Business Incubator and Accelerator Sustainability · Business Incubator and Accelerator...
Transcript of Business Incubator and Accelerator Sustainability · Business Incubator and Accelerator...
Business Incubator and
Accelerator Sustainability
Thea Chase and Julian Webb
May 2018
Contents 1 Background 4
2 Context for considering financial sustainability 4
21 Public support that encourages the right behaviour 5
22 The quality of ecosystems is an important factor in self sustainability 5
23 Blurred distinctions 5
3 Business Incubator Sustainability 6
4 Property based business model a foundation for self-sustainability 9
41 Critical factors to maximise financial self-sustainability 11
411 Scale of facilities 11
412 Free buildings with long term arrangements 12
413 Critical Mass of Demand 15
414 Time 15
42 Cowork spaces 16
5 Building on the foundation with other revenue sources 17
51 Success sharing 17
511 Small percentage of sweat equity 17
512 Small percentage of sales or increased sales (royalty) 19
513 Seed Funding 19
52 Training 21
53 Partnerships and corporate sponsorship broadening revenue opportunities 22
54 Hybrids Super incubators 23
55 Other commercial activities 23
56 Government funding 23
6 Accelerator Sustainability 25
61 Introduction Accelerator Models still evolving 25
62 Views on accelerator sustainability 27
621 Equity 28
622 Revenue share 29
623 Fee for service 29
624 Related business 29
625 Economies of scale 29
626 Conclusions 30
63 Models 31
631 Investment ndash funding centric 31
632 Community based ndash economic development 32
633 Corporate 33
634 Targeted populations and industries 34
635 Conclusions 35
1 Background This paper was initially commissioned by the BADIR Technology Incubator program in Saudi Arabia
in early 2018 to raise awareness about the global reality of incubator and accelerator financial self-
sustainability It was updated for broader circulation in conjunction with BIIA in Mid-2018
The BADIR Technology Incubator Program which commenced in 2007 pioneered incubation in
Saudi Arabia and now operates 8 technology incubators and 2 accelerators with more planned It
has become the benchmark for incubation in Saudi Arabia and indeed other countries in the Gulf
region
The authors Thea Chase from the USA and Julian Webb from CREEDA Projects Pty Ltd and BIIA in
Australia have extensive experience with incubation and acceleration in more than 50 countries and
work closely with BADIR in Saudi Arabia They thank BADIR for making this paper possible
2 Context for considering financial sustainability Across the globe most start-ups do not continue and of the small percentage that do only a tiny
percentage go on to grow An obvious market failure exists around provision of support to start-ups
whether in terms of infrastructure advice mentoring and coaching or seed finance Start-ups are
simply too risky for this to be viable without public support of one form or another
Hence it should be no surprise that all business incubators rely upon public sector support to some
degree for their establishment and capital costs and to support operational costs some for a limited
time and others for the long term From a purely private commercial point of view no business
incubators are independently financially viable in terms of covering both their operating and capital
costs and making a return to investors The few examples are the exception rather than the rule1
and also rely upon either corporate or public-sector support Over the past 50 years incubators have
become an accepted part of the landscape in most countries with numerous studies of their
operations and impact the results of which help justify public and other investment
Despite early promise it seems seed accelerators are in a similar position with only a few
exceptions that are privately self-sustainable notably y-Combinator Tech Stars 500 Start Ups and
maybe a few other early examples The bulk now rely upon government philanthropic or corporate
funding to support their operations Accelerator models however keep changing as operators search
for a viable business models and relevant impact As a far newer concept and service this is no real
surprise and is why data is hard to come by although research is underway to better understand the
role they play and the impact they achieve
Rather than asking the question can business incubators and accelerators be financially self-
sustainable more pertinent questions are
bull whether or not the public support can be provided in better ways than annual operating
grants
bull to what degree can they be self-sustainable and
bull what are the factors that underpin self-sustainability
1 Just about the only one is Raizcorp in South Africa run by an entrepreneur guru and which receives significant corporate support httpwwwraizcorpcom
Analysis of financial self-sustainability is complicated by the proliferation of services for start-ups in
the past decade many of which use the term incubation or acceleration in new ways and by fact
that accelerator models keep changing Definitions and distinctions are at times blurred
21 Public support that encourages the right behaviour Business incubators and accelerators should operate entrepreneurially in one sense as role models
for their clients Grants are necessary to assist with establishment but in the longer term may not be
the best mechanism for support Grants are normally for relatively short periods and may not
encourage the necessary longer-term perspective recognising it takes many years for client
companies to succeed They can make people lazy and may give the wrong incentive (ie more
grants) unless they are managed by very tight and clear KPIs such as creating x number of
companies and y number of jobs in a period There may be better ways than annual operating
grants Ways that encourage a long-term approach help with at least partial financial self-
sustainability and encourage the right entrepreneurial behaviour As is shown by the following
analysis of sustainable business incubator examples one common way is to provide incubators with
buildings at no or minimal cost They then have to work entrepreneurially to generate rental income
from start-ups Providing seed funds for incubators and accelerators to use to help finance the
growth of start-ups at the same time as encouraging private co-financing is another way public
funds can be used to encourage the right entrepreneurial behaviour and help achieve a degree of
financial self-sustainability A number of examples are outlined in the following analysis
22 The quality of ecosystems is an important factor in self sustainability In parts of the USA Europe Australia and New Zealand incubators and accelerators can rely upon
voluntary high-quality business mentors legal accounting and other professional help This means
they can operate with minimal staff and minimal costs This is not the case in more disadvantaged
regions and countries where this expertise has to be paid for or provided by paid staff Staffing
levels and the cost of operating a similar quality incubator or accelerator with a similar number of
clients may be far higher For this reason even with free buildings many incubators still rely upon a
percentage of public funding The analysis following profiles some examples in good entrepreneurial
ecosystems which cover all their operating costs by rent and other self-generated income albeit in
free buildings provided by the public sector They may not be the most relevant examples for
countries and regions with less well-developed ecosystems where more staff may be need where
costs may be higher and where partial self-sustainability may be a more relevant ambition
23 Blurred distinctions Since the Global Financial Crisis support services for start-ups have proliferated often calling
themselves incubators or accelerators with little regard for definitions This is especially so with
acceleration as noted by GUST in their 2016 report ldquoAs new models emerge the term accelerator
describes an increasingly diverse set of programs and organizations and often the lines that
distinguish accelerators from similar institutions like incubators and early-stage funds become
blurredrdquo2 The rapid rise of coworking spaces in the same period complicates the picture even
further especially when they accommodate acceleration programs or target start-ups
NESTA in the UK now considers incubation ldquonot just as the services provided by a selfndashidentified
lsquoincubatorrsquo but rather as an umbrella term for a range of startup programmesrdquo3
2 httpgustcomaccelerator_reports2016global
3 Start Up Programs Whatrsquos the difference NESTA 2015
In this report despite blurring lines of distinction we consider incubator and accelerator financial
sustainability separately to draw relevant insights from each which then may be combined in
practice around a mixed model Indeed proven and long-standing incubators that may have started
in the 1990s are very likely today to offer most if not all of the services in the table above
3 Business Incubator Sustainability As the World Bank notes ldquoSelf-sustainability while a major aspiration for incubators globally is often
seen as a big challengerdquo4
However there are many examples of business incubators that are financially self-sustainable in
terms of covering their operating costs from self-generated revenue typically in buildings for which
they do not pay rent or the capital costs of the building and after initial public seed funding for their
establishment This is illustrated by data in the NBIA 2012 State of the Industry Report5 which asked
respondents about their ability to maintain operations if cash operating subsidies ceased One third
(33) said they did not rely upon cash subsidies on par with survey results from 2006 and only 18
said they would have to discontinue their services if subsidies ceased
Figure 1 iNBIA - Ability of incubators to continue without subsidy
4World Bank infoDev Program Module 14 Business Models Incubator Manager Training Program
5 2012 State of the Business Incubation Industry NBIA
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Contents 1 Background 4
2 Context for considering financial sustainability 4
21 Public support that encourages the right behaviour 5
22 The quality of ecosystems is an important factor in self sustainability 5
23 Blurred distinctions 5
3 Business Incubator Sustainability 6
4 Property based business model a foundation for self-sustainability 9
41 Critical factors to maximise financial self-sustainability 11
411 Scale of facilities 11
412 Free buildings with long term arrangements 12
413 Critical Mass of Demand 15
414 Time 15
42 Cowork spaces 16
5 Building on the foundation with other revenue sources 17
51 Success sharing 17
511 Small percentage of sweat equity 17
512 Small percentage of sales or increased sales (royalty) 19
513 Seed Funding 19
52 Training 21
53 Partnerships and corporate sponsorship broadening revenue opportunities 22
54 Hybrids Super incubators 23
55 Other commercial activities 23
56 Government funding 23
6 Accelerator Sustainability 25
61 Introduction Accelerator Models still evolving 25
62 Views on accelerator sustainability 27
621 Equity 28
622 Revenue share 29
623 Fee for service 29
624 Related business 29
625 Economies of scale 29
626 Conclusions 30
63 Models 31
631 Investment ndash funding centric 31
632 Community based ndash economic development 32
633 Corporate 33
634 Targeted populations and industries 34
635 Conclusions 35
1 Background This paper was initially commissioned by the BADIR Technology Incubator program in Saudi Arabia
in early 2018 to raise awareness about the global reality of incubator and accelerator financial self-
sustainability It was updated for broader circulation in conjunction with BIIA in Mid-2018
The BADIR Technology Incubator Program which commenced in 2007 pioneered incubation in
Saudi Arabia and now operates 8 technology incubators and 2 accelerators with more planned It
has become the benchmark for incubation in Saudi Arabia and indeed other countries in the Gulf
region
The authors Thea Chase from the USA and Julian Webb from CREEDA Projects Pty Ltd and BIIA in
Australia have extensive experience with incubation and acceleration in more than 50 countries and
work closely with BADIR in Saudi Arabia They thank BADIR for making this paper possible
2 Context for considering financial sustainability Across the globe most start-ups do not continue and of the small percentage that do only a tiny
percentage go on to grow An obvious market failure exists around provision of support to start-ups
whether in terms of infrastructure advice mentoring and coaching or seed finance Start-ups are
simply too risky for this to be viable without public support of one form or another
Hence it should be no surprise that all business incubators rely upon public sector support to some
degree for their establishment and capital costs and to support operational costs some for a limited
time and others for the long term From a purely private commercial point of view no business
incubators are independently financially viable in terms of covering both their operating and capital
costs and making a return to investors The few examples are the exception rather than the rule1
and also rely upon either corporate or public-sector support Over the past 50 years incubators have
become an accepted part of the landscape in most countries with numerous studies of their
operations and impact the results of which help justify public and other investment
Despite early promise it seems seed accelerators are in a similar position with only a few
exceptions that are privately self-sustainable notably y-Combinator Tech Stars 500 Start Ups and
maybe a few other early examples The bulk now rely upon government philanthropic or corporate
funding to support their operations Accelerator models however keep changing as operators search
for a viable business models and relevant impact As a far newer concept and service this is no real
surprise and is why data is hard to come by although research is underway to better understand the
role they play and the impact they achieve
Rather than asking the question can business incubators and accelerators be financially self-
sustainable more pertinent questions are
bull whether or not the public support can be provided in better ways than annual operating
grants
bull to what degree can they be self-sustainable and
bull what are the factors that underpin self-sustainability
1 Just about the only one is Raizcorp in South Africa run by an entrepreneur guru and which receives significant corporate support httpwwwraizcorpcom
Analysis of financial self-sustainability is complicated by the proliferation of services for start-ups in
the past decade many of which use the term incubation or acceleration in new ways and by fact
that accelerator models keep changing Definitions and distinctions are at times blurred
21 Public support that encourages the right behaviour Business incubators and accelerators should operate entrepreneurially in one sense as role models
for their clients Grants are necessary to assist with establishment but in the longer term may not be
the best mechanism for support Grants are normally for relatively short periods and may not
encourage the necessary longer-term perspective recognising it takes many years for client
companies to succeed They can make people lazy and may give the wrong incentive (ie more
grants) unless they are managed by very tight and clear KPIs such as creating x number of
companies and y number of jobs in a period There may be better ways than annual operating
grants Ways that encourage a long-term approach help with at least partial financial self-
sustainability and encourage the right entrepreneurial behaviour As is shown by the following
analysis of sustainable business incubator examples one common way is to provide incubators with
buildings at no or minimal cost They then have to work entrepreneurially to generate rental income
from start-ups Providing seed funds for incubators and accelerators to use to help finance the
growth of start-ups at the same time as encouraging private co-financing is another way public
funds can be used to encourage the right entrepreneurial behaviour and help achieve a degree of
financial self-sustainability A number of examples are outlined in the following analysis
22 The quality of ecosystems is an important factor in self sustainability In parts of the USA Europe Australia and New Zealand incubators and accelerators can rely upon
voluntary high-quality business mentors legal accounting and other professional help This means
they can operate with minimal staff and minimal costs This is not the case in more disadvantaged
regions and countries where this expertise has to be paid for or provided by paid staff Staffing
levels and the cost of operating a similar quality incubator or accelerator with a similar number of
clients may be far higher For this reason even with free buildings many incubators still rely upon a
percentage of public funding The analysis following profiles some examples in good entrepreneurial
ecosystems which cover all their operating costs by rent and other self-generated income albeit in
free buildings provided by the public sector They may not be the most relevant examples for
countries and regions with less well-developed ecosystems where more staff may be need where
costs may be higher and where partial self-sustainability may be a more relevant ambition
23 Blurred distinctions Since the Global Financial Crisis support services for start-ups have proliferated often calling
themselves incubators or accelerators with little regard for definitions This is especially so with
acceleration as noted by GUST in their 2016 report ldquoAs new models emerge the term accelerator
describes an increasingly diverse set of programs and organizations and often the lines that
distinguish accelerators from similar institutions like incubators and early-stage funds become
blurredrdquo2 The rapid rise of coworking spaces in the same period complicates the picture even
further especially when they accommodate acceleration programs or target start-ups
NESTA in the UK now considers incubation ldquonot just as the services provided by a selfndashidentified
lsquoincubatorrsquo but rather as an umbrella term for a range of startup programmesrdquo3
2 httpgustcomaccelerator_reports2016global
3 Start Up Programs Whatrsquos the difference NESTA 2015
In this report despite blurring lines of distinction we consider incubator and accelerator financial
sustainability separately to draw relevant insights from each which then may be combined in
practice around a mixed model Indeed proven and long-standing incubators that may have started
in the 1990s are very likely today to offer most if not all of the services in the table above
3 Business Incubator Sustainability As the World Bank notes ldquoSelf-sustainability while a major aspiration for incubators globally is often
seen as a big challengerdquo4
However there are many examples of business incubators that are financially self-sustainable in
terms of covering their operating costs from self-generated revenue typically in buildings for which
they do not pay rent or the capital costs of the building and after initial public seed funding for their
establishment This is illustrated by data in the NBIA 2012 State of the Industry Report5 which asked
respondents about their ability to maintain operations if cash operating subsidies ceased One third
(33) said they did not rely upon cash subsidies on par with survey results from 2006 and only 18
said they would have to discontinue their services if subsidies ceased
Figure 1 iNBIA - Ability of incubators to continue without subsidy
4World Bank infoDev Program Module 14 Business Models Incubator Manager Training Program
5 2012 State of the Business Incubation Industry NBIA
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
63 Models 31
631 Investment ndash funding centric 31
632 Community based ndash economic development 32
633 Corporate 33
634 Targeted populations and industries 34
635 Conclusions 35
1 Background This paper was initially commissioned by the BADIR Technology Incubator program in Saudi Arabia
in early 2018 to raise awareness about the global reality of incubator and accelerator financial self-
sustainability It was updated for broader circulation in conjunction with BIIA in Mid-2018
The BADIR Technology Incubator Program which commenced in 2007 pioneered incubation in
Saudi Arabia and now operates 8 technology incubators and 2 accelerators with more planned It
has become the benchmark for incubation in Saudi Arabia and indeed other countries in the Gulf
region
The authors Thea Chase from the USA and Julian Webb from CREEDA Projects Pty Ltd and BIIA in
Australia have extensive experience with incubation and acceleration in more than 50 countries and
work closely with BADIR in Saudi Arabia They thank BADIR for making this paper possible
2 Context for considering financial sustainability Across the globe most start-ups do not continue and of the small percentage that do only a tiny
percentage go on to grow An obvious market failure exists around provision of support to start-ups
whether in terms of infrastructure advice mentoring and coaching or seed finance Start-ups are
simply too risky for this to be viable without public support of one form or another
Hence it should be no surprise that all business incubators rely upon public sector support to some
degree for their establishment and capital costs and to support operational costs some for a limited
time and others for the long term From a purely private commercial point of view no business
incubators are independently financially viable in terms of covering both their operating and capital
costs and making a return to investors The few examples are the exception rather than the rule1
and also rely upon either corporate or public-sector support Over the past 50 years incubators have
become an accepted part of the landscape in most countries with numerous studies of their
operations and impact the results of which help justify public and other investment
Despite early promise it seems seed accelerators are in a similar position with only a few
exceptions that are privately self-sustainable notably y-Combinator Tech Stars 500 Start Ups and
maybe a few other early examples The bulk now rely upon government philanthropic or corporate
funding to support their operations Accelerator models however keep changing as operators search
for a viable business models and relevant impact As a far newer concept and service this is no real
surprise and is why data is hard to come by although research is underway to better understand the
role they play and the impact they achieve
Rather than asking the question can business incubators and accelerators be financially self-
sustainable more pertinent questions are
bull whether or not the public support can be provided in better ways than annual operating
grants
bull to what degree can they be self-sustainable and
bull what are the factors that underpin self-sustainability
1 Just about the only one is Raizcorp in South Africa run by an entrepreneur guru and which receives significant corporate support httpwwwraizcorpcom
Analysis of financial self-sustainability is complicated by the proliferation of services for start-ups in
the past decade many of which use the term incubation or acceleration in new ways and by fact
that accelerator models keep changing Definitions and distinctions are at times blurred
21 Public support that encourages the right behaviour Business incubators and accelerators should operate entrepreneurially in one sense as role models
for their clients Grants are necessary to assist with establishment but in the longer term may not be
the best mechanism for support Grants are normally for relatively short periods and may not
encourage the necessary longer-term perspective recognising it takes many years for client
companies to succeed They can make people lazy and may give the wrong incentive (ie more
grants) unless they are managed by very tight and clear KPIs such as creating x number of
companies and y number of jobs in a period There may be better ways than annual operating
grants Ways that encourage a long-term approach help with at least partial financial self-
sustainability and encourage the right entrepreneurial behaviour As is shown by the following
analysis of sustainable business incubator examples one common way is to provide incubators with
buildings at no or minimal cost They then have to work entrepreneurially to generate rental income
from start-ups Providing seed funds for incubators and accelerators to use to help finance the
growth of start-ups at the same time as encouraging private co-financing is another way public
funds can be used to encourage the right entrepreneurial behaviour and help achieve a degree of
financial self-sustainability A number of examples are outlined in the following analysis
22 The quality of ecosystems is an important factor in self sustainability In parts of the USA Europe Australia and New Zealand incubators and accelerators can rely upon
voluntary high-quality business mentors legal accounting and other professional help This means
they can operate with minimal staff and minimal costs This is not the case in more disadvantaged
regions and countries where this expertise has to be paid for or provided by paid staff Staffing
levels and the cost of operating a similar quality incubator or accelerator with a similar number of
clients may be far higher For this reason even with free buildings many incubators still rely upon a
percentage of public funding The analysis following profiles some examples in good entrepreneurial
ecosystems which cover all their operating costs by rent and other self-generated income albeit in
free buildings provided by the public sector They may not be the most relevant examples for
countries and regions with less well-developed ecosystems where more staff may be need where
costs may be higher and where partial self-sustainability may be a more relevant ambition
23 Blurred distinctions Since the Global Financial Crisis support services for start-ups have proliferated often calling
themselves incubators or accelerators with little regard for definitions This is especially so with
acceleration as noted by GUST in their 2016 report ldquoAs new models emerge the term accelerator
describes an increasingly diverse set of programs and organizations and often the lines that
distinguish accelerators from similar institutions like incubators and early-stage funds become
blurredrdquo2 The rapid rise of coworking spaces in the same period complicates the picture even
further especially when they accommodate acceleration programs or target start-ups
NESTA in the UK now considers incubation ldquonot just as the services provided by a selfndashidentified
lsquoincubatorrsquo but rather as an umbrella term for a range of startup programmesrdquo3
2 httpgustcomaccelerator_reports2016global
3 Start Up Programs Whatrsquos the difference NESTA 2015
In this report despite blurring lines of distinction we consider incubator and accelerator financial
sustainability separately to draw relevant insights from each which then may be combined in
practice around a mixed model Indeed proven and long-standing incubators that may have started
in the 1990s are very likely today to offer most if not all of the services in the table above
3 Business Incubator Sustainability As the World Bank notes ldquoSelf-sustainability while a major aspiration for incubators globally is often
seen as a big challengerdquo4
However there are many examples of business incubators that are financially self-sustainable in
terms of covering their operating costs from self-generated revenue typically in buildings for which
they do not pay rent or the capital costs of the building and after initial public seed funding for their
establishment This is illustrated by data in the NBIA 2012 State of the Industry Report5 which asked
respondents about their ability to maintain operations if cash operating subsidies ceased One third
(33) said they did not rely upon cash subsidies on par with survey results from 2006 and only 18
said they would have to discontinue their services if subsidies ceased
Figure 1 iNBIA - Ability of incubators to continue without subsidy
4World Bank infoDev Program Module 14 Business Models Incubator Manager Training Program
5 2012 State of the Business Incubation Industry NBIA
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
1 Background This paper was initially commissioned by the BADIR Technology Incubator program in Saudi Arabia
in early 2018 to raise awareness about the global reality of incubator and accelerator financial self-
sustainability It was updated for broader circulation in conjunction with BIIA in Mid-2018
The BADIR Technology Incubator Program which commenced in 2007 pioneered incubation in
Saudi Arabia and now operates 8 technology incubators and 2 accelerators with more planned It
has become the benchmark for incubation in Saudi Arabia and indeed other countries in the Gulf
region
The authors Thea Chase from the USA and Julian Webb from CREEDA Projects Pty Ltd and BIIA in
Australia have extensive experience with incubation and acceleration in more than 50 countries and
work closely with BADIR in Saudi Arabia They thank BADIR for making this paper possible
2 Context for considering financial sustainability Across the globe most start-ups do not continue and of the small percentage that do only a tiny
percentage go on to grow An obvious market failure exists around provision of support to start-ups
whether in terms of infrastructure advice mentoring and coaching or seed finance Start-ups are
simply too risky for this to be viable without public support of one form or another
Hence it should be no surprise that all business incubators rely upon public sector support to some
degree for their establishment and capital costs and to support operational costs some for a limited
time and others for the long term From a purely private commercial point of view no business
incubators are independently financially viable in terms of covering both their operating and capital
costs and making a return to investors The few examples are the exception rather than the rule1
and also rely upon either corporate or public-sector support Over the past 50 years incubators have
become an accepted part of the landscape in most countries with numerous studies of their
operations and impact the results of which help justify public and other investment
Despite early promise it seems seed accelerators are in a similar position with only a few
exceptions that are privately self-sustainable notably y-Combinator Tech Stars 500 Start Ups and
maybe a few other early examples The bulk now rely upon government philanthropic or corporate
funding to support their operations Accelerator models however keep changing as operators search
for a viable business models and relevant impact As a far newer concept and service this is no real
surprise and is why data is hard to come by although research is underway to better understand the
role they play and the impact they achieve
Rather than asking the question can business incubators and accelerators be financially self-
sustainable more pertinent questions are
bull whether or not the public support can be provided in better ways than annual operating
grants
bull to what degree can they be self-sustainable and
bull what are the factors that underpin self-sustainability
1 Just about the only one is Raizcorp in South Africa run by an entrepreneur guru and which receives significant corporate support httpwwwraizcorpcom
Analysis of financial self-sustainability is complicated by the proliferation of services for start-ups in
the past decade many of which use the term incubation or acceleration in new ways and by fact
that accelerator models keep changing Definitions and distinctions are at times blurred
21 Public support that encourages the right behaviour Business incubators and accelerators should operate entrepreneurially in one sense as role models
for their clients Grants are necessary to assist with establishment but in the longer term may not be
the best mechanism for support Grants are normally for relatively short periods and may not
encourage the necessary longer-term perspective recognising it takes many years for client
companies to succeed They can make people lazy and may give the wrong incentive (ie more
grants) unless they are managed by very tight and clear KPIs such as creating x number of
companies and y number of jobs in a period There may be better ways than annual operating
grants Ways that encourage a long-term approach help with at least partial financial self-
sustainability and encourage the right entrepreneurial behaviour As is shown by the following
analysis of sustainable business incubator examples one common way is to provide incubators with
buildings at no or minimal cost They then have to work entrepreneurially to generate rental income
from start-ups Providing seed funds for incubators and accelerators to use to help finance the
growth of start-ups at the same time as encouraging private co-financing is another way public
funds can be used to encourage the right entrepreneurial behaviour and help achieve a degree of
financial self-sustainability A number of examples are outlined in the following analysis
22 The quality of ecosystems is an important factor in self sustainability In parts of the USA Europe Australia and New Zealand incubators and accelerators can rely upon
voluntary high-quality business mentors legal accounting and other professional help This means
they can operate with minimal staff and minimal costs This is not the case in more disadvantaged
regions and countries where this expertise has to be paid for or provided by paid staff Staffing
levels and the cost of operating a similar quality incubator or accelerator with a similar number of
clients may be far higher For this reason even with free buildings many incubators still rely upon a
percentage of public funding The analysis following profiles some examples in good entrepreneurial
ecosystems which cover all their operating costs by rent and other self-generated income albeit in
free buildings provided by the public sector They may not be the most relevant examples for
countries and regions with less well-developed ecosystems where more staff may be need where
costs may be higher and where partial self-sustainability may be a more relevant ambition
23 Blurred distinctions Since the Global Financial Crisis support services for start-ups have proliferated often calling
themselves incubators or accelerators with little regard for definitions This is especially so with
acceleration as noted by GUST in their 2016 report ldquoAs new models emerge the term accelerator
describes an increasingly diverse set of programs and organizations and often the lines that
distinguish accelerators from similar institutions like incubators and early-stage funds become
blurredrdquo2 The rapid rise of coworking spaces in the same period complicates the picture even
further especially when they accommodate acceleration programs or target start-ups
NESTA in the UK now considers incubation ldquonot just as the services provided by a selfndashidentified
lsquoincubatorrsquo but rather as an umbrella term for a range of startup programmesrdquo3
2 httpgustcomaccelerator_reports2016global
3 Start Up Programs Whatrsquos the difference NESTA 2015
In this report despite blurring lines of distinction we consider incubator and accelerator financial
sustainability separately to draw relevant insights from each which then may be combined in
practice around a mixed model Indeed proven and long-standing incubators that may have started
in the 1990s are very likely today to offer most if not all of the services in the table above
3 Business Incubator Sustainability As the World Bank notes ldquoSelf-sustainability while a major aspiration for incubators globally is often
seen as a big challengerdquo4
However there are many examples of business incubators that are financially self-sustainable in
terms of covering their operating costs from self-generated revenue typically in buildings for which
they do not pay rent or the capital costs of the building and after initial public seed funding for their
establishment This is illustrated by data in the NBIA 2012 State of the Industry Report5 which asked
respondents about their ability to maintain operations if cash operating subsidies ceased One third
(33) said they did not rely upon cash subsidies on par with survey results from 2006 and only 18
said they would have to discontinue their services if subsidies ceased
Figure 1 iNBIA - Ability of incubators to continue without subsidy
4World Bank infoDev Program Module 14 Business Models Incubator Manager Training Program
5 2012 State of the Business Incubation Industry NBIA
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Analysis of financial self-sustainability is complicated by the proliferation of services for start-ups in
the past decade many of which use the term incubation or acceleration in new ways and by fact
that accelerator models keep changing Definitions and distinctions are at times blurred
21 Public support that encourages the right behaviour Business incubators and accelerators should operate entrepreneurially in one sense as role models
for their clients Grants are necessary to assist with establishment but in the longer term may not be
the best mechanism for support Grants are normally for relatively short periods and may not
encourage the necessary longer-term perspective recognising it takes many years for client
companies to succeed They can make people lazy and may give the wrong incentive (ie more
grants) unless they are managed by very tight and clear KPIs such as creating x number of
companies and y number of jobs in a period There may be better ways than annual operating
grants Ways that encourage a long-term approach help with at least partial financial self-
sustainability and encourage the right entrepreneurial behaviour As is shown by the following
analysis of sustainable business incubator examples one common way is to provide incubators with
buildings at no or minimal cost They then have to work entrepreneurially to generate rental income
from start-ups Providing seed funds for incubators and accelerators to use to help finance the
growth of start-ups at the same time as encouraging private co-financing is another way public
funds can be used to encourage the right entrepreneurial behaviour and help achieve a degree of
financial self-sustainability A number of examples are outlined in the following analysis
22 The quality of ecosystems is an important factor in self sustainability In parts of the USA Europe Australia and New Zealand incubators and accelerators can rely upon
voluntary high-quality business mentors legal accounting and other professional help This means
they can operate with minimal staff and minimal costs This is not the case in more disadvantaged
regions and countries where this expertise has to be paid for or provided by paid staff Staffing
levels and the cost of operating a similar quality incubator or accelerator with a similar number of
clients may be far higher For this reason even with free buildings many incubators still rely upon a
percentage of public funding The analysis following profiles some examples in good entrepreneurial
ecosystems which cover all their operating costs by rent and other self-generated income albeit in
free buildings provided by the public sector They may not be the most relevant examples for
countries and regions with less well-developed ecosystems where more staff may be need where
costs may be higher and where partial self-sustainability may be a more relevant ambition
23 Blurred distinctions Since the Global Financial Crisis support services for start-ups have proliferated often calling
themselves incubators or accelerators with little regard for definitions This is especially so with
acceleration as noted by GUST in their 2016 report ldquoAs new models emerge the term accelerator
describes an increasingly diverse set of programs and organizations and often the lines that
distinguish accelerators from similar institutions like incubators and early-stage funds become
blurredrdquo2 The rapid rise of coworking spaces in the same period complicates the picture even
further especially when they accommodate acceleration programs or target start-ups
NESTA in the UK now considers incubation ldquonot just as the services provided by a selfndashidentified
lsquoincubatorrsquo but rather as an umbrella term for a range of startup programmesrdquo3
2 httpgustcomaccelerator_reports2016global
3 Start Up Programs Whatrsquos the difference NESTA 2015
In this report despite blurring lines of distinction we consider incubator and accelerator financial
sustainability separately to draw relevant insights from each which then may be combined in
practice around a mixed model Indeed proven and long-standing incubators that may have started
in the 1990s are very likely today to offer most if not all of the services in the table above
3 Business Incubator Sustainability As the World Bank notes ldquoSelf-sustainability while a major aspiration for incubators globally is often
seen as a big challengerdquo4
However there are many examples of business incubators that are financially self-sustainable in
terms of covering their operating costs from self-generated revenue typically in buildings for which
they do not pay rent or the capital costs of the building and after initial public seed funding for their
establishment This is illustrated by data in the NBIA 2012 State of the Industry Report5 which asked
respondents about their ability to maintain operations if cash operating subsidies ceased One third
(33) said they did not rely upon cash subsidies on par with survey results from 2006 and only 18
said they would have to discontinue their services if subsidies ceased
Figure 1 iNBIA - Ability of incubators to continue without subsidy
4World Bank infoDev Program Module 14 Business Models Incubator Manager Training Program
5 2012 State of the Business Incubation Industry NBIA
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
In this report despite blurring lines of distinction we consider incubator and accelerator financial
sustainability separately to draw relevant insights from each which then may be combined in
practice around a mixed model Indeed proven and long-standing incubators that may have started
in the 1990s are very likely today to offer most if not all of the services in the table above
3 Business Incubator Sustainability As the World Bank notes ldquoSelf-sustainability while a major aspiration for incubators globally is often
seen as a big challengerdquo4
However there are many examples of business incubators that are financially self-sustainable in
terms of covering their operating costs from self-generated revenue typically in buildings for which
they do not pay rent or the capital costs of the building and after initial public seed funding for their
establishment This is illustrated by data in the NBIA 2012 State of the Industry Report5 which asked
respondents about their ability to maintain operations if cash operating subsidies ceased One third
(33) said they did not rely upon cash subsidies on par with survey results from 2006 and only 18
said they would have to discontinue their services if subsidies ceased
Figure 1 iNBIA - Ability of incubators to continue without subsidy
4World Bank infoDev Program Module 14 Business Models Incubator Manager Training Program
5 2012 State of the Business Incubation Industry NBIA
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Others are partially self-sustainable combining self-generated revenue with public subsidies as
illustrated by data from the European Business Innovation Centre Network EBN which reports in its
2016 Impact Report that on average public subsidies contributed 68 of member revenues and that
of the remaining 32 58 was contributed by rent and 15 from other income from SMEs and
entrepreneurs
Figure 2 EBN Impact Report 2016 Incubator public subsidies
Figure 3 EBN Impact Report 2016 Incubator private revenue
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Across the globe the vast majority of self-sustainable or partially self-sustainable business incubators
rely upon public funding for their establishment and then a rental business model which
predominates and has been supported by governments in numerous countries such as China USA
Europe Malaysia and Australia and which is used as a foundation for a mixed business model such
as India Indeed most incubators have a mixed business model to some extent making revenue from
a range of sources including from training and success sharing with clients
This is illustrated by UK data which shows the importance of public university and corporate support
Percentage of UK incubators receiving funding from different sources6
Other incubators and incubation programs deliberately rely upon long term government funding for
the bulk of their revenue as is the case with the technology commercialisation incubation program in
Israel and much of the incubation in the Gulf at least to date in Saudi Arabia Qatar and Kuwait
although the situation is changing In these cases government is buying the incubation outputs
whether they be jobs companies or commercialisation and providing a service of public benefit at
the same time as addressing a market failure
Self-sustainability is not always desirable if necessary services have to be understaffed or below
standard to make ends meet financially Incubators in many countries or disadvantaged regions
cannot rely upon the free mentoring and professional services that incubators enjoy in other more
developed ecosystems which can minimize operating costs by relying on free services without
compromising services These countries and regions also have well developed entrepreneurial
ecosystems meaning there are fewer gaps and hurdles for entrepreneurs to overcome in other
words less need for incubation
Understanding the particular conditions that underpin sustainable business models is most important
especially the rent-based property model and how this underpins a mixed revenue model with
additional revenue from success sharing training and other sources
Ultimately the question is to what extent can incubators be financially self-sustaining in particular
circumstances and working for particular objectives Whatever the answer it needs to be planned and
will take time to achieve
6 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
4 Property based business model a foundation for self-
sustainability The traditional property-based incubation model is the most common around the world For instance
in 2012 93 of USA incubators had a dedicated facility The model normally relies upon free buildings
(not having to pay capital costs or heavily subsidized rental) with long term arrangements and of
sufficient scale so that the rent and associated facility and office service fees charged to tenants cover
all or a large portion of operating costs Business support is typically bundled in with the rent and not
charged separately
Given incubation relies upon physical facilities it is no surprise that globally a very high percentage
of incubators rely upon rental income as their main revenue source For example the NBIA 2012 State
of the Business Incubation Industry report7 shows that rent accounts for 53 of revenues on average
Figure 4 NBIA - Incubator revenue by source
As mentioned earlier with the 150 incubators in the European Business and Innovation Centre
Network (EBN) public subsidies provide for 68 of revenues and rental fees (housing) accounts for a
total of 58 of the remaining 32 of revenue8
Incubators that rely heavily on rental fees often employ fewer staff members in comparison to those
that rely on subsidies which can afford larger staff numbers Incubators that rely on rental fees for
sustainability typically have small staff numbers ranging from one to five members depending upon
the incubatorrsquos size For instance in 2012 in the USA the average full time equivalent staff numbers
per incubator in the USA was 18 down from 24 in 20029 and in 2012 the average number of clients
in USA incubators was 35 In Europe with higher levels of subsidy EBNrsquos BICrsquos employ more people10
7 2012 State of the Business Incubation Industry NBIA
8 EBN EU BIC 2016 Impact Report
9 ibid
10 EBN BIC Observatory 2016
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
However it must be noted that these incubators in the USA and other developed countries rely upon
significant voluntary assistance from quality mentors and business professionals something that is far
more difficult to achieve in many other countries
Anchor tenants
A feature of property models is anchor tenants Anchor tenants are organizations who are not
incubatees and who are rented space on longer term arrangements They may be service providers
useful to incubatees or related organizations who help attract incubatees to the facility or graduates
or simply organizations renting larger spaces to provide cash flow to the incubator In the USA in 2012
15 of space in USA incubators was rented to anchor tenants
Stepped and Discounted Rental Rates
Many incubators have discounted rental rates stepped up to the commercial rate over the typical
period of incubation say 25 in year 1 50 in year 2 75 in year 3 and 100 of the commercial rate
thereafter
Anchor tenant example Appalachia incubators
Appalachia is a cultural region in the Eastern United States that stretches from the Southern Tier
of New York to northern Alabama Mississippi and Georgia A total of 76 incubators responded to
the 2009 survey of Appalachian business incubators Of these 39 ARC incubators (~50) house
service providers and 38 incubators (~50) house anchor tenants
The presence of anchor tenants in a significant percentage of ARC survey respondents is seen as a
positive indicator for two reasons First the presence of anchor or key tenants can influence
whether an incubator is financially viable Second anchor or key tenants can provide important
services and benefits to incubating tenants ranging from providing supplier or service-provider
opportunities to acting as mentors1
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Others instead and to maximizing the rental yield charge a premium for smaller spaces and rent
clients just for the space they need allowing them to change (increase or decrease) on a monthly
basis with a license agreement rather than a lease They may only need 20m2 and be prepared to pay
a premium for such a small space Commercial comparisons are often only realistic for larger spaces
around 100m2
41 Critical factors to maximise financial self-sustainability Three critical factors work together to make this model viable
1 Scale of the facility
2 Free buildings with long term arrangements
3 A critical mass of demand
4 Time
411 Scale of facilities Size matters when it comes to the property-based incubation model Economies of scale are crucial
so that a large proportion of the operating costs are covered by rent The rule of thumb in the USA
and Europe is 3500m2 but it all depends on local conditions The size required depends on the level
of salaries and other operating costs and potential income which in turn depends heavily on prevailing
rental rates against which incubator rates are pegged Incubators struggle when they are too small
Unfortunately in the Middle east 96 have an average of 1000m2 according to the 2011 iPark11
evaluation benchmarking exercise which also found the international average size of an incubator is
4700m2 The situation may be changing at least if the Qatar Business Incubator is any indication
claiming to be the biggest mixed-use incubator in the world with a facility of 20000m212
China with the Torch Program under the Ministry of Science and Technology takes scale to another
level The best of Chinarsquos 1239 technology incubators and 435 national level technology incubators
supported under the program are located in high technology zones or parks of one form or another
capitalising upon the benefits of clustering and so entrepreneurs can benefit from the regulatory tax
and financing services offered in these zones13 and with many tens of thousands of square metres at
their disposal For example
bull Shanghai Pudong Software Park Incubator located in the China (Shanghai) Pilot Free Trade Zone
and the core area of Zhangjiang National Innovation Demonstration Zone is a ldquostate-level science
and technology business incubatorrdquo identified by the Torch Center of the Ministry of Science and
Technology and has 40000m2 for incubation of which 31741m2 is leasable The incubator is
profitable and most revenues are from rent and will soon be enhanced by returns from its seed
fund investment in clients
bull National Science Park of Southeast University (SEUSP) operated by Jiangsu Dongda Science and
Technology Park Development Co Ltd has a rentable area of 127000 m2 and more than 350
companies under incubation It makes 60 of its revenue from rent The initial capital investment
was from the university
bull Suzhou(Cao Hu )Tech Park of Xirsquoan Jiaotong University is a more recent development (2012) by
Xian Jiaotong University and Xiangcheng Economic Development Zone with 28000m2 for
11 iPark ndash Jordanrsquos Technology Hub wwwiParkjo
12 httpwwwqbicqawhy-qbicspace
13 httpwwwchinatorchgovcnenglishxhtmlProgramhtml
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
incubation with 115 incubatees in 2017 in a park with a further 90000m2 of office space Only
30 of its revenues are from subsidies14
In effect China combines incubation technology parks
clustering and early stage financing into one Since the
program started in 1988 it has taken significant
investment from the Torch Program and municipal
partners but the reported results including 11 of
Chinarsquos GDP are more astounding than the scale They
are summarised by the University of NSW15 in the
adjacent graphic noting the investment may well be
understated in terms of the capital cost invested by
municipal partners Writing in the Huffington Post Steve Blank calls the Torch Program the ldquoGlow
that can light the worldrdquo saying ldquoIn size scale and commercial results Chinarsquos Torch Program from
MOST (the Ministry of Science and Technology) is the most successful entrepreneurial program in the
world Of all the Chinese government programs the Torch Program is the one program that kick-
started Chinese high-tech innovation and start-upsrdquo16
412 Free buildings with long term arrangements A large facility on its own is insufficient if
the incubator has to pay the capital costs
or rent There is simply no way to make
a margin to cover the costs and in
particular the cost of a business support
program Buildings may be provided on a
long-term basis with what is called a
peppercorn rental typically a nominal
sum such as $100 or they may be
owned having been purchased or
purpose built with public funding In the
West incubators commonly use old
disused facilities provided by state or
local governments or universities which
they refurbish as business incubators
Old manufacturing facilities schools
council depots are not uncommon In
other countries old disused buildings are
far less common in which case purpose-
built facilities may be the best option
This is common for example in China
14 Information from the authors private contact with the incubators
15 httpwwwtorchunsweduaunational-context
16 httpswwwhuffingtonpostcomsteve-blankchinas-torch-program-the-_b_3063069html
Example INNOVATION DEPOT Birmingham Alabama
USA
Building Former Sears store in downtown Birmingham
Constructed Late 1940s
Renovated 2006
Renovation Cost $17 million
Renovation Funding Sources City of Birmingham
Jefferson County University of Alabama at Birmingham
private donations
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Korea and other parts of Asia for instance at the Hong Kong Science and Technology Park17 or
Technology Park Malaysia18
The National Science and Technology Entrepreneurship Development Board in the Department of
Science and Technology19 is the main funding body for technology incubators in India They know the
importance of free facilities and mandate in their guidelines that the host institutions mostly
universities and research institutes have to provide the facilities and utilities at no cost to incubators
which need to be run at armrsquos length from the host institution typically by new non-profit
organisations They make it clear they will only provide funding for 5 years after which the incubator
has to generate the bulk of its own revenues although they do continue to provide what may be called
project funding To date facilities have not been large enough and rent averages around 25 of
revenues Accordingly they are changing the guidelines to mandate 2000m2 must be provided
t-Hub in Hyderabad is a good
example It is being constructed with
public funds claiming to be the
largest technology incubator in South
Asia with 70000ft2 (~7000m2) in
Phase 1 and another 300000ft
(~30000m2) as Phase 2 in the next 3
years20
17 wwwhkstporgenabout-hkstpthe-corporationabout-hkstp
18 httpwwwtpmcommy
19 httpwwwnstedbcom
20 Personal conversations with NSTEDB head Mr HK Mittal and httpstartuphyderabadcomt-hub-phase-2-hyderabad-4-times-bigger-phase-1
Example T-Hub India ndash largest technology incubator in South
Asia
T-Hub also illustrates an important trend whereby leading
incubators incorporate incubation acceleration cowork spaces
and seed funding sometimes referred to as Super incubators or
Hubs
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
The Innovation Centre Sunshine Coast is an example of a
technology incubator where the university has provided a
1500m2 purpose-built facility for incubation in a regional
area just north of Brisbane21
21 httpsinnovationcentrecomau
Example Innovation Centre Sunshine
Coast
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
413 Critical Mass of Demand While the property model works well at scale
in major population centres it struggles in
smaller communities where there is not the
critical mass of demand to underpin the
necessary economies of scale The model
can still underpin a sustainability strategy
but needs to be complemented with other
revenue sources and related services to
ensure relevance
This is illustrated by the Grand Junction
Colorado mixed use business incubator
(BIC) With 35000ft2 of incubation space a
loan fund and as a provider of SBDC
services BIC is 75 self-funded Income is
generated through a variety of sources
including tenant rent and program fees
low-cost workshops and classes Business
Loan Fund interest Enterprise Zone
administrative fees and property
management fees for a Department of
Energy facility located on the campus BIC
also receives grants from city county state
and federal government entities and
sponsorships from local banks corporate
entities service clubs and private donors22
414 Time It takes time to adapt incubation to particular local circumstances to evolve government support
systems and incubator business models that work and maximise the potential for self-sustainability
In other words policies and government support systems need to evolve along with the incubators
supported to jointly maximise the potential for self-sufficiency The Torch Program in China started
in 1988 and only in the last decade or two has the program and its incubators with Chinese
characteristics become a beacon for others it took many years to perfect the system Similarly the
Indian incubation system under the NSTEDB started in 1984 but took many years to get the policy and
ecosystem right so that now incubators are only funded by the national government for 5 years but
benefit from seed funds they can use with their clients In most countries the same sort of evolution
applies Malaysia with good incubators in parks such as Technology Park Malaysia (TPM) where
government funds the capital costs and the incubator relies mostly on rent found performance
improved dramatically when the incubators were corporatized ie owned and managed by
independent government owned non-profit companies as opposed to by government departments
22 httpgjincubatororg
Example Grand Junction Colorado Business
incubation Centre in a community of 60000
people
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
42 Cowork spaces Cowork spaces have a similar business model to property-based business incubators making most of
their revenue from renting desks and space as shown by Deskmag data below23
The big and critical difference is that they do not invest in a comprehensive business support program
allowing 74 of those that need to be profitable to break even or make a profit They simply canrsquot
afford to and instead rely upon events and peer learning None the less numerous property-based
incubators around the world now incorporate cowork spaces into their offering and or work with
private cowork spaces
23 Deskmag 2017 Global Survey
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
5 Building on the foundation with other revenue sources As noted earlier rental revenue is often supplemented with revenue from a range of other sources in
particular from sharing in the success of clients and training
51 Success sharing With success sharing the incubator shares in the financial success of clients to generate
additional revenue that supplements rental income Even though it does not generate reliable
annual revenue it can be attractive in that clients only pay if they are successful and the
incubator and client interests are thereby aligned There are a few variants
1 Small percentage of sweat equity typically seen in technology incubators for which there are many examples eg Cicada Innovations Sydney (see below)
2 Small royalty on client revenues which is far rarer than equity examples eg SINE at IIT Bombay which also takes a small equity position (see below) and CTIC an IT incubator in Dakka Senegal24 and Western BACE in Melbourne Australia25
3 Finance brokerage whereby the incubator takes a percentage of the finance it helps a client raise typically 1-2 but not if it takes equity
4 Own seed fund investment with a spectrum from supplementing rent with seed fund management fees and a percentage of profits (eg IceHouse NZ Building Clever Companies NZ Indian Technology Incubators) to the very few where investment is the main revenue source (eg PowerHouse NZ)
511 Small percentage of sweat equity With this variant a small percentage of equity typically in the order of 5 is taken in clients Note
the incubators do not pay for the equity with cash Instead it is provided as a condition of incubation
Equity stakes vary by incubator type and from one client to the next Most incubators donrsquot exceed a
10 equity stake while others go as low as 2
The NBIA 2012 Stock Take showed that 29 of technology incubators take equity in some or all of
their clients compared to 13 for mixed use incubation programs Interestingly this is a significant
decline from 2006 when 46 of technology incubators took equity in some or all of their clients
24 httpwwwcticdakarcomfr
25 httpwesternbacecom
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
This equity which is likely to be diluted by financing rounds does not provide for reliable day to day
revenues It may only be
realizable at exit events or
via founder buy back
arrangements up to 10
years later Instead it allows
the incubator to share in
client success and can be
very useful for motivating
and paying for the right sort
of staff people who may be
allocated a of the
eventual returns None the
less the returns at times can
be high Cicada Innovations
in Sydney26 is just one of
many good examples
involving a ldquofreerdquo building
and in which rent covers the
basic costs and the 5
equity in all clients shares in their success and is used as an incentive for staff
SINE at IIT Bombay27 one of Indiarsquos leading
technology incubators is another example
that enjoys free buildings and shares in client
success by way of both equity and revenue
sharing and with its own seed fund
Raizcorp28 is a rare example of a for-profit
incubator that provides a return to its investors
Raizcorp makes a small profit on rentals and
services charged at market-related rates shares
in the profits and takes an equity stake in the
companies incubated It currently supports more
than 500 businesses with more than 1500
businesses that have graduated since it started in
2000 It develops more than 3000 businesses
per year in other entrepreneurial programs and
employs over 100 full-time staff Raizcorp
generates approximately 40 of its revenue
from profit share and dividends 40 from
Services to Corporates (fees) 5 project
work and 5 from rental
26 cicadainnovationscom
27 httpsineiitborgsineabout-usabout-sine 28 httpwwwraizcorpcomabout-raizcorp
Example Cicada Innovations Sydney iNBIA Award winner - Randall
M Whaley Incubator of the Year 2018
With large free facilities old refurbished railway workshops in a
prime location Cicada Innovations is a classic example Rent covers
the basic costs and the 5 equity taken in all incubatees allows both
the staff and the incubator to share in client success
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
512 Small percentage of sales or increased sales (royalty) As with sweat equity royalty arrangements typically supplement rental revenue but are rarer (see
Maxum example below)
In the case of incubation royalties are often expressed as a percentage in the order of 2-10 of the
incubatees sales or increase in sales for a fixed period such as 3 years or while under incubation
Equity is often preferable unless the royalty on sales relates to technology transfer agreements such
as occurs with some Indian technology incubators commercialising technology from the host
university or unless the incubator is actively involved in helping generate sales as in the case of the
CTIC in Dakka29 However other examples do occur where a royalty on sales is a preferred mechanism
for the incubator and clients for instance Western BACE in Melbourne30 which has a large free building
and co-work space and charges for incubation with a 7 royalty on sales Another is the Maxum
Business Incubator in South Africa Maxumrsquos incubatees pay for the incubation services through a
royalty system This system means that graduates pay Maxum a royalty of 2 of annual turnover for
the equivalent period that they participate in the incubation program Despite being in operation for
a couple of years only 12 of the costs of the incubator are covered by royalty income
In India there are examples where royalty is combined with equity ie SINE at IIT Bombay which helps
commercialise IIT technology and has its own seed fund (see below)31
513 Seed Funding A few incubators have their own seed funds which generate revenue to supplement rental revenue
(eg Dublin BIC32 IceHouse NZ Building Clever Companies NZ Indian Technology Incubators such
as SINE at IIT Bombay) and at the same time increasing the power of their incubation For a very
few return on investment from seed funding is the main revenue source (eg PowerHouse-Ventures
NZ) It needs to be noted that the vast majority of incubators that operate with seed funds proved
their capability by succeeding with incubation first before managing to set up a seed fund either
with public investment or a mixture of public and private investment
Under the guidance of the National Science and Technology Entrepreneurship Development Board in
India incubators with proven quality manage seed funds capitalized by the Technology Development
Board of India33 This has proven very successful for the incubators concerned which can use the funds
for debt or equity financing and the Technology Development Board which has seen the power of
investing via incubators in companies supported by incubators34 SINE at IIT Bombay is just one
example of an incubator that has succeeded with significant equity returns from its seed fund that
enabled it to be self-sufficient after only a few years of operation35 A number of incubators in New
29 ibid
30 ibid
31 httpsineiitborgsineincubationrelevant-facts
32 wwwdublinbicie
33 httpwwwnstedbcominstitutionaltbihtm
34 Authorrsquos personal communication with the head of the NSTEDB
35 httpsineiitborgsineabout-usabout-sine
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Zealand manage funds capitalized by angel investors and government (wwwnzvifconz) for which
good examples are IceHouse36 and IceAngels37 and Building Clever Companies38 and MigAngels39
PowerHouse Ventures40 from New Zealand is a rare and inspiring example of an incubator which now
generates the bulk of its revenue from investing in early stage companies that commercialise public
research The incubator grew steadily over more than a decade before it reached this enviable
position It started in 2001 as the Canterbury Innovation Incubator Cii a reasonably typical non-profit
technology incubator supported by 3 local universities and the municipality in Christchurch New
Zealand along with government funding It was successful with entrepreneur led incubation This
success stimulated establishment of an angel investor network and angel investment funds
capitalising on government early stage investment mechanisms41 Subsequently Cii and the angel
investment fund merged to form PowerHouse Ventures in 2008 as a public private partnership with
the initial public shareholders alongside private investors It continued to grow focussing exclusively
on commercialisation of public Research and Development with its own investment in every venture
assisted In 2017 it listed on the Australian Stock Exchange It illustrates what can be achieved over
time with good incubation combined with seed funding
The Israeli incubator program which has been copied in a range of countries such as Chile New
Zealand and Australia is one example where the government supports technology incubation by
buying commercialisation outcomes via seed funding technology commercialisation projects The
Government invests up to USD$1000000 in commercialisation projects (future companies) by way of
a conditional grant providing up to 85 of a projectrsquos budget to be incubated by one of 18 certified
incubators (partners) who need to provide the remaining 15 of the project budget The grant is
provided via the partner incubator so that the incubator ends up with equity in the venture If the
company succeeds the grant is repayable from revenues in effect as a low interest loan The objective
of the program is to develop innovative technological ideas into start-ups and lead them towards first
round investment42 The program started in 1991 and has steadily evolved and been improved The
investment has been substantial As of 2012 more than USD$650 million had been invested in the
program43 The incubators involved make their money from the equity they accrue from the
government seed funding in the projects and from subsequent investment at least for those that have
venture capital funds Over the years the government has also provided direct funding to help the
incubators establish
36 httpswwwtheicehouseconz and wwwiceangelsconz
37 wwwiceangelsconz
38 httpwwwthebccconz
39 httpwwwthebccconzinvestmentmig-angels
40 wwwpowerhouse-venturesconz
41 wwwnzvifconz
42 httpwwwmatimoporgilIncubatorshtml
43 httpeipaeucomcategoryinformation-centrescience-technologytechnological-incubators-program
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
52 Training Many incubators with a mixed revenue model make significant revenue from training related to
entrepreneurship SME growth and management or in some industry specific examples vocational
training There are many examples but a few illustrate the potential
The IceHouse44 in Auckland New Zealand a globally
recognised incubator affiliated with the Auckland
University business school but an independent non-
profit company makes most of its revenue from
training that complements its incubation angel
investment and cowork space activities
The Kiln Incubator45 a component of the Canberra
Innovation Network in Australia complements
government funding rent of incubation and cowork
space with revenue from start-up training
Furntech46 in South Africa is the main vocational
education provider for the furniture industry
and operates an incubator for those of its clients
interested in starting a furniture business The
incubator contributes 15 to its overall
revenues
44 wwwtheicehouseconz
45 httpwwwkilnincubatorcomworkshopshtml
46 furntechorgzaincubation
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
53 Partnerships and corporate sponsorship broadening revenue opportunities Partnerships with the corporate sector and universities is a source of deal flow capability and revenue
for more and more incubators Most have some form of corporate sponsorship and various
partnerships for delivery of particular programs The trend for more corporate engagement is
illustrated by BCG data47
Tech Fort Worth in the USA is a case in point48 Incubation and acceleration are their core programs
generating a core of revenue They have a ldquofreerdquo building from the City for
which they pay $100 per annum as well as 22 of the rent they receive till
2028 Adding to this base are a range of programs and initiatives including
bull Corporate sponsorship revenue
bull CowtowTechnest a revenue neutral pipeline generator
bull The impact awards to showcase impactful technology
and entrepreneurs generating ticket sales
bull Angel investors generating membership fees
application fees and sponsorship
bull Partnerships with universities leading to funding
referrals experts and interns
bull Partnerships with large universities leading to
sponsorship experts to help clients potential
customers for clients board member sand referrals
47 BCG Incubators Accelerators Venturing and More 2017
48 httptechfortworthorg
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
54 Hybrids Super incubators Most of the examples quoted so far including Cicada Innovations in Sydney Kiln in Sydney Innovation
Depot in Birmingham Alabama IceHouse and BCC in New Zealand t-Hub and other Indian incubators
are hybrids or what have been called super incubators combining incubation acceleration cowork
spaces sometimes seed funds and numerous partnerships leading to corporate sponsorship and
funding opportunities
The EBN 2016 BIC Observatory reports that 77 of EU BICs incorporate a cowork space 46 have a
start-up acceleration program and 91 offer access to funding Indeed just about any proven
incubator globally will operate along these lines with a mixed business model
55 Other commercial activities A few incubators support themselves by making money from other related commercial activities They
are not common but illustrate what can be achieved with innovation and entrepreneurship
With similarities to franchising Timbali in South Africa49 incubates poor women as flower growers and
makes revenue by selling the flowers under the Ambon brand The model has been successful and
with additional government funds is expanding into horticulture The Rural Enterprise Network in Sri
Lanka50 does the marketing and sales for its incubatees who are poor rural producers and takes a
20 commission
The Seda construction incubator in South Africa makes money out of project management by taking
on large construction contracts and sub-contracting the work to its incubatees51
TrecStep52 a famous technology incubator in India makes significant revenue by executing donor
funded development projects
56 Government funding As noted earlier government funding is crucial for incubator establishment in terms of both
operational and capital costs The market failure is clearly evident and incubators simply do not start
without Government initiative and funding
UBI data illustrates the importance of government funding for university incubators along with that
from universities which may be a combination of facilities and funds53
49 httpwwwtimbalicoza
50 httpwwwrensrilankaorghomehtml
51 httpwwwsedaorgzaMyBusinessSTPPagesethekweniaspx
52 httpswwwtrecstepcom
53 UBI World Benchmark Report 1718
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Those incubators that over time become financially self-sustainable typically rely also upon free
buildings provided by government most often municipal or state governments rather than national
governments or universities or other public bodies However only some incubators are self-
sustainable in this way
Many other incubators are only partially financially self-sufficient even in free buildings as shown
earlier with date from the EU and examples from China In these cases government is in effect buying
either jobs new companies or at times commercialisation of RampD from the incubator Given
government funding lasts this strategy can be sustainable and can pay for more intensive incubation
than is possible in self-funded examples in effect paying for jobs companies commercialisation or
ecosystem benefits
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
6 Accelerator Sustainability
61 Introduction Accelerator Models still evolving Accelerators provide fixed-term programs that last for fewer than 12 months most last about three months They provide mentorship and technical assistance that enable the ldquofast-testrdquo validation of ideas Additionally accelerators link entrepreneurs to business consultants and provide assistance in the preparation of pitches needed to obtain further investment 54
The first significant research and attempts at definition were conducted by University of Richmond
assistant professor of management Susan Cohen in 2013 (and in 2014 with professor Yael Hochberg
of Rice University) settled on a succinct definition based on four characteristics identified in the Seed
Accelerator Ranking Project ldquoa fixed-term cohort-based program including mentorship and
educational components that culminates in a public pitch event or demo dayrdquo55 Y Combinator and
TechStars two of todayrsquos most preeminent accelerator programs were at the forefront of the
accelerator phenomenon with Paul Graham of Y Combinator credited with establishing the first
program in the United States in 2005 When TechStars founded by entrepreneurs David Cohen Brad
Feld David Brown and Jared Polis launched in 2007 it became Y Combinatorrsquos first real
competition56 The characteristics of traditional accelerator models are as follows
bull Provides seed stage investment 15-25k in exchange for 4-7 equity
bull Short duration 3-6 months ndash primary difference with incubation or angel investment
bull Cohort based ndash companies entering and graduating at same time
bull Intensive programs characterized by extensive mentor interaction
bull Extensive networking educational and mentoring opportunities
bull Selection ndash generally casting wider net due to durationfocus
bull Companies very early stage ndash may not have any organizational form
bull Programs geared toward business model validation and preparation of offer
bull Most have work space
bull Demo day culmination ndash presentation to investors
Inspired by long tested incubator models and experience with investor backed incubators in the dot-com era the private sector popularized Accelerators starting in 2005 Accelerators are typically focused on highly scalable high-growth high-value startups However the general profiles of accelerators and their participants have begun to change Todayrsquos cheaper technology costs easier routes to customer acquisition and better forms of direct monetization suit the nimble talented technology-heavy teams that are able to create a product or service quickly Overtime models have continued to evolve focusing on developing specific industry cluster innovations fostering geographic based economic development goals and promoting entrepreneurial projects in underserved populations
54 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A
Report Prepared by the Federal Research Division Library of Congress February 2018 10
55 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo
56 Randall Stross The Launch Pad Inside Y Combinator Silicon Valleyrsquos Most Exclusive School for Startups (New York
Portfolio 2012) 41
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
As models evolve a lack of clarity exists in what constitutes an accelerator Some groups refer to themselves as accelerators but in actuality function as incubators while others meet the formal definition of accelerator but continue to call themselves incubators These programmatic differences however become blurred on an organizational level as startups position themselves in the marketplace Indeed the 2016 Global Accelerator Report by Gust a startup service provider notes that ldquoas new models emerge the term lsquoacceleratorrsquo describes an increasingly diverse set of programs and organizations and often the lines that distinguish accelerators from similar institutions like incubators and early-stage funds become blurredrdquo57 Research has shown that attracting venture capital to a region has a positive impact on employment growth and entrepreneurship more broadly An increase in finance activity following the arrival of an accelerator leads to new growth in local regional investment groups Accelerators also can serve as catalysts bringing together forces to create an entrepreneurial environment where one did not exist previously58
57 Gust ldquoGlobal Accelerator Report 2016rdquo accessed September 20 2017 httpgustcomaccelerator_reports2016 global
58 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 4 25 29
bull Business development assistance
bull Increased success rates
Business
Incubation
bull Critical early stage capital
bull Access to networks
Angel investment
Seed accelerators
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
62 Views on accelerator sustainability Sustainability of Accelerator programs is entirely dependant on the model under consideration Indeed many Accelerators are not focused on the Accelerator program sustainability as it may be part of a larger strategy as shown by the examples below or a lost leader in the product chain (for example the investment fund or incubator) In the traditional equity model unicorns and gazelles are expected to experience liquidation events returning funds to the Accelerator and associated funds From a structural standpoint the actual equity is sometimes held by the Accelerator itself as an entity or may be held by a separate entity The Telluride Venture Accelerator (TVA) 59located in Telluride CO USA started in 2013 in an effort to engage mentors and investors from the region impact the local economy through attraction of technology companies and ignite a regional entrepreneurial eco-system TVA was started by a non-profit community foundation ndash the Telluride Foundation and programmatic funds are raised by the foundation from individuals private foundations and government grants Simultaneously the Telluride Venture Fund (TVF) was formed as a LLP with a small number of investors (less than 10) TVF has raised 3 funds with slightly different investors and has invested in approximately frac12 of the graduates from TVA TVA historically invested $30k USD for a 5 equity stake in participant companies This equity is held by the Telluride Foundation (TF) and any returns would go to TF to continue its charitable work and IS NOT tied to supporting TVA long term from a sustainability perspective however it is implied TVA has adopted the revenue share option for the 2018 cohort and sees this as an immediate strategy to return dollars from investments for operations TVF operates independently making investments in both TVA and other regional companies It expects to make typical venture fund returns but also acts with a philanthropic eye towards regional economic development and is ldquopatient capitalrdquo The bigger picture outcomes for projects like TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) located in Durango CO is the increase in active investment capital in Western Colorado Concentration of capital in the US has historically been on the coasts The proliferation of Accelerators the experimentation with models AND views on sustainability are directly related to the effort to change this because of the correlation of availability of risk capital to startup and growth of job creating firms The two Accelerators in the southwest region of Colorado have arguably inspired the startup of several funds and angel groups throughout western Colorado as well as new $12MM USD government sponsored fund serving rural Colroado
59 wwwtelluridevacom
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Concentration of Venture Capital Investment Across the United States
Source Richard Florida ldquoA Closer Look at the Geography of Venture Capital in the USrdquo CityLab February 23 2016
httpswwwcitylabcom life201602the-spiky-geography-of-venture-capital-in-the-us470208
621 Equity Traditional models exchanged cash investments and resources in exchange for an equity ownership
in young companies Essentially a private sector model these programs reduce risk for investors
give investors better access and encourage a faster paced growthfail determination Accelerators
also reduce costs for angel investors and venture capitalists in a number of ways The accelerator
model distributes ldquothe inherent riskiness of investing in tech startups over a large startup poolrdquo and
reduces the real and opportunity costs associated with searching for new investment opportunities
as well as investment risk along two dimensionsmdashproduct risk and company risk60 Risk is lowered in
part because the accelerator gathers candidates in a single location and thus attracts investors who
might find the costs of searching for opportunities in smaller regions too high The use of a demo day
allows investors to observe multiple companies in a single instance and creates opportunities for
non-local investors to seek additional investment opportunities in the area This helps reduce the
search and sorting costs for investors when investing in smaller regions61
Pay back or return on investment is anticipated through liquidation events which returns multiples
to investors and the Accelerator programs Accelerator titans ndash Y Combinator 500 Startups and
TechStars have been successful in ROI mostly because of outliers or Unicorns The vast majority of
Accelerators have not seen liquidation events in a timely manner expecting a 5-7 year performance
but in reality a 10-12 year time line might be more realistic Even then the challenge becomes the
paper value of these investments transitioning to cash available for operations Although TVA
investments held by TF are valued at over $30MM USD no funds have been returned in 5 years The
60 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 1 17 18
61 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 7
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Global Accelerator Network (GAN) in 2015 reported a 5 acquisition rate overall (most common
liquidation event enabling payback of investment) 6 in Accelerators over 4 years old In summary
the equity model has worked for a few early accelerators but for the remainder is still unproven
622 Revenue share As Accelerators have proliferated a movement away from purely IT to product services and other
STEM focused companies has led to exploration of other manners of funding and returns Revenue
share has emerged as a common alternative to the equity model This approach generally involves
providing an investment in exchange for a percentage of revenue ndash usually a percentage of gross
profit that kicks in after a revenue milestone and continues through some predetermined rate of
return In the case of the Telluride Venture Accelerator (TVA) companies have the option to receive
an initial investment of $30k US and begin payback after reaching $100k US in revenue with a 20 of
gross profit payment until a 3X return is achieved for the Accelerator This development recognizes
a more appropriate method to finance companies which appeals to both the companies and
investors as liquidation events are less likely and less desirable for certain types of companies and
economic development minded investors
623 Fee for service The value of programming connection to mentors and increased attractiveness to investors that
Accelerator programs provide is a service companies are willing to pay for The emergence of
models providing high level service in exchange for payment is often not connected to an exchange
of equity or other risk orientated return expectation
Founders Space offers an accelerator and incubator program that doesnrsquot invest in its startups
but instead offers services in exchange for cash and equity upfront Founders Space runs more
than a dozen types of startup programs in-person and on-line These programs range from one
day to several months Some programs are designed for early-stage startups while others focus
on later stage and some programs are focused on particular sectors like Fintech Agtech Health
Advertising Big Data AI SaaS etc62
624 Related business Hybrid models have emerged as a norm These models combine various aspects from traditional
Acceleration business incubation and fee for service and rely on multiple sources of revenues
Often times providing Acceleration becomes a feeder for the main focus of the effort such as
incubation where the business model may rely on rent and fee payments or investment funds
where the returns are expected on the investment fund itself rather than any initial investment
during the Accelerator program In fact Accelerators such as TechStars quickly moved to offering
additional capital with terms that somewhat protected the investment from the significant dilution
experienced by the first in money Accelerators commonly provided
625 Economies of scale Economies of Scale kick in when Accelerators perfect models and launch them in additional
locations The most prolific of these models is TechStars based in Boulder CO
Techstars is an extensive worldwide network that provides their clients with a three-month program and mentorship that is authentic optimistic and empathetic Once yoursquore in the Techstars family yoursquore in for life Techstars wants their members to feel cared for and to give them the freedom to
62 httpswwwfoundersspacecomprogram
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
work in the environment best suited for them Thatrsquos what makes them so unique They offer 34 location options for their programs giving these entrepreneurs plenty of choices
ldquoOur global ecosystem of founders mentors investors and corporate partners work together to create a network of support that lasts throughout your entrepreneurial journeyrdquo -- Techstars63
626 Conclusions Some accelerators are pushing the decision by the startup to provide equity or other payment to
the end of the program contingent on the Startup achieving its goals and receiving the benefits
offered by the Accelerator programs This provides a guarantee of sorts and places a good amount
of risk to the Accelerator itself to make good on their upfront claims This caveat is in response to an
increasingly competitive environment to attract the best startups into Accelerators
A variety of success factors and benefits are provided by business accelerators to startups local
economies investors policymakers and the accelerators themselves The success of these programs
can be measured in both short- and long-term events according to research published in 2013 by
Ross Baird CEO of Village Capital a Washington DC-based venture capital firm and others In their
report for the Aspen Institute Baird and his co-authors found that in the short term the success
rate of an accelerator can be measured against the acceptance rate and frequency with which
graduates are acquired or otherwise exit the program In the long run an acceleratorrsquos success can
be measured against its startupsrsquo internal rates of return and abilities to bring in sources of funding
particularly if the accelerator does not take equity stakes in its startups Other characteristics related
to an acceleratorrsquos scale of success include the intensive format of mentoring and business skills
training the program length and the founderrsquos historical connections to investors64
When it comes to financial self-sustainability recent data from the Global Accelerator Learning
Initiative (GALI) shows the importance of corporate philanthropic and government revenues not
equity In their 2016 survey nearly 50 of respondents received corporate funding and 21 relied
on corporate funding for at least half of their total funding Less than 10 generated revenue from
equity returns or success fees charged to investors65
63 ldquoAmericas Top 7 Startup Accelerators and What Makes Each Uniquerdquo Entrepreneurcom September 13 2017
64 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 28
65 wwwgalidataorgaccelerators
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Accelerator Revenues GALI 2017
The importance of corporates is reflected in UK data also where 51 of accelerators receive
corporate funding (please note the graph below shows the percentage receiving funding from a
source not the amount)66
Percentage of UK accelerators receiving funding from various sources
This reflects the evolution in the industry and the emergence of new models outlined in the next
section It indicates that financial sustainability more and more depends on corporate philanthropic
and government support
63 Models
631 Investment ndash funding centric Cohenrsquos idea was to help start more companies by investing a small amount in 10 of them at one
time and enrolling them in an intense 90-day program during which they would work closely with
66 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
mentors and other angel investors in order to get their businesses to the next stage and in a position
to raise a full angel round67
632 Community based ndash economic development One of the primary motivators for use of the Accelerator model in community and economic development is the models ability to help organize capital in the eco-system Funding for the operation of these programs is through federal state and local grants as well as corporate and private foundations Additionally accelerators have the potential to impact local economies through tax benefits and economic growth A population of successful entrepreneurs can bring substantial tax revenues to regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes Metropolitan statistical areas with an established accelerator show more seed and early-stage entrepreneurial financing activity Such activity is not limited to accelerated startups but also impacts non-accelerated companies primarily from an increase in investors68 One of the largest intentional funders is the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program (GAFC) Other significant public and private funding tends to be project based targeted to geographic areas which are experiencing significant economic stress Both The TVA and the Southwest Colorado Accelerator Program for Entrepreneurs (SCAPE) have been recipients of GAFC awards SCAPE was founded in 2013 by local angel investors mentors and regional economic development groups to foster development of the entrepreneurial eco-sytem Supported with an initial grant from the State of Colorado Office of Economic Development and International Trade (OEDIT) SCAPE raises funds each year for operations and direct company investment Investment funds are managed through a separate LLP investment entity with a carry reserved for the SCAPE non-profit entity Company investment is provided in small increments during the program to assist companies in attaining investment relevant milestones such as intellectual property and product development Applications are solicited from a 5-county region and are evaluated with a job creation and local impact lens Investments are regarded as a long-term play (10-12 years) and impact is regarded as a regional build of the capacity to support growth companies The LLP invests more significant dollars and leverages other investors at the completion of the program upon evaluation of companies potential for regional impact and investment worthiness Investment vehicles are both equity and revenue share A population of successful entrepreneurs can bring substantial tax revenues to their home regions as well as broader economic benefits Regions with more entrepreneurial activity tend to have better economic outcomes In regions with less venture capital financing accelerators become more important as a funding source In light of many local governments adopting the accelerator model Massachusetts Institute of Technology economist Daniel C Fehder and Rice University professor Yael Hochberg published in 2015 their findings from a study that measured the impact of such programs on local entrepreneurial ecosystems The researchers focused on the availability and provision of seed and early-stage venture capital financing for startups and found that the presence of an accelerator led to a shift in the general equilibrium of funding activity Their findings revealed that the arrival of an accelerator was associated with a 104 percent annual increase in the number of seed and early-stage venture capital deals a 289 percent increase in the amount of seed and early-stage funding provided in the region and a 97 percent increase in the number of distinct investors investing in the region Fehder and Hochberg were able to tie the increases to the presence of
67 Brad Feld Startup Communities Building an Entrepreneurial Ecosystem in Your City (Hoboken NJ Wiley 2012) 15
68 Hathaway ldquoAccelerating Growthrdquo
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
nearby investment groups Regions with previously existing formal angel groups experienced a larger impact than regions without such groups meaning that startup accelerators are complementary to existing institutions in a regionrsquos innovation ecosystem69 The SBA created the GAFC program in 2014 to draw attention and funding to parts of the country where gaps exist in the entrepreneurial ecosystem The GAFC awards $50000 cash prizes to accelerators to help support their organizations The money can be used for operational expenses hiring or programmatic support that leads to better access to capital mentorship networks and workspace enabling high-growth startups to scale up and grow sustainably In 2014 GAFC awarded $25 million to 50 winners from 31 states Washington DC and Puerto Rico In 2015 it awarded a total of $44 million to 88 winners representing 39 states Washington DC and Puerto Rico In 2016 the program awarded $34 million to 85 winners representing 38 states and Washington DC Overall between 2014 and 2016 the SBA awarded 223 GAFC prizes to 187 unique winners for a total of $103 million For the 2017 competition the SBA limited the awards to past GAFC winners and planned to award 20 teams with the $50000 prize 70
Contrary to the typical accelerator model in which the provision of seed funding is fairly standard less than half of the GAFC winners provided such financing to their startups and even fewer took an equity stake in those businesses Approximately one-quarter of the winners provided seed funding to only their most promising startups Of those that did take an equity stake in exchange for seed funding most took 5ndash6 percent equity Accelerators that made investments in their startups made an average total investment of $1827600 between 2014 and 2016 71 Governments around the world are increasingly seeing innovation as a key factor for maintaining economic competitiveness One way of doing so is to create their own public programs and funds or reinforce existing programs so that they can have a bigger impact on the ecosystems they serve In the USA and Canada 36 of accelerators reported that they either received a mix of private and public funding or are 100 publicly funded Public funding typically comes in the form of government grants and subsidies72
633 Corporate Corporates are entering the Accelerator space with a variety of motivations and models These
models fall manly in two camps
1 to encourage the use of their platforms and tools and
2 to encourage innovation within their corporation
Corporate accelerators drive innovation at a much faster pace than is possible internally create
growth options by taking stakes in interesting companies gain a window into technologies and
business models that will become ldquowinnersrdquo and profitably leverage existing sales distribution
69 Fehder and Hochberg ldquoAccelerators and the Regional Supply of Venture Capital Investmentrdquo 2ndash3
70 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
71 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
72 Gust ldquoUSA amp Canada Accelerator Report 2015rdquo accessed October 5 2017 httpgustcomusa-canada-accelera tor-
report-2015
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
networks and relationships into additional value73 Just about any good corporate has its own
accelerator Corporate accelerators like Microsoftrsquos may overly encourage the use of their products
with the chief purpose not making money but ldquoincubatingrdquo its parent companyrsquos
ecosystem74 Microsoft for Startups is a new program that delivers access to technology go-to-
market and community benefits and which helps startups grow their customer and revenue base It
is committing $500 million over the next two years to offer joint sales engagements with startups
along with access to Microsoft technology and new community spaces that promote collaboration
across local and global ecosystems Startups are an indisputable innovation engine and Microsoft is
partnering with founders and investors to help propel their growth75
634 Targeted populations and industries Increasingly Accelerators have been used as tools to target specific industries and populations where entrepreneurship and innovation are a desired outcome GUST in its 2016 survey found that ldquothe global acceleration landscape is increasingly moving towards verticalization with 575 of accelerators running programs focused on a particular industry or sector niche businesses associated with a specific industry sectorrdquo None the less others are not focused on a sector as shown by UK data76
Percentage of UK accelerators with a technology focus
The chart above also illustrates the sectoral breadth of acceleration which now operates in varied and very different sectors as is illustrated also by GUST technology trends77
73 Dempwolf Auer and DrsquoIppolito ldquoInnovation Acceleratorsrdquo 22
74 httpswwwfastcompanycom3062151four-alternative-types-of-accelerator-that-startups-overlook
75 httpsblogsmicrosoftcomblog20180214grow-build-connect-microsoft-startups
76 BEIS Research Paper Number 7 Business Incubators and Accelerators the National Picture 2017
77 GUST 2016 Accelerator report
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018
Approximately half of the respondents in the GAFC study described themselves as focused on an industry (such as life sciences or food) or a location (such as rural areas or specific counties) Forty-one percent of the winners described themselves as focused on a demographic (such as women Native Hawaiians or veterans) or technology (such as biotechnology or clean technology [cleantech]) Between 10 percent and 20 percent of the respondents described their organizations as being focused on a product a service or being a social enterprise 78
635 Conclusions Accelerators have proven to be effective tools in providing investors access to qualified deal flow
and value add to fledgling companies Communities have benefitted from a better eco-system to
support a greater network and targeted industries and populations have seen success in the growth
of startups
Sustainability of these efforts is dependent on the patience and diversity of funding sources
combined with customized investment models to appropriately fund companies and provide returns
for Accelerators and investors In this context it is becoming clear that the vast majority of
accelerators require either public subsidies or corporate support or both to be sustainable
78 Evaluating the US Small Business Administrationrsquos Growth Accelerator Fund Competition Program A Report Prepared by the Federal Research Division Library of Congress February 2018