positive outcome,
as it makes the accelerator attractive to start-ups as a good place to test and develop their
ventures without the risk of diluting shareholder equity held by the founder(s).
33
Within the NFPA category, there are two types of players: NGOs/Goverments,
and Universities. Table 4-2 characterizes the differences amongst these sub-groups
Table 4-2. NFPA Players
Primary focus
Ecosystem development
Experiential learning
Successful examples
MassChallenge/Start-up Chile
MIT GFSA, Harvard iLab
-> Case Study #1: MIT's Global Founders Skill Accelerator
The MIT Global Founders Skills Accelerator (GFSA) was founded in the summer
of 2013. It is hosted at the Martin Trust Center for MIT Entrepreneurship, and runs as an
international entrepreneurship program that provides student entrepreneurs with the skills
and resources needed to launch successful start-ups. The GFSA touts itself as "the
premier university student accelerator in the world." Its mission is to provide a "capstone
experiential learningopportunityfor student entrepreneurs"(MIT GFSA, 2014). Its key
characteristics are shown in Table 4-3.
Table 4-3. Key characteristics of MIT GFSA
Generalist, although high-tech companies tend to dominate (e.g., Big
Data, healthcare, connected devices, autonomous devices)
US$20,000. $2,000/month per participant for living expenses is vested
0%
12 weeks
MIT
MIT backing
Perception of a lack of industry expertise in certain industry verticals
Awarding funds to a venture is associated with attaining weekly
. "methodology steps." This can reduce the attractiveness of the program
4 to high-potential ventures that might choose other NFPAs in the Boston
area that do not require this vesting structure
Source: thesis author
34
The GFSA acceleration methodology is based on the book Disciplined
Entrepreneurshipby William Aulet, director of the Martin Trust Center. Participants are
guided through the acceleration process following the structured plan laid out in Aulet's
book, and upon milestone completion, are given vested living allowances.
In order to participate in the program, one team member must be a current MIT
student. Participants are selected according to the following criteria: team, attitude,
potential of the venture to "change the world," and potential to "solve hard problems with
hard science." Demo Days are conducted in Boston, New York City, and San Francisco.
->
Case Study #2: Harvard's iLab
Harvard's Innovation Lab (iLab) was founded in 2011, with a mission to "help
students grow their ventures at any stage of development and covers a wide range of
disciplines" (Harvard iLab, 2014). The i-lab occupies nearly 30,000 square feet of space
near the Harvard Business School.
The iLab organizes its Venture Incubation Program, a "12 week program
designed to help students make progress on their entrepreneurial ventures" (Harvard
iLab, 2014). Key characteristics of the program (shown in Table 4-4) include an
emphasis on mentorship, and workshops held by IDEO 9 on human-centered design. In
addition, iLab is co-governed by each of the deans of Harvard and the provost, with
program funding supplied by schools across the university. This results in increased
participation by multiple schools within Harvard University; it also creates a corporate
governance structure that is hard to manage and reduces school ownership.
9
An international design and consulting firm founded in Palo Alto, California, in 1991.
35
Table 4-4. Key characteristics of Harvard iLab
United States
Not for rofit - UniversitFsonsored
Generalist. Has received ventures from different industries like Social
Media, Fin Tech, Hardware, even Consumer Goods
None
0%
12 weeks
Findit, Vaxess Technolovies
Harvard University
Havrd backing
50No fnding for accelerated companies
SPerceived isolation from the rest of Harvard ecosystem
Source: thesis author
To participate in the program, one team member must be from Harvard. As with
most other NFPAs, the key participant selection criteria are team and attitude.
(2) For-profit accelerators
For-profit accelerators (FPAs) are differentiated from NFPAs in that the mission
of an FPA is to produce a financial return to the investment partners. Therefore, in
exchange for the services and money they provide, FPAs require an equity stake (usually
5-10%) in the companies they accelerate, following a "spray and pray" approach.
The for-profit strategy has two sub-strategies:
SIndependent Accelerators. These FPAs operate under their own brand, and are
thus considered more "pure," as the accelerators only act on behalf of
financial return to their investors. They do not have an explicit focus on
developing ecosystems or producing non-financial externalities to their
investors. Notable examples are Y-Combinator and AngelPad.
36
*
CorporateSponsored. These FPAs operate under the brand of a sponsoring
company. Besides financial objectives, corporate-sponsored accelerators
leverage the capabilities of the sponsoring company and act as an "open
innovation" arm for the sponsor. Many of the sponsoring companies outsource
their accelerator to Techstars.1 0 Notable examples of accelerators are
Microsoft (tech-focused), Disney (digital media-focused), Barclays (financial
tech- focused).
-> Case Study #3: Y-Combinator
The first-ever accelerator, and still the most famous, is Y-Combinator (YC),
which has generated a cadre of accelerated companies and a strong alumni network that is
one of the most sought-after pieces of their value proposition for accelerated companies.
Key portfolio stats as published by Y-combinator on their website:
14);
716
> US$30 Bn
Source: Y-Combinator Stats
Key characteristics of YC are provided in Tale 4-5.
10 A mentorship-driven, startup accelerator that holds 13-week programs for startups at locations in the
U.S. and London.
37
Table 4-5. Key characteristics of Y-Combinator
;~
accelerators
Percieved lack of industr expertise in certain verticals
Source: thesis author
During the past four years, almost 800 venture capital investors have made at least
one investment in more than 400 qualifying companies, and 27 of those investors have
backed 10 or more YC start-ups. During the same four-year stretch, venture capital
investors poured close to $2 billion into 700+ rounds involving YC companies, with $941
million invested in 2014 (Pitchbook, 2015).
The top investors in YC-backed companies have historically been angel investors,
venture capital funds, and even other accelerators. For example, over the past four years
(in descending order) SV Angel, Start Fund, Andreessen Horowitz, 500 Start-ups, and
FundersClub have made major investments.
The key criticisms of the YC model are related to the "light touch" of the
acceleration process. Mentorship is limited and restricted primarily to YC partners, with
limited external experts offering mentorship.
38
4.4.2
Focus
The second strategic dimension has to do with accelerator specialization regarding
the companies it helps. The rationale behind a focused accelerator in a particular industry
is to leverage the knowledge base of mentors and alumni, and to provide support that is
specific to the needs of a particular market segment. Not surprisingly, most corporatesponsored FPAs are focused, so they can leverage their sponsor company connections
and with participating companies.
Analyzing the industry, the most common area of focus comes from a particular
industry, for example:
" SURGE (Houston, TX), focused on acceleration of energy start-ups
" Imagine K12 (Silicon Valley, CA), focused on education-related start-ups
* Healthbox (Chicago and Boston) and RockHealth (San Francisco and
Cambridge), focused on acceleration of healthcare-related start-ups.
Alternatively, certain accelerators focus on restricting applicants to a certain
community affiliation, for example women or minority-owned start-ups. This type of
focus is less common among the studied sample.
-
Case Study #4: SURGE Ventures
Established in 2011 and based in Houston, Texas, SURGE Ventures is a energy&
focused accelerator. SURGE invests in companies working in the oil & gas, power
utilities, water, clean technology, and industrial sectors. SURGE is vertically integrated,
operating a program for later-stage energy technology companies named "Development"
and a venture capital fund.
39
The key benefits to SURGE of following this focused approach are that they can:
*
Access quality deal flow as prospective companies seek out SURGE due to their
industry expertise
" Identify the true value of high-potential teams and ideas as they have more
insights in the industry value drivers. This also puts SURGE in a better
negotiating position for investing in the companies
" Leverage existing industry relationships to generate value to their participants,
helping them connect with potential customers and/or buyers
SURGE selected Houston as its base of operations, as most of the decision makers in
the energy industry are based there, thus facilitating interactions with key stakeholders
and allowing for access to specialized mentors. Going forward, SURGE foresees
opportunities for international expansion as long as the target countries showcase the
right characteristics for their model (energy industry focus, strong team on the ground,
stability, etc.). Key characteristics of SURGE are provided in Table 4-6.
Table 4-6. Key characteristics of SURGE
Focused on energy companies working in the oil & gas, power
&
4
ntiities, water, clean-tech, and industrial sectors
US$ 30,000
Reqsreloat
to Houston , whichpt inter viwesaetioned isunnot
generate disruption to current operations associated with the relocation
of management
Source: thesis author
40
Among SURGE's investors is Shell Technology Ventures (Shell's internal corporate
ventures arm), which gives the accelerator strong ties with a potential source of exit to
accelerated companies.
4.4.3
Geographic Scope
The third strategy has to do with where the accelerator services perform
geographically. It is important to note that this geographic scope does not refer to where
the candidates come from. Increasingly, out-of-city and international applications are
becoming the norm for successful programs.
Within this strategy two "pure" options are apparent:
(1) Focus in one geography. The rationale for focusing on one city (for example,
YC, and SUP Chile) is that this strategy enables the accelerator to concentrate and
to develop a better network of venture capitalists and mentors. The underlying
assumption of these accelerators is that their key capabilities cannot be replicated
in other geographies. By focusing on one region, the accelerator can more
efficiently offer services to their clients.
The downside of this strategy is that it requires the accelerator to have a
strong brand and forces the accelerator to be generalist by nature, in order to
maintain an appropriate applicant pool. Also, it forces participant companies to
leave their established home bases and local client relationships, which can result
in increased operating costs to them.
(2) Expand through multiple regions. The reasoning behind this strategy is that
through geographic expansion, the accelerator can serve new segments of clients
for whom they might not be willing to relocate in order to work with the
41
accelerator. This strategy assumes that the accelerator can leverage its core
capabilities across regions, especially its acceleration methodology. Having an
expanded geographical footprint increases the applicant pool and allows
accelerators to capture new value. An added benefit of this strategy is that it
allows accelerators to focus in a particular industry across regions. A good
example of this strategy is MassChallenge's Israel and UK operations, which are
integrated into the U.S. deal flow.
An intermediate strategy between focused and regional is multi-domestic. Multidomestic accelerators have local operations in different geographies, but they are
operated independently. A good example of this is MassChallenge operations, which can
be found throughout the U.S.
-> Case Study #5: MassChallenge
Founded in 2009 by John Harthorne and Akhil Nigam, former management
consultants and recent business school graduates, MassChallenge (MC), a non-for-profit
corporation, bills itself as the "world's largest start-up accelerator."" Key characteristics
of MassChallenge are shown in Table 4-7.
See: < http://masschallenge.org/accelerator>. Accessed 4/20/15.
42
Table 4-7. Key characteristics of MassChallenge
Not-for-profit, government and privately sponsored
Generalist. Open to any early-stage start-up, in any industry, anywhere
None
0%
Commonwealth of Massachusetts, Desh Despande (Angel Investor)
Large scale and brand recognition
Clear internationalization strategy
they ~ ~
requirement
~i patiipteNo
Aw214std
of itsel aluni companies foundig the
equityyMashale
No secured funding for articipating companies
Peroieved
thesis author
Source:resultsrms
lack of industry expertise in certain verticals
shownckr inpti Tableks 4-8.en
MassChallenge's vision is to "catalyze a startup renaissance" 1 in the cities where
they participate. A 2014 study by MassChallenge of its alumni companies, found the
results shown in Table 4-8.
Table 4-8. MassChallenge alumni companies: Key indicators
Alumni Companies (2014)
Founding Raised
Jobs Created
Revenue Generated
Average Funding per company
% Active companies
617
US$706 M
4,802
US$404 M
US$1.144 M
86%
Source: MassChallenge Alumni Metrics. <http://impact.masschallenge.org/metrics/>. Accessed
4/20/15.
12
See: <http://masschallenge.org/about/vision>. Accessed 4/20/15.
43
MassChallenge structures its services through a four-month program that
includes: mentorship, office space, education, network & community, amongst other
resources. It awards more than US$2 million in cash awards and more than US$10
million in-kind services.
One of most salient characteristics of MC is its global model and
internationalization strategy. Understanding that in order to achieve their goal of
becoming the world's largest accelerator they must grow beyond Boston, the founders
defined an aggressive goal of opening ten new accelerators globally within the next five
years (see Figure 4-2). To achieve this goal, the organization has put in place a five-year
expansion plan that aims to prioritize countries where they have strong partnerships and
that allow for a fast revenue capture (Fehder & Murray, 2014). Within this timeframe, it
has opened new operations in Israel and the UK.
High
11@11
FAGER
KOREA
O BRAZIL
CA INDIA
co
NY
JP
MOIDDE
CHINA
CAST
LOW
Speed to Revenue
High
Fig. 4-2. MassChallenge market selection criteria
Source: Fehder & Murray, 2014
44
4.5
RANKINGS
Although other accelerator rankings exist (e.g., Forbes, Accelerate), the one that
has established itself as the industry standard is the U.S. Seed Accelerator Rankings.1 3 It
was started in 2011 and is published by Yael Hochberg, Susan Cohen, and Daniel Fehder
"to begin a larger conversation about what makes seed accelerators successful, and to
provide Start-ups with a tool to help them decide which seed accelerators are a good
match for their needs."14
Rankings are based on six factors (qualified financing activity, qualified exits,
reputation with leading vcs, alumni network, equity taken, and stipend) and are intended
to quantify how well a for-profit seed accelerator is able to position its start-ups for longterm success.
Table 4-9 2015 accelerator rankings
1. AngelPad (San Francisco, NY City)
11. Surge (Houston)
2. Mucker Lab (Los Angeles)
12. MassChallenge (Boston)
3. Techstars (various)
13. Brandery (Cincinnati)
4. University of Chicago NVC (Chicago)
14. Gener8tor (Madison, Milwaukee)
5. Alchemist (San Francisco)
15. ZeroTo510 (Memphis)
6. StartX (Palo Alto)
16. AlphaLab (Pittsburgh)
7. Amplify LA (Los Angeles)
17. Blue Start-ups (Honolulu)
8. 500 Start-ups (Mountain View)
18. ERA (New York City)
9. Capital Innovators (St. Louis)
19. Betaspring (Providence)
10. Dreamlt (various)
20. Iron Yard (Spartanburg, Greenville)
Source: http://www.seedrankings.com/pdf/sarp_2014_acceleratorrankings.pdf
13 See: <http://www.seedrankings.com/pdf/sarp 2014_accelerator rankings.pdf >.
14 See: <http://news.rice.edu/2015/03/1 7/seed-accelerator-rankings-unveiled-at-sxsw/>.
45
Note that neither YC nor RockHealth appear, as both programs now classify
themselves as seed funds rather than accelerators. According to the authors of the ranking
survey, "if YC were to be considered in this version of the ranking, it would top the list."
4.6
ACCELERATOR VALUE
One of the key areas of debate is: What is the real value that accelerators offer to
founders, ecosystems, and financial sponsors? I present qualitative results from my
interviews as they pertain to each of these groups separately, identify key criticisms of
the model, and close this section by presenting the current state of research on this matter.
4.6.1
Founders
Many founders mention that the key value of joining an accelerator is that it
allows them to focus their effort for a limited time period in order to get their idea off the
ground. Through this process they are able to "fail fast and cheap" and test the validity of
their ideas without spending unnecessary time on them.
Mentorship is often cited among as a key value-add of the accelerator programs.
Being given access to an "outside" perspective from experts and successful entrepreneurs
who face similar challenges helped founders find solutions to their problems faster than
they could do by themselves.
Another valued element is networking. Given the fact that accelerators bring
many entrepreneurs into the same place, there is a kind of "cross-pollination" effect that
allows teams to learn from each other and build networks. These networks go beyond the
46
cohorts to also include a network of alumni, especially as more founders pass through the
programs.
Finally, the cash infusion is a "nice to have" element, but is not the driving factor
for joining an accelerator, particularly for-profit accelerators. In the case of not-for- profit
accelerators, the "free money" is more highly valued.
4.6.2
Ecosystem
Given their fixed-term nature and the availability of a Demo Day, accelerators
also bring benefits to the entrepreneurial ecosystem. Accelerators serve, as one Latin
American venture capital partner mentioned, to "corral the entrepreneurial community."
Accelerators bring together founders, mentors, and investors in a geographical place for a
specific period of time. One example of this is what Techstars and The Foundry Group
accomplish in Boulder, Colorado.
Accelerators also provide inspiration as they bring a cadre of entrepreneurial
personalities to the ecosystems through open presentations and mentoring to-be founders.
4.6.3
Financial Sponsors
The value of accelerators to sponsors is to help them identify investments that
could generate high financial returns with limited downside risk and a low amount of
investment. For corporate sponsors such as Telefonica and Disney, in addition to the
financial returns accelerator provide the ability to "outsource" innovation through an
open process that allows them to understand better the new trends in industries in which
they are currently involved. Accelerators also improve the awareness of the corporate
47
sponsors in the market, building their brands as innovative companies and helping with
recruiting efforts.
4.7
KEY CRITICISMS OF ACCELERATORS
Accelerator processes, by their nature, are intense on teams and do not necessarily
represent the typical path that founders follow when they are creating companies. The
artificial and self-imposed stress and scrutiny that founders endure when going through
an accelerator can result in the dissolution of teams that might not otherwise have
happened if they had gone through more traditional development rounds. This effect has
help denominate accelerators as "team meat grinders."
Another criticism is that accelerators attract founders who are unsure of their
company's potential. My interviewees mentioned that some companies that go through
the acceleration process are not sure of their products and team, so they join an
accelerator to "try out" the venture. In such a situation, there could be a negative selfselection among companies that pass through the accelerator because the founder is less
than confident in his/her business.
Finally, although not necessarily a criticism of the model, it is important to point
out that highly capital-intensive companies (e.g., aerospace), or those that are in
extremely complex businesses (e.g., biotech) might not extract a significant amount of
value from the mentorship and capital that accelerators can provide, especially if they are
generalist by nature. Not all business are equally poised to take advantage of accelerator
services.
48
Chapter 5
Accelerators in Latin America
5.1
HISTORY AND ENVIRONMENT
The emergence of the accelerator phenomenon in Latin America really began in
the last five years. The first accelerator to set up operation was the government-sponsored
Start-up Chile (SUP), which launched in 2010. In 2011, a series of new privately
sponsored accelerators followed: NXTP Labs (Argentina), Wayra (Latam), and 21212
(Brazil).
As noted earlier in this thesis, given the relatively recent appearance of
accelerators, there is no agreed-on definition of an accelerator. Also noted earlier, I have
relied on the definition put forward by Cohen and Hochberg (2014). This means that
given the lack of a precise and generally accepted definition, the number of accelerators
in Latin America ranges from 20 to around 53, depending on the source. Consequently, I
use 20 as the total number of accelerators based on applying the Cohen-Hochberg
definition, as well as my own primary research to determine which are the most relevant
accelerators in the region.
Looking at the number of accelerators by country (see Figure 5-1), it is apparent
that, as I expected, the United States has the most accelerator companies, with more than
half of the accelerators located there. For comparison purposes, Latin American countries
are marked in red.
49
Number of accelerators per country
l18
United States
France
United Kingdom
Canada
Bras
Mexico
Germany
7
7
6
6
5
it*ly
Sweden
lasel
Spain
4
Argentina
Nathedands
Chile
Russia
Portugal
Bulgada
Australia
Egypt
Switzerand
Austria
8
8
~1
~1
Singapore
Ukraine
CzechRepublic
Denmark
Finland
keland
Uruguay
Jordan
Estonia
3
3
3
3
2
2
2
I
I
I
I
I
1
I
I
I
1
I
I
Fig. 5-1. Number of accelerators by country (as of 2015)
Source: There is no unique official source to determine the number of worldwide accelerators. To construct
this database, I consolidated 3 industry sources: Pitchbook, Seed-DB and Fundacity. Later I added relevant
Latin American accelerators using information collected through my research and interviews.
US$11,45014 BRAZIL
US$11,25,000 CHILE
COOWm
US$7,447 50
MEXICO
US$3,116,250 ARGENTINA
UNUAY
US$S
COLOMBIA
MNA
US$627,000
URUGUAY
i au~
Fig. 5-2. Value of Latin America accelerators (US$ Invested in accelerated companies)
Source: <http://www.fundacity.com/latam-accelerator-report-2014 >.
50
5.2
KEY PLAYERS
Among all the accelerators operating in the Latin American landscape, only a
handful are recognized by the market as established and serious players: Start-Up Chile,
Wayra, NXTP Labs, and 21212.15 I have analyzed each of them through interviews with
their executives, venture capital firms that operate in the region, and alumni of
accelerators, seeking to identify the key strengths and areas for development of each
player.
-> Case Study #6: Start-Up Chile
Founded in 2010, Start-Up Chile (SUP) was the first accelerator to start
operations in Latin America, and it is the largest based on the number of accelerated
companies. SUP is administered by the Chilean government's Economic Development
arm, Corfo.16 SUP Chile's mission is to attract early-stage, high-growth potential
entrepreneurs who are willing to stay in Chile for six months to develop their companies.
The program awards US$40,000 equity free, plus visas and work space for the founders.
Heman Cheyre, former head of Corfo, said:
We perceived the need to design a program to produce a cultural
transformation amongst Chile's youth, encouraging them to engage in
entrepreneurial activities. We felt that by bringing foreign entrepreneurs in
Chile, we could create an ecosystem to foster innovation and connectivity.
(Applegate, et al., 2012, p.1)
15 See: <https://medium.com/theageofthelatinopreneur/theultimatelistofStartupresourcesinlatinamerica629a65 a9c7b8>.
16 A Chilean government organization founded in 1939 by President Pedro Aguirre Cerda, to promote
economic growth in Chile.
51
Table 5-1. Key characteristics of SUP Chile
ST)RT-UPCHILE
Geographic Scope
Chile
Mission
Focus
Average funding
Equity required
Program Duration
Successful Companies
Key Backers
Strengths
Not-for-profit, government sponsored
Generalist
US$40,000
0%
6 months
SaferTaxi, WeHostels, Cruisewise
Chilean government, through Corfo
Government backing
Brand awareness
No equity requirement
Companies must conduct business in English
Perception that certain founders might choose to go to SUP for
"lifestyle" reasons more than actual venture development
Light mentorship
Areas for development
Source: thesis author
Case Study #7: Wayra
Founded in 2011 in Spain, Wayra (the Quechua word for wind) is the corporate
accelerator for Telefonica.1 7 It has operations in Spain and in several Latin American
countries, including Argentina, Brazil, Colombia, Chile, and Mexico.
Wayra adheres to a multi-domestic strategy, meaning it has a common brand and
utilizes key acceleration methodologies, but it operates with a high degree of
independence across operations. It also follows a focused approach to acceleration,
providing tech-based start-ups with financial support, workspace, and advice from expert
mentors and partners.
17
Headquartered in Madrid, Spain, it is the largest telecommunications company in the region.
52
With a small class size in each country, backed by a large telecom player with a
regional focus, Wayra's value proposition is to leverage its footprint and ties to
Telefonica in order to provide a more focused approach to acceleration. On the subject of
areas for development, interviewees mention that ties with Telefonica could actually
result in limiting the value-capture potential for accelerated companies, as business
opportunities with the parent company are not always realized, yet there it is a preferred
option to work with Telefonica when looking for new deals. Table 5-2 provides the key
characteristics of Wayra.
Table 5-2. Key characteristics of Wayra
wuvrm.
Geographic Scope
Mission
Focus
Average funding
Equity required
Program Duration
Key Backers
Strengths
Areas for development
Regional (Argentina, Colombia, Chile, Mexico, Brazil)
For-profit, corporate sponsored by Telefonica
Generalist in web technologies, software, mobile-web, gaming and ecommerce
US$30,000 cash, US$70,000 in-kind services (e.g., back office)
7-10%
6 months
Telefonica
Regional focus
Strong ties with Telefonica
Focused advice
Realization of Telefonica value to accelerated companies
Multi-domestic approach limits value creation across geographies
Streamlining of deal terms
Source: thesis author
-
Case Study #7: NXTP Labs
Founded in 2012 in Argentina, NXTP Labs is a for-profit accelerator. It has
operations in several Latin American countries, including Argentina, Chile, and Mexico
(in association with Naranya Labs). NXTP Labs was founded by a group of successful
53
Argentine entrepreneurs, including Ariel Arrieta (co-founder of Digital Ventures), along
with Gonzalo Costa, Marta Cruz, and Francisco Coronel. It takes a generalist approach to
acceleration, and provides young entrepreneurs with seed funding plus infrastructure,
training, mentoring and interactive marketing services. Its key characteristics are shown
in Table 5-3.
Table 5-3. Key characteristics of NXTP Labs.
>Nxtsp.Labs
Geographic Scope
Mission
Focus
Average funding
Equity required
Program Duration
Successful Exits
Key Backers
Strengths
Areas for
development
Source: thesis author
Regional
For-profit
Generalist (AdTech, AgTech, B2B, BigData, Bitcoin, CloudTech,
eCommerce, Education, FinTech, Mobile, Gaming, Internet of
Things, Payment, Security, Services, Social, Travel, Video 1)
US$25,000
2-10%
16 weeks
Muraly, Wideo, Satellogic, WeHostels (also SUP)
Funded by several successful Argentine entrepreneurs. Leverages
Chilean government funds to promote international expansion
Increasing regional focus
Strong network of founders and alumni
Streamlining and standardizing of term sheets
The company is undergoing aggressive expansion plans, recently opening
operations in Chile and Mexico; it is also leveraging Chileans government funds to
enable it to further pursue international expansion in the country. NXTP Labs recently
launched a US$30 million follow-on fund geared to helping alumni accelerated
companies continue to grow.
18
See: <https://www.crunchbase.com/organization/nxtp-labs>.
54
-> Case Study #9: 21212
Founded in 2012 by a group of successful U.S. and Brazilian entrepreneurs,
21212 is a Brazil-based, digitally focused accelerator. Its main operations are in Rio de
Janeiro, but it also has a New York corporate office, hence the name 21212.19 Key
characteristics of 21212 are provided in Table 5-4.
Table 5-4. Key characteristics of 21212.
Geographic Scope
Mission
Focus
Average funding
Equity required
Program Duration
Successful Exits
Key Backers
Strengths
Areas for development
Source: thesis author
Brazil
For-profit
Digital businesses in Brazil, with global potential
US$17,000 as stipend, not directly valuated
10-20%
16 weeks
Zero Paper sold to Intuit
Infoglobo, private investors
Strong focus on digital business and brazil
Lack of standardization on deal terms to start-ups
There are several other accelerators in the Latin America region, which I cite
briefly below.
*
500 Startups Mexico:
19
(212)
o
Based in Mexico City, local affiliate of U.S.-based 500 Start-ups
o
For-profit, generalist, regional focus
The name 21212 comes from the combination of Rio de Janeiro's (21) area code and New York's
55
"
*
Venture Institute Mexico:
o
Mexico City-based
o
For profit, generalist, local focus
o
"Higher touch" model, fewer accelerated companies
Naranya Labs (Mexico):
o Monterrey, Mexico-based
o For-profit, corporate sponsored, generalist, local focus
o Partnered with NXTP labs
To better understand the local Latin American market, I have mapped the relevant
accelerators in Latin America according to two dimensions: their geographic strategy and
their focus (see Figure 5-3).
Latin American Accelerators
Key Competitive Strategies
Regional
U
Muth
...
EDomnestic
Local
Generalist
Focused
Strategic Focus
Fig. 5-3. Competitive strategies for Latin American accelerators.
Source: thesis author
56
This analysis shows an obvious lack in the local market: there are few regional
and multi-domestic accelerators. This gap presents an interesting market opportunity for
an accelerator willing to capitalize on its industry knowledge, and ability to leverage
entrepreneurs across the region.
FACTORS INFLUENCING THE DEVELOPMENT OF
ACCELERATORS IN LATIN AMERICA
5.3
With only a few established venture accelerators in Latin America, there is still
room for further development in the region, especially when compared to developed
countries. My analysis highlights key factors that might be influencing the development
of accelerators in Latin America.
5.3.1
Limited Number of Latin American World Class Universities
Universities play an important role as drivers of innovation. Latin America is
home to many universities, including the Universidade de Sao Paulo (Brazil, ranked #127
on the QS ranking), Pontificia Universidad Catolica de Chile (Chile, #166), and
Universidad de Buenos Aires (Argentina, #209).20 Nevertheless, only 24 institutions can
be found in the QS top 500 universities. 2 1
Universities and accelerators have close relationships. Most non-governmentsponsored NFPAs evolved from universities. Also, several Top 20 accelerators have
20
See: <http://www.topuniversities.com/university-rankings/world-university-rankings/2013 #sorting
=rank+region=3 49+country=+faculty=+stars=false+search= >.
21 See: <http://www.iu.qs.com/product/201415-qs-world-university-rankings-result-tables-excelformat/ >.
57
current ongoing relationships with Latin American accelerators (e.g., University of
Chicago, Startex (Stanford).22
Looking at Figure 5-4, it is possible to see a relationship between having good
universities and the emergence of venture accelerators. 28 of the 31 countries that have
accelerators have at least one university amongst the top 500.
Number of accelerators
11 .0
F
-
8.5
8.0 -
United Kingdome
Canada
-
7.5
Mexico
7.0 -
*
Brasil
-
6.5
Germany
-
-
6.0
5.5
5.0
4.5
4.0
3.5
3.0
altaly
Sweden
-
Israel
-*
-
* CNile
-
2.5 2.0-
*
* Portugal
1.5 - E Ukraine
1.0 -
*-~~~
*T.
EstoniaIAustria Ireland
- CzechRepublic
0.0
-
1
2
*
Russia
Singapore India Switzerland
0.5
0
a * Netherlands
Spain
Argentina
3
*Fi
fan4
* Austraha
Demr
I
I
T-
T
I
4
5
6
7
8
I
I
I
I
I
I
9 10 11 12 13 14
H.
I
I
20 21 22
H. / II/IIIIIII,
/
0France
United
States
37 38 39 40 41 42 43 44 45 46 47
97
# Universities in Top 500
Fig. 5-4. Number of universities in the top 500 in countries with accelerators.
Source: Author elaboration on public rankings
As Latin American universities continue to improve and develop, it is expected
that more accelerators will develop, especially in countries that today do not have
institutions in the Top 500 positions, for example, Peru.
22
According to the Seed Accelerator Rankings.
58
5.3.2
Latin America has Fewer Entrepreneurial "Success Stories,, 2 3
Most innovative companies in the developed world fail within their first few
years.24 This happens despite the fact that in countries like the U.S., entrepreneurship is
celebrated and fostered.
According to my research and in discussions with my interviewees, Latin
American entrepreneurs face additional cultural challenges that make starting-and
maintaining-a company even more challenging. Consistent with a 2014 World Bank
report, I found two key challenges facing Latin American entrepreneurs: (1) a lack of
entrepreneurial skills, and (2) an ingrained culture that ostracizes failure.
(1) Entrepreneurial Skills
Although the technical skills needed to start companies exist,
entrepreneurship
is still not widely taught in Latin American universities and technical institutes. Only in
the past five years have the leading institutions in the region begun to widely offer
entrepreneurial skill development courses in their curriculums.
(2) Risk taking and the culture of failure
Risk taking is a crucial component of developing entrepreneurs. Yet, in Latin
America, failing is culturally "expensive." Interviewees concurred that in Latin America
23 For this analysis, I left out the more structural elements of ecosystems (private property protection,
rule of law, government influence, etc.) which undoubtly have a strong effect on development. Instead, I
focused on the distinctive cultural characteristics of Latin American entrepreneurs vis-A-vis accelerators.
24 Start-up Genome Report.
25 Latin American countries still need to improve their technical skills. The region has a historic
deficit
of engineers, dating back to at least the early
2 0
th
century (World Bank 2014).
59
there is a strong association of failure with fraud, and in many countries failing in a
venture results in being cut from the formal financial services industry.
Because entrepreneurial skills are lacking and ventures exist in a risk-averse
culture, there are fewer entrepreneurial "success stories." The role of successful
entrepreneurs in developing entrepreneurial ecosystems is critical to developing an
environment in which accelerators can find the necessary "raw material" for start-ups,
which in turn leads to accelerators. Successful entrepreneurs can be characterized this
way:
"
Through their example, they motivate new generations of founders to start
companies that become the deal-flow for accelerators.
" They provide angel/venture-capital funding to accelerators. In the U.S., successful
entrepreneurs like Mark Andreesen develop their own venture funds (AndreesenHorowitz), which help fuel new start-ups and encourage investment in
accelerators like Y-Combinator.
" Entrepreneurs generate new, educated cohorts of potential entrepreneurs through
the "first lines" of their companies. Early employees grow fast and are able to
''cash out" and fund their own ventures and go to accelerators to develop their
businesses.
Endeavor, one of the world's leading global entrepreneurship development organizations,
calls this effect the "Growth Cycle of Successful Entrepreneurship Ecosystems," as
shown in Figure 5-5 (Endeavor, 2014).
60
The Growth Cycle of Successful Entrepreneurship Ecosystems.
Growth Cycle Steps tSub-Components:
Build scaLable
Support the next
companies
generation
.6o.,
900
New Entrepreneurs
Successful Entrepreneurs
Fig. 5-5. Growth cycle of successful entrepreneurship ecosystems
Source: Endeavor and the Knight Foundation (Endeavor, 2014)
-
Case Study #10: Argentina
In Latin America, the most notable case of successful entrepreneurs fueling the
ecosystem comes from Argentina. Despite the structural hardships endured by local
entrepreneurs because of the political and economic systems, the Argentine ecosystem
has produced some of the most successful entrepreneurs in the region, including Ariel
Arrieta (Digital Ventures) and Hernan Kazah (MercadoLibre, known as Latin America's
e-Bay).
After taking his company public to the NASDAQ, Kazah and fellow
Mercadolibre founder Nicolas Szekasy founded a successful venture capital company
called Kaszek Ventures. To date, Kaszek has invested more than US$190 million in 30+
local start-ups. and today the firm is a limited partner with NXTP Labs, one of Latin
America's most important accelerators.
61
Endeavor developed a methodology for mapping the multiplier effect of
entrepreneurs in the local economy (see Figure 5-6). Through this methodology, we can
appreciate how Mercadolibre (Kazah) and Patagon (Casares) have been fulcrums of the
local entrepreneurial ecosystem.
ETi
------------- -------------
Fig. 5-6. Multiplier effect of local entrepreneurs in Argentina.
Source: Endeavor and the Knight Foundation (Endeavor, 2013)
62
5.3.3
Innovation in Latin America is Still in the Early Stages
Innovation is still developing in Latin America. The region lags behind the
developed world in this area significantly.
One key indicator of innovation in an economy is the number of patents per
inhabitant. The more patents per person, the more innovation created and captured by the
economy. Looking at this indicator vis-a-vis the top economies (see Figure 5-7), it is
apparent that Latin America is well behind most developed economies.
PCT patents, applicationsimlion pop.
315
Swizedand
Japan
Sweden
Finland
''I
227
Gennany
Denark
Korea, Rep.
Nethedrands
Austria
United States
Norway
Singapore
France
Belgium
United Kingdom
Canada
Ireland
Australia
NewZealand
215
193
166
150
M139
125
118
I 13
89
85
83
78
74
-4
40
Spain
Estonia
Hungary
Latin America
33
25
18
Fig. 5-7. Number of patents per inhabitant.
Source: thesis author, elaboration of Global Competitiveness index.
3(
63
Innovation is growing more slowly in Latin America than in OECD countries. In
Latin America, investment in research and development (R&D) grew from an average of
0.5% of gross domestic product in 2004 to 0.63% in 2009. In comparison, among OECD
countries, R&D grew from 2.2% to 2.4% during the same period (OECD 2013).
This is another place where the role of universities could come into play, but from
a different perspective. Universities and corporations need to work closely to bridge the
separation between scientific research and industry R&D. When I analyzed these factors,
I found that Latin American universities produce lower-quality scientific research, and
they collaborate less with industry than the average for the largest 80 economies in the
world. With lower innovation intensity, fewer innovation-driven companies are
developed and then need to be accelerated.
Table 5-5. Research quality and university-industry collaboration.
Quality of scientific research
institutions, 1-7 (best)
University-industry collaboration in
R&D, 1-7 (best)
3.48
4.26
3.66
4.01
Source: thesis author, elaborating on Global Competitiveness index.
5.3.4
Venture Capital Companies and Strategic Exits are Limited
The venture capital industry has grown significantly in the past few years in Latin
America. From 2008 to 2013, available funds grew 31% annually throughout the region
(see Figure 5-8).
64
714
537
+31%
371
312
188
184
143
115
1158
34
13
2008
2009
2010
M Fundraising
U
2011
2012
2013
Investments M Exits
Fig. 5-8. Annual Latin American venture capital fundraising, investments, and exits
Source: LAVCA 2014.
Still, even taking into account this considerable growth, relative penetration by
the venture capital industry is very low compared to the more developed markets (see
Table 5-6).
Table 5-6. Availability of venture capital.
Venture Capital Availability
1-7 (best)
Latin American Average
Top 80 nation average
2.64
3
Source: thesis author, elaborating on Global Competitiveness index.
Furthermore, among international limited partners (LPs), there is some concern
about established venture capital firms. A 2013 report noted that LPs considering an
investment in Latin America and Caribbean (LAC) countries over the next five years
65
cited the limited experience of fund managers (or general partners) as the number one
deterrent to investing in the region (LAVCA, 2014).
Fig. 5-9. Deterrents cited by LPs considering investments in LAC.
Source: LAVCA 2014.
According to a 2014 by the Latin American Venture Capital Association
(LAVCA), one of the key challenges in Latin American venture capital is the lack of
exits. LAVCA notes:
The option of an initial public offering (IPO) is fairly constrained, but
many investee companies are exited through trade sales, usually
acquisitions by larger companies. A few of the more dynamic companies
have exited via IPO on other global stock markets. For instance, Globant,
an Argentine software company, went public on the New York Stock
Exchange in July 2014. Globant was the first LAC software company to
do so and it had taken 11 years to mature to that point. (LAVCA 2014,
p.5)
66
The low development of the venture capital industry in Latin America, in terms of
size, sophistication, and lack of exits, is critical for accelerators. These situations limit the
ability of accelerated companies to find Series A financing, thus reducing investment
attractiveness for an accelerator.
5.3.5
Slow Development of Local Markets Affects Local Start-ups
One common concern among innovation-driven accelerators in the region is the
lack of development of the local corporate environment. Seven of the ten largest
companies in Latin America are driven by natural resources. 26 Only three companies in
the Top Ten are not related to natural resources: America Movil (telecom), Odebrecht
(construction) and Wal-mart Mexico (retail). It is not until number 80 that a technology
company, Samsung Brazil, enters the ranks.27 In comparison, at the time of this writing
(2015), the three-largest U.S. companies (based on valuation) are Exxon Mobil (resource
based), Apple, and Google (both technology-based).
The lack of sophisticated corporations affects the development of new innovationdriven ventures and accelerators in at least three ways:
1) Reduces the market (and therefore the need) for companies that create
sophisticated goods, as there are no local companies demanding such
products.
This includes state-owned companies such as Pemex, Petrobras, and PDVSA, and that ownership
might have an effect on the companies' ability to drive innovation intensity to other industries.
27 American Economia website. See <http://rankings.americaeconomia.com/las-500-mayores26
empresas-de-latinoamerica-2014/ranking-500-latam-1-50/ >.
67
2) Limits the number of specialized mentors that can support accelerated
companies.
3) Reduces the possibilities for non-venture capital exits for accelerated
companies.
5.3.6
Growing Pains Among Local Accelerators
According to entrepreneurs who were in the early cohorts of the accelerator
programs and the venture capital companies that dealt with graduates exiting the
accelerators, there were, at the time, a few issues that hindered the popularity of
accelerators and limited the intake of new companies and the availability of venture
capital. Because the accelerator market is fairly new worldwide, early entrants into the
Latin American accelerator market had more problems dealing with the issues that today
have been resolved. Examples of these "growing pains" in earlier versions of the
accelerators (some are no longer in business) are:
" Accelerator fund managers with limited experience dealing with venture capital
managers, thus limiting the ability to negotiate in non-standard investment
situations (i.e., complex ownership structures, international exposure, etc.)
" Terms of seed deals that hindered Series A investments, such as:
o
Anti-Dilution clauses (Full ratchets)
o
Standard valuations that were too high for the Latin American market,
leaving founders with the dilemma of down-rounds immediately after
exiting the accelerator
68
o
Clauses that linked the accelerator to the venture far beyond the
acceleration period and hindered the company's value-generating
potential. For example, clauses requiring services to be provided on an
ongoing basis by the accelerator to the company; clauses that limited the
founder's ability to do business with clients in industries that conflicted
with the accelerator's main sponsor
Having discussed venture capital companies and accelerators in general terms,
and more specifically in Latin America, in the next chapter I put forth design elements for
developing a new model that will encourage the founding and growth of for-profit
accelerators in Latin America.
69
Chapter 6
Designing A New Business Model For
Latin American For-Profit Accelerators
Armed with an understanding of the key issues and lessons learned in the
developed countries, I will identify in this chapter a set of design principles that can be
applied to Latin American accelerators in order to maximize their rate of success in the
future.
Not-for-profit accelerators have a unique mission, and in Latin America (and
other countries) they enjoy a steady source of funding from the government. With this
security, most of the competitive pressures I discussed earlier do not threaten the viability
of NFPAs because it is ensured by their supporting organizations.
With this understanding in mind, therefore, my recommendations will focus on
for-profit accelerators.
DESIGN PRINCIPLE #1: Differentiate by defining and focusing on a clear
6.1
corporate and investment strategy - avoid "Spray and Pray"
As shown in my discussions about the international experience of accelerators,
only a few generalist accelerators are successful (YC, Techstars), and their current
success is based on their established brand names that help them secure the best deals.
Today, for-profit, country-specific, generalist accelerators only appear in Brazil
and Mexico (because of their relatively large market sizes). Consequently, there appears
70
to be an opportunity for industry-focused, for-profit regional accelerators. Potential
industries that could be targeted based on international expansion in Latin America might
be:
" mobile apps
*
agriculture
*
natural resources - for example Mining or Energy
*
Big Data/analytics
Figure 6-1 illustrates potential opportunities for accelerators in the Latin American
market.
Lfmt
e mAccn
KoY CaMPOWivw 8W
.
m
Muiam
Facuuud
'i-I.-
ftac
,Fren
Fig. 6-1. Potential opportunities in the Latin American market
Source: thesis author
71
6.2
DESIGN PRINCIPLE #2: Define an innovative value proposition to attract
the best mentors
Mentors are a critical element of an accelerator, as they are actual front-line
employees that provide advice and guidance for founders seeking to take their companies
to the next stage of development.
As more accelerators join the market, it is expected that the competition for
mentors will increase, and good mentors will become even scarcer. In this scenario, the
mentor value proposition should be adjusted. One way to do this might be to pay mentors
a set stipend for their service (along the lines of a board member fee) or allowing mentors
to participate in investments the fund is making. Founders Institute, a leading U.S.-based
accelerator uses this "contract" model in order to secure mentors.
Another model of "paid mentors" is the "Entrepreneur in Residence" (EIR)
program in certain U.S.-based accelerators. The EIR is part of the accelerator's paid full
time staff and he/she is responsible for aiding entrepreneurs.
In both scenarios (contract and EIR), mentors are more motivated to spend time
giving their advice and knowledge to entrepreneurs, while the principal-agent alignment
is guaranteed. The downside of this strategy, which was cited by several interviewees,
could be that the intrinsic motivation of some mentors might be diminished. Also, paying
a full-time employee, such as an EIR, would reduce the profitability of the accelerator,
which already operates within very tight margins and today benefit from free mentors.
Another option for motivating mentors-combined with a regional or
specialization strategy-is to offer them networking or training possibilities that go
beyond their current connections or markets. For example, accelerators could set up
72
international conferences or other events and encourage their mentors to participate in
such events, thus helping them build their connections.
Accelerators should also partner with local high-caliber entrepreneurs that can
inspire new founders and help them build their brands in the local ecosystems. By having
such marquee entrepreneurs in the accelerator, it may be possible to differentiate from
other players in the accelerator market while also providing value to the founders.
Finally, accelerators can improve mentors' personal branding visibility in the
ecosystem by using them as spokespersons on specific subjects and providing media
exposure. For example, marquee entrepreneurs in an accelerator could be featured in
local business publications, at the same time mentioning their involvement with the
accelerator.
6.3
DESIGN PRINCIPLE #3: Streamline term deals
As competition among accelerators increases, and founders become more
sophisticated, there will be pressure not just on valuations but also on simplifying the
terms of deals. A recent example of this trend in the U.S. is Y-Combinator, which is now
offering a simplified deal: the fund takes 7% of an accelerated company for the price of
US$120,000, utilizing a simple structure called SAFE (simple agreement for future
equity). The SAFE combines the straightforward nature of equity with the flexibility of
the convertible note, but simplifies the associated operational requirements involved - for
example, they are not loans, do not accrue interest, etc.
73
Sophisticated entrepreneurs can avoid potentially dilutive and creative clauses
that may hide consulting fees that decrease the company's valuation, by seeking more
favorable deals from accelerators that provide simpler terms.
DESIGN PRINCIPLE #4: International partnerships
6.4
International partnerships with established global accelerators could generate
interesting benefits for Latin American accelerators. By partnering with established
global players, such as Techstars or MassChallenge, local accelerators could:
*
locally adapt their partner's world-class acceleration methodologies into the local
markets. This would increase the effectiveness of the program by incorporating
international best practices into the local operations
" tap into an international network of mentors, which would enable founders to find
answers to specific problems that may be too sophisticated for the local mentor
market.
*
Find exits beyond the region. Leveraging the venture capital networks of the
international accelerators would make it easier to exit to more developed markets
such as the U.S. Furthermore, it may be possible to conduct Demo Days in
multiple countries.
6.5
DESIGN PRINCIPLE #5: Work with the local governments to encourage
investments in innovation-driven enterprises
Although not a design principle per se, would-be regional accelerators need to
work with the local government to offer incentives to established companies who are
considering an investment in innovation-driven enterprises.
74
As I showed in previous chapters, given the relative underdevelopment of the
venture capital market vis-ai-vis other countries, an interesting source of deals could come
from established corporations. Latin American scholars suggest that the local or regional
government could extend tax-exemption privileges to corporations that are willing make
investment in or to acquire innovative companies. In this way, a more dynamic M&A
market for innovation-driven enterprises could be generated, as well as increased
economic dynamism.
75
Chapter 7
Conclusion
In the last decade, accelerators have grown into a worldwide phenomenon with an
impact on thousands of companies. Particularly in Latin America, the emergence of
accelerators is apparent, with some players positioning themselves as relevant
participants in the region. Throughout this thesis, I have highlighted key characteristics
and factors when thinking accelerators. The highlights are outlined below.
Although a recent phenomenon, accelerators are one of the preferred start-up
development instruments today, both for founders and governments
Accelerators enable founders to focus their efforts for a limited period of time in
order to get their idea off the ground. Founders can fail "fast and cheap" and test the
validity of their ideas without spending unnecessary time. At the same time, they
receive valuable advice and cash to make their ventures grow.
At the same time, accelerators allow governments to conduct targeted
development interventions in local ecosystems, in a limited time frame, and with a
smaller amount of investment. These targeted interventions have high visibility in the
markets, thus generating awareness, putting boundaries around the ecosystem, and
creating brand value for the governments.
76
*
There is considerable debate among scholars and practitioners as whether
accelerators add value
Because this a new field of study, only a few articles have been published on the
subject and the evidence regarding the ability-or possibility-that these
organizations will add value to the entrepreneur, to investors or to the relevant
ecosystems.
Within practitioners and the investment community at large, especially in the
Latin American market, there is debate about the real value of accelerators to the
companies and founders. The key items of debate are:
-
Is the distributed investment approach (i.e., "spray and pray") successful?
-
What models truly add value to the companies?
-
What if a founder has a high-capital project?
There is also debate among Latin American entrepreneurs and the investment
industry regarding the investment sophistication of accelerators and incubators in
general. Several of my interviewees mentioned that in the past there were instances in
which accelerators and incubators imposed deal terms (e.g., anti-dilution clauses,
extremely high valuation clauses, consulting fees, etc.) on unsophisticated start-ups,
which ultimately hindered their availability to raise capital.2 8
*
Increased competition will put further pressure on the accelerator model
As more accelerators join the market, all will face competition not only among
themselves, but also with many other sources of readily available capital, such as
28 See: <http://pulsosocial.com/2015/01/15/cuando-las-Start-ups-tienen-que-lidiar-con-los-problemasque-les-generan-las-incubadoras/>.
77
angels, venture capital funds, family offices, many of which have lower operating
cost structures. This results in several organizational impacts:
-
Deal flow will become scarcer as more accelerators compete for the same number
of start-ups.
-
Mentors may become less available. Unpaid but qualified mentors (one of the
cornerstones of the accelerator model) will become less available as competition
increases and as accelerators become less differentiated among themselves.
-
Pressure on operating margins. Accelerators operate on thin budgets, yet
increased competition for deals and mentors will result in higher customer
acquisition costs (marketing, recruitment, etc.).
-
Given that accelerated companies (start-ups) take time to become profitable (3-7
years), accelerators need to have proper funding in place to avoid being put out of
business by operating costs.
*
Consolidation and exits are to be expected
In an increasingly competitive market, accelerators will go bankrupt, will be
forced to merge with others, or will find new business models.
There are doubts in some market players about the sustainability of the model,
especially for smaller players. In the recent past, more than 20 accelerators including
large, established players such as Turner Accelerator, Excelerate Labs, Bootup Labs,
have closed their doors (McClure, 2015).
78
*
New business models will arise
In order to provide higher value to their clients, it is expected that more vertically
focused accelerators will arise, which will be able to develop and leverage their
industry networks and bring in specialist mentors.
Successful accelerators will leverage their brand to create better deal flow. That,
combined with increased industry expertise, will result in accelerators moving from
early stage to series A financing due to their higher understanding of the businesses
they are in and investors more willing to place large bets on successful managers.
To reduce operating and acquisition costs, accelerators will start pooling
resources together. An example of this is the Global Accelerator Network, which
provides not only a central application point for start-ups, but also a repository of best
practices and knowledge sharing, while helping accelerators present a unified voice to
the market.
In closing, despite the many challenges that venture accelerators will face as they
continue to grow and go international, there will be opportunities in Latin America for
those players that are willing and able to adapt their models to the realities of local
entrepreneurship and build on the unique characteristics of the region. In this way, not
only will they be successful economically, but also will play a key role in developing the
Latin American entrepreneurship ecosystem.
79
APPENDIX A
INTERVIEWS
Company
Position
Name
Country
Argentina
Agu de Marco
CEO
Wideo
Alan Farcas
Co-Founder
Nazca Ventures
Chile
Alicia de Santola
PhD Student
Harvard
USA
Amir Pinchas
Principal
Microsoft Ventures
Israel
Andres Barreto
Social Atom
Colombia
MIT
USA
Benjamin White
Seed Investor and
Entrepreneur
Professor of Entrepreneurial
Finance
Founder
21212
Brazil
Brad Bernthal
Associate Professor
University of Colorado
USA
Brad Feld
Founder
Techstars / Foundry Group
USA
Carl Stjernfeldt
NA Venture Manager
Shell Venture Capital
USA
Mexico
Antoinette Schoar
Cesar Salazar
Partner
500 Startups
Ciro Echesortu
Program Coordinator
NXTP Labs
Argentina
Daniel Collin Fehder
PhD Student
MIT
USA
David Cohen
CEO
Techstars
USA
Fernando L. de Larrea
Managing Partner
ALL Ventures
Mexico
Gonzalo Costa
Partner
NXTP Labs
Argentina
Gordon Jones
Managing Director
Harvard iLab
USA
Hernan Fernandez
Director
Angel Ventures
Mexico
Kirk Coburn
Surge Ventures
USA
Kyle Judah
Founder and Managing
Director
Managing Director
MIT GFSA
USA
Lorena Suarez
Managing Director
Wayra
Argentina
Lucila Campos
CEO
Funne.ly
Argentina
Luke Deering
Lead Author
Accelerate
USA
Marcelo Diaz
Partner
Inversur
Chile
Matt Cartagena
Co-Author
Accelerate
USA
Michael Leatherbee
PhD Student
Stanford
USA
Patrick McGinnis
CEO
Dirigo Advisors
USA
Patrick Riley
CEO
Paul English
Sandy Kreis
CEO
Blade
EIR
Blade
USA
USA
Sandy Yu
PhD Student
NYU
USA
Scott Stern
Professor of Management
MIT
USA
Sebastian Vidal
Executive Director
Start-up Chile
Chile
Director Venture Mentoring
Service
MIT
USA
Sherwin Greenblatt
_
Global Acceleration
Network
USA
80
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