Growing global ventures by effective seed acceleration

The opportunities and barriers of business acceleration

Supervisors:

Gyorgy Drotos PhD (Corvinus University of Budapest, Research Centre of Information Resources

Management)

Peter Kadas MD (serial entrepreneur, founder of Brandvocat, blogger at startupdate.hu).

14. 05. 2013

2

About the author

Balazs Szabo is head of Business Development at InVendor and the Advisor of the Global Executive

Team at Kairos Society. Balazs Szabo was attended to the CEMS Masters’ in International Management

program which is one of the best management master according the Financial Times’ ranking and he

also attended Management and Leadership and Sociology at the Corvinus University of Budapest

beside studying in Université Catholique de Louvain in Belgium. He is an entrepreneur, strategic and

investment advisor for early stage startup companies. He is the main organizer of inveAst - Investors

Meet Startups from CEEMEA co-organized by InVendor and Bloomberg in London. He was the

organizer of the first Hungarian Innovation Day, that was held on the 16th October, 2012 in London in

order to connect the Hungarian startups with high growing potentials with London based Venture

Capitalists and Seed Investors. The patrons of the event were the British Ambassador to Hungary, the

Hungarian Ambassador to Great Britain and the Chairman of the Hungarian Private Equity and Venture

Capital Association. The event was supported by the British Private Equity and Venture Capital

Association and the EBRD.

Balazs is also a member of the education committee at Hungarian Venture Capital and Private Equity

Association. He has been elected four times as a Future Leader, by The Ambrosetti Forum (IT), by the

World Foresight Forum (NL) by the St. Petersburg International Economic Forum (RU), Youth

International Economic Forum (RU) and Open Innovations Forum (RU).

Balazs is a TEDx speaker and the author of startup/investment articles in business magazines, NEXT

Mentor, Startup Sauna Pioneers Festival and Startup Tour Ambassador. Balazs is the founder and

editor of www.cee-startups.com

You can find Balazs on LinkedIn.

www.balazsszabo.com

3

Table of Contents About the author .................................................................................................................................. 2

1 Introduction ..................................................................................................................................... 7

1.1 Problem statement .................................................................................................................. 9

1.2 The scope of the thesis .......................................................................................................... 10

1.3 Relevance .............................................................................................................................. 11

2 Methodology ................................................................................................................................. 14

3 Theoretical framework .................................................................................................................. 15

3.1 Describing the concepts ........................................................................................................ 15

3.1.1 Entrepreneurship........................................................................................................... 15

3.1.2 Startup ........................................................................................................................... 15

3.2 The actors of the entrepreneurial ecosystem ....................................................................... 17

3.2.1 Entrepreneurs ................................................................................................................ 18

3.2.2 Investors ........................................................................................................................ 18

3.2.3 Mentors/advisors .......................................................................................................... 19

4 The new economics of startups .................................................................................................... 21

4.1 How companies grow? .......................................................................................................... 21

4.2 The early stage startup challenges ........................................................................................ 23

4.3 Changes in the business environment .................................................................................. 24

4.4 The background of the shift between business incubators and business accelerators ........ 29

4.5 Business accelerators ............................................................................................................ 32

5 Key elements of the business accelerator programs .................................................................... 34

5.1 Easily accessable open application process .......................................................................... 35

5.2 Intensive competition ........................................................................................................... 35

5.3 Offered pre-seed/seed investment ....................................................................................... 35

5.4 Focus on teams ...................................................................................................................... 35

5.5 Time-limited support, intensive mentoring .......................................................................... 36

5.6 Batch of startups and alumni network .................................................................................. 37

6 Introduction of international best practices of seed acceleration ................................................ 39

6.1 Y Combinator ......................................................................................................................... 39

6.2 Techstars ............................................................................................................................... 40

6.3 500 Startups .......................................................................................................................... 42

4

6.4 Seedcamp .............................................................................................................................. 43

6.5 Startup Sauna ........................................................................................................................ 44

6.6 Startup Wise Guys ................................................................................................................. 45

6.7 StartupBootcamp .................................................................................................................. 46

6.8 Startup Highway .................................................................................................................... 46

7 Qualitative and quantitative research ........................................................................................... 48

7.1 Interviews .............................................................................................................................. 48

7.1.1 The importance of accelerators .................................................................................... 48

7.1.2 The birth of accelerators ............................................................................................... 48

7.1.3 Creating entrepreneurial ecosystem by using best practices ....................................... 49

7.1.4 Criteria of selecting teams ............................................................................................. 50

7.1.5 Value proposition for startups ...................................................................................... 50

7.1.6 Mentors/coaches........................................................................................................... 50

7.1.7 The core program .......................................................................................................... 51

7.1.8 The geographic areas covered....................................................................................... 52

7.1.9 Success and metrics ....................................................................................................... 52

7.1.10 Skills ............................................................................................................................... 53

7.2 Survey .................................................................................................................................... 54

7.2.1 Demographic limitations ............................................................................................... 54

7.2.2 The surveyed sectors ..................................................................................................... 56

7.3 Analysis of the survey results ................................................................................................ 56

7.4 Summary of the survey results .............................................................................................. 61

7.4.1 Accelerators and their location ..................................................................................... 61

7.4.2 The most important decisive factors of selecting accelerator ...................................... 61

7.4.3 The key added values of an accelerator program ......................................................... 61

7.4.4 Other preferences of entrepreneurs regarding the length and program elements ..... 61

8 Conclusion ..................................................................................................................................... 62

9 The findings of the research .......................................................................................................... 63

10 Recommendation for further research ..................................................................................... 65

References ............................................................................................................................................. 66

Appendix ................................................................................................................................................ 70

1. E-mail Interview Questions for StartupHighway – Agnė Adomaitytė 02. 04. 2013 .................. 70

2. E-mail Interview with Antti Ylimutka Startup Sauna CEO 17. 04. 2013 .................................... 72

3. Interview with Peter Kadas MD., serial entrepreneur, blogger 13. 04. 2013, Budapest .......... 77

5

4. E-mail Interview with Mike Reiner, Startup Wise Guys 23. 04. 2013........................................ 78

5. The questionnaire...................................................................................................................... 81

6

Graphs 1. Graph The process of the deaflow ................................................................................................... 12

2. Graph The entrepreneurial ecosystem ............................................................................................. 17

3. Graph How companies grow? ........................................................................................................... 21

4. Graph The transition from a startup to a company .......................................................................... 22

5. Graph The investment need and lifecycles ...................................................................................... 23

6. Graph Equity gap vs. competence gap ............................................................................................. 24

7. Graph Seed deals by vintage quarter ............................................................................................... 27

9. Graph The Role of Business Incubators ............................................................................................ 30

10. Graph Continuum of added value services provided by incubators and accelerators .................. 31

11. Graph Different types of accelerators ............................................................................................. 33

12. Graph The intersection of accelerators and incubators ................................................................. 34

13. Graph The Accelerator Cycle ........................................................................................................... 37

14. Graph Key elements of the accelerator program ............................................................................ 38

15. Graph The vicious circle of the accelerators ................................................................................... 38

16. Graph The age distribution of the surveyed entrepreneurs ........................................................... 54

17. Graph Nationality of the surveyed entrepreneurs ......................................................................... 55

18. Graph Number of entrepreneurs by their sector ............................................................................ 56

19. Graph The proportion of the surveyed entrepreneurs regarding their current stay ...................... 57

20. Graph Have you ever participated in a startup accelerator program? .......................................... 57

21. Graph Types of funding .................................................................................................................. 58

22. Graph The most important decisive points of choosing an accelerator ......................................... 58

23. Graph Please evaluate the most important added valua of an accelerator ................................... 59

24. Graph Please evaluate the following educational elements of the accelerator program .............. 60

25. Graph How to measure accelerators .............................................................................................. 63

7

1 Introduction

„Entrepreneurs embody the promise of America: the idea that if you have a good idea and are willing

to work hard and see it through, you can succeed in this country. And in fulfilling this promise,

entrepreneurs also play a critical role in expanding our economy and creating jobs.”

President Barack Obama

After Barack Obama acknowledged the importance of entrepreneurship through the launch of Startup

America, the phenomenon was at the forefront of the discussions. Entrepreneurship and startups

became a global theme that impacted every geography, industry, market and demographic throughout

the world. (Feld, 2012) We are living in the age of entrepreneurship and fast growing ventures

according to Janos Vecsenyi (Vecsenyi, 2011)

Building a sustainable startup ecosystem is a key factor towards eliminating the market risks of seed

funding as this is the stage where most companies fail. There are different models of seed acceleration

throughout the world in order to minimize the risks of seed investors that is a common bottleneck of

growing global ventures.

In certain countries where the investment culture is more developed market actors do the acceleration

phase (USA), in other parts of the world governmental interventions and support is needed to get

private investors involved in one of the riskiest part of the investment lifecycle (Israel, Finland etc.)

Business accelerator is a new approach of helping and funding startup companies at the seed stage.

Instead of filtering out only one startup at a time these programs filter out cohorts and mentoring

them in batches to make it more efficient and less risky. The business accelerator model differs from

the traditional seed-stage investing and business incubators (Cristiansen, 2009)

Over the past eight years, a new methods of incubating technology startups have emerged, driven by

business angel investors, serial entrepreneurs and venture capitalists: the accelerator program.

In the global innovation hubs like the Silicon Valley, New York, Boston, Berlin or London all the needed

elements of the entrepreneurial ecosystem are present, including (serial) entrepreneurs, angel

investors, venture capitalists, incubators, accelerators etc. There other countries that were not

identified as flagship nations of the innovation a few decades ago, but there is significant improvement

as the results of the well organized and executed strategies and subsidies coming from the state or

wealthy private individuals. Countries as Israel, Chile or even Estonia are on their track to be among

the innovation hub of their geographical region or even broaden territories.

The thesis sheds light on the global best practices of seed funding and business acceleration. The goal

of the paper is to identify suitable and adaptable models of seed funding that could contribute to the

8

birth of new venture success stories and entrepreneurial growth in those regions that can not be

considered as traditional business hubs.

I have been involved personally in building an entrepreneurial ecosystem in Hungary and in Central

Eastern Europe since 2010. I was the president of Kairos Society, a student run global not for profit

organization in the past two years in Hungary and I was working on the Central Eastern European

expansion where I met really promising early stage companies building an innovative globally scalable

product of service. Currently I am an investment advisor for startup companies at InVendor Investment

and Innovation Ltd. and I am working with scalable businesses on their international expansion. I was

the local organizer of the first international seed accelerator program’s Warmup in Budapest (Startup

Sauna Warmup in 1st October 2012) and I have organized the Startup Sauna Zagreb Warmup event in

March 2013.

I was also the main organizer of the first Hungarian Innovation Day, that was held on the 16th October,

2012 in London in order to connect the Hungarian startups with high growing potentials with London

based Venture Capitalists and Seed Investors. The event was supported by the British Private Equity

and Venture Capital Association and the EBRD. I am also a TEDx speaker and the author of

startup/investment articles in business magazines.

By regularly working with startups I have realized that there is a lack of publication and primary

research on the topic not just in the local level but on the global scale as well. I have started to work

on my research at the autumn of 2012. In the meantime a few really valuable contribution had been

published including Frimodig, Barrehag et al, and Bollingtoft’s research on the topic (Frimodig, 2012,

Barrehag et al 2012, Bollingtoft, 2012). Therefore I have decided to focus on the empirical added value

expecially by measuring the preferences quantitatively.

The effective acceleration of businesses at the early stage is a new management challenge that is

solved by top tier accelerator programs and their mentorship based educational elements. This way of

education is considered as an alternative of an MBA course, mostly for entrepreneurs as the startup

stage needs different skills and approaches (searching for the working business model) as the

transition stage of becoming a successful company (executing a business model). I thought the

phenomenon of business accelerators is an interesting research topic of my Management and

Leadership thesis in order to know their best practices and added values better that helps their

positioning within the management science. Because of the lack of Hungarian sources and the low

number of global scientific literature in this topic I have asked for the opportunity to write a reference

work in English in order to have a small contribution to the business accelerators literature within the

science of management.

The cradle of business acccelerators is in the US, as a result of the growing popularity of Y combinator

(located in Mountain View) and Techstars (started in Boulder, Colorado). The number of accelerator

programmes has grown fastly in the US over the past few years and apparently the trend is being

replicated in Europe. From one accelerator programme, Y Combinator in 2005, there are now hundreds

just in the US that are funding hundreds of startups per year. There are also a number of high profle

startup that succeeded from accelerator programmes. (Miller, Bound, 2011)

9

Despite the short track record it is obvious that business accelerator programs have positive impact on

entrepreneurs, helping them to develop rapidly, create a powerful network that helps business

development and follow-on fundings within a short timeframe.

In order to get primary information on the actors during this research I have conducted interviews with

global investors as the founders and executives of Startup Sauna, Startup Wise Guys, Startup Highway

and a serial entrepreneur. I have also asked entrepreneurs on their experiences and expectations on

business accelerator programs by conducting a survey.

After the analysis of the results provided by the secondary research and the primary sources

(interviews, survey) we are getting to the conclusion and try to give recommendations for global and

national actors involved in this ecosystem both in the world and in my home country Hungary.

1.1 Problem statement

Business accelerators and their predecessors have proven to be an economic development tool for the

communities they serve. (van Huijgevoort, 2012 p. 4) Growing new ventures is considered as an

essential way of creating new workplaces and boosting economy. At the beginning of a company

lifecycle there are significant obstacles (lack of business experience, lack of capital, validation) and as

a result of that the initial phase of starting a venture could be considered the most critical period of

the venture lifecycle. Accelerator programs are pushing start-ups through their earliest life cycle at an

accelerated pace by helping to learn the basics of business, giving the participants mentoring,

networking, peer support, validation of the business idea and also access to follow-on funding.

Accelerators provide entrepreneurs with the support and funding they need to bridge the path

between ideas and developing working prototypes. (Miller and Bound, 2011)

Business accelerators usually offer seed money and guidance for a small stake, usually between 4 and

10 percent, of the start up company. These programs combine services offered by business incubators

with additional resources and benefits to help start-ups quickly secure funding and receive validation.

Unlike business incubators, accelerators are more selective, often accepting only maximum 10-15

startups per batch. The reduced number of companies offers a more tailored business development

process. (launchause.com, 2012)

The growing number of accelerator programs is the result of the changing economics of starting up.

Costs associated with early-stage tech startups have dropped signifcantly in the past years, making

possible to start a business with small initial money (USD 10 000-USD 50 000) compared to previous

eras of investment in digital businesses.

There is little scientific literature available about seed accelerator programs (eg. Cristiansen, 2009, van

Huijgevoort, 2012, Frimodig, 2012, Barrehag et al, 2012,) despite its significance presence in

technology blogs (eg. Techcrunch) and online business magazines (eg. Forbes). According to

Cristiansen „While significant literature exists on startups and entrepreneurship, these accelerator

programmes are so new that they still consider their own success an open question.”(Cristiansen, 2009

p.5)

In this thesis we are using the following definiton for business accelerators:

10

„Accelerators are organizations that provide cohorts of selected nascent ventures seed-investment,

usually in exchange for equity, and limited-duration educational programming, including extensive

mentorship and structured educational components. These programs typically culminate in “demo

days” where the ventures make pitches to an audience of qualified investors.” (Cohen, 2012 in Forbes

2013)

Business accelerator programs and their effects are changing the pre-seed phase of venture

development lifecycle that needs more research focus from the seed financing and also from the

management perspective of the accelerator program.

1.2 The scope of the thesis

Starting from the fact that there is little academic research on accelerators, there is a wide range of

possible research angles available for this thesis. In order to create the context this chapter outlines a

purpose and aim of the thesis, as well as a research question. Furthermore, the scope of the study is

described as well as how sustainability fits into the investigation.

This goal of the research is to identify the criteria of success for business accelerator from different

point of view. The stakeholders are the startup founders, entrepreneurs programme founders and

external investors. We are not examining other stakeholders as governmental institutions and other

NGO-s because they are out of scope of the study. The track record of the accelerators is too early to

evaluate programs and their effect. On the long run we can evaluate by measuring success factors as

survival rate of the participating ventures and follow-on investment rounds. There are also soft factors

that can be considered as the perceived added value by the participating entrepreneurs.

The main question of the research: What are the key success factors of a business accelerator?

Sub-questions of the research are:

How can we define success in case of the business accelerators?

How do entrepreneurs select business accelerator programs?

What are the expected outcomes of the accelerator programs by the founders, mentors,

investors and by the participating startups?

Is that possible to create a successful business accelerator outside of the major investment

hubs?

The hypothesis of the research is that the success of a business accelerator program is not determined

by the geographical location and the local investment environment where it exists.

By using this hypothesis the goal is to find out whether Hungary could be an entrepreneurial hub by

offering internationally competitive accelerator program for companies at the seed level. We will have

the final conclusion after answering the main- and sub-research questions.

11

1.3 Relevance

At the time of the slow economic recovery there is growing interest in helping startups launch and

succeed that has a positive effect on the whole society by creating new jobs. There are an increasing

number of initiatives seeking to support entrepreneurs as they launch their businesses. (Forbes.com,

2012a)1

The currently available data on accelerators is lacking, and not sufficient therefore at this stage we are

unable to measure the real macroeconomic effects of these initiatives. What can be seen is the

immediate effects on the labour market. 151 registered accelerator programs accelerated 2416

companies that has created 6408 jobs so far according to seed-db.com that is an online repository of

seed accelerators based on Cristiansen’s research (Cristiansen, 2009, seed-db.com, 2013)

Number of registered programs worldwide

151

Companies accelerated 2416

Number of successful exits 124

Sum of exit value $ 1 130 258 600

Total funding $ 1 793 109 821

Jobs created 6408

1. Table The macroeconomic effects of business accelerators

Source: Own edition based on http://www.seed-db.com Date: 03.03.2013.

The database has significant limitation as it has been updated by the accelerators manually and some

of them not consider their presence here a priority therefore in certain cases the data are missing or

out of date. Despite the macroeconomic effects that are visible by seed accelerators it is important to

higlight the fact that because of the lack of data and the short time span we can not evaluate the social

impact made by the accelerators in this early phase. Y Combinator, the flagship accelerator program

operating since 2005, that is why it has provided more funding alone than the other 152 accelerators

together.

1 http://www.forbes.com/sites/kauffman/2012/08/08/evaluating-the-effects-of-accelerators-not-so-fast/

12

All Accelerator without Y

Combinator (N=152)

Y Combinator

Companies accelerated 1937 479

Jobs created 4892 1548

Number of exits 68 57

Funding (USD) 801 695 421 USD 1 009 779 400 USD

2. Table The macroeconomic effects of accelerators without Y Combinator

Source: Own edition based on http://www.seed-db.com 2 Date: 10.03.2013.

Accelerators could be funded by entrepreneurs, wealthy individuals, VCs, business angels or

governmental institutions. Beside the positive macroeconomic effect by job creation business

accelerators are providing the pipeline and the dealflow for Venture Capital investors giving them the

opportunity of identifying the next success stories. Sourcing is a crucial element of the VC investment

process. According to Mahendra Ramsinghani 7% of the investment opportunities are screened, 5%

of them are getting to meetings with VCs, 3% will reach the due diligence and only 1% of the

opportunities end up with investment. (Ramsinghani, 2011)

1. Graph The process of the deaflow

Source: Mahendra Rasmsinghani, The Business of Venture Capital, 2011 Figure 6.2

2 You can find a detailed article on the methodological bias by evaluating seed accelerators: http://www.forbes.com/sites/kauffman/2012/08/08/evaluating-the-effects-of-accelerators-not-so-fast/2/

13

As it can be seen above only 1% of the new investment opportunities ends up with successful

investment from the Venture Capital perspective (Ramsinghani, 2011). Accelerators could help the

newly established companies to get the needed knowledge, network, mentoring and attitude towards

creating successful businesses giving value to the VCs by offering pre-filtered and validated projects

and valuable dealflow.

14

2 Methodology

During the research it was a real challenge to find proven and curated academic literature on the topic.

The thesis built on the knowledge conveyed by the accelerator research of Cristiansen, Van

Huijgevoort, Miller and Bound, Frimodig, Barrehag et al. (Cristiansen, 2009, Van Huijgevoort, Miller

and Bound 2011, Frimodig, 2012, Barrehag et al, 2012) I have also used accredited online newspapers

as New York Times, Financial Times, Forbes, TechCrunch, Wall Street Journal, Inc etc. as secondary

sources.

The study combines quantitative (surveying entrepreneurs as prospective accelerator applicants and

alumni) and qualitative approach (exploratory interviews). The qualitative approach was needed

because of the lack of previous studies on the topic. According to Hirsjärvi et al. the aim of qualitative

research is to create the description of real situations, including the aspect of the manifold view of the

reality. The aim of qualitative research is to explore the topic as comprehensively as possible.

Moreover, the objective is rather to find or reveal the new facts than verify existing propositions.

(Hirsjärvi et al., 2009, Frimodig, 2012).

Because of the limited numbers of scientific literature and research on the topic it was essential to

have primary sources of information about the perception and preferences of entrepreneurs. I have

conducted a survey and asked 94 entrepreneurs including alumni and perspective seed accelerator

participants. A variety of international entrepreneurs were surveyed and in order to have first hand

experiences I have conducted interviews with the founders of the accelerators, key employees and

serial entrepreneurs. This paper is not providing detailed insight into the different sources of

investments because these are considered out of the research scope. The research only deals with

those actors (seed investors, business angels, venture capitalists) that are connected with the business

accelerators either as founders or partners providing follow on investments. I am not evaluating the

effectiveness of involving seed investors and angel investors instead of applying to an accelerator as it

has been considered out of scope.

15

3 Theoretical framework

In order to have a better understanding of the framework and the ecosystem the goal of this section

is to shed light on the concepts and the actors around business accelerators. Therefore this section

defines entrepreneurship and startup as the basic concepts of the study. Both phenomenon has many

definitions in use and there is no single definition and the terms are not consistent that are being used.

This section also describes how we define an entrepreneur, what are the types of the investors and

how the mentors are involved in the processes of growing successful ventures from scratch.

3.1 Describing the concepts

3.1.1 Entrepreneurship

Solving a real existing problem is one of the fundamentals of starting a successful company. Identifying

„pain points” and offer solutions for them by starting up new ventures is a creative process that is

called entrepreneurship.

Entrepreneurship can be defined as the pursuit of opportunity beyond resources controlled3.

According to Steve Blank’s thoughts entrepreneurs could be everywhere. Inside the corporation,

within the government or the leader of a non profit initiative could be named as an entrepreneur. Real

entrepreneurs should do something in a radically new way and solve problems by doing that. Startups

are led sometimes by managers, engineers or scientists but not real entrepreneurs. (Blank, 2012) Brad

Feld define entrepreneur as someone who has co-founded a company. He makes a differentiation

between „high-growth entrepreneurial companies” and „small businesses” He consider both

important but entrepreneurial companies have the potential to be or are high growth businesses

whereas small businesses tend to be local, profitable, but slow-growth organization (Feld, 2012)

In this research we are using the narrower approach that is supported by Brad Feld. He makes a

difference between entrepreneurs and small business owners that are running traditional businesses

(Feld, 2012)

3.1.2 Startup

Defining startup is a big challenge. We often think about two programmers in a garage if we hear this

term. Starting a new company is getting more and more popular, becoming a trend. As a result of the

recent hype around entrepreneurship there are some books, studies, papers on the topic but there is

no widely accepted terminology at all. Definitions vary in terms of the maturity of the company,

commercial track record, etc. In this paper I am taking a look at the potential ways of defining a startup

company and finally create an own terminus technicus for that phenomenon.

3 http://blogs.hbr.org/hbsfaculty/2013/01/what-is-entrepreneurship.html

16

The pre-startup phase, the process from the idea to actual startup phase can be divided into five steps:

intention, product/market fit validation, organization creation, business concept alignment and

market entry. At the beginning of this process, entrepreneurs can be identified as nascent

entrepreneurs (potential entrepreneurs) and later at the final part starting entrepreneurs, firstly

novice entrepreneurs. (Geldren et al., 2005, Frimodig, 2012) If they are running their businesses

successfully and get to exit by an acquisition or an IPO they often start their next businesses becoming

’serial entrepreneurs’.

According to Eric Ries, the father of lean startup concept startup is a melting pot term. „Entrepreneurs

are everywhere. (…) concept of entrepreneurship includes anyone who works within my definition of

a startup: a human institution designed to create new products and services under conditions of

extreme uncertainty. Entrepreneurship is management. A startup is an institution, not just a product,

and so it requires a new kind of management specifically geared to its context of extreme uncertainty.

In fact, as I will argue later, I believe “entrepreneur” should be considered a job title in all modern

companies that depend on innovation for their future growth. (Ries, 2011 p.17)

Steve Blank, the professor of Entrepreneurship at Stanford and a serial entrepreneur using the

following definition "A startup is an organization formed to search for a repeatable and scalable

business model."

According to Steve Blank the keyword of the definition is the search as startups have to adapt to the

needs of the customers and challenge the initial assumptions by testing all their hypothesis. Therefore

the goal of the startup is to search and to find the scalable business model that serves the market

needs and solve the customers’s pain points while enables profitable operation and growth.

Dave McClure the Founder of 500 Startups, a leading accelerator has identified the following formula

STARTUP = Hacker + Hustler + Designer4

According to the European Venture Capital Association startup could be defined as „Companies that

are in the process of being set up or may have been in business for a short time, but have not sold their

product commercially.” (evca.eu, 2012)

Based on the definitions provided above this paper using the term startup as the following:

Start-up companies are businesses with high growing potential and global scalability by solving a real

customer need and continously looking for the most successful business model.

4 Based on TechCrunch interview with Dave McClure, the Founder of 500 Startups: http://techcrunch.com/2011/04/10/dave-mcclure-on-500-startups-if-sequoia-is-the-yankees-were-the-oakland-as/ Dowloaded: 29.04. 2013.

17

3.2 The actors of the entrepreneurial ecosystem

Entrepreneurs running startups, are existing within the entrepreneurial ecosystem that contains

investors, mentors, accelerators, governmental institutions, educational institutions and other actors

of the society. In this paper I put the accelerator in the middle of the ecosystem as you can see below.

The graph shows that all the actors are interconnected. The accelerators provides networking access

to entrepreneurs as they are supported by mentors during their program. The mentors get access to

promising startups and up-to-date knowledge in their industry. On the other hand they provide

branding support for the accelerators by let them use their name for promotions in order to attract

the best startups. Having the most promising companies provide a dealflow for investors that could

result in capital raise and follow on investment after the core accelerator program.

2. Graph The entrepreneurial ecosystem, Own edition based on Barrehag et al, 2012

18

3.2.1 Entrepreneurs

Accoding to Merriam-Webster dictionary entrepreneur is the “one who organizes, manages and

assumes the risks of a business or enterprise (Forbes, 2012)5. In this research we are using the term

entrepreneur according to Brad Feld’s definition found in the book called Startup Communities:

Building an Entrepreneurial Ecosystem in Your City (Feld, 2012) According to the founder of TechStars

entrepreneurs are running globally scalable startups. We consider small business owners out of scope

in this paper, therefore we are focusing on entrepreneurs running their business that has real added

value and the business can be scalable. According to Hemingway and Balint, the idea of a startup is

based 47% on the previous experience of the entrepreneurs as they are tend to choose a problem to

be solved within they feel themselves comfortable (Hemingway-Bálint, 2004)

3.2.2 Investors

Running a startup is associated with high risk and often requires more funding than the founders can

provide themselves by boostrapping. Therefore they have to find investors that can provide them

capital in exchange for equity (Arundale, 2007). According to the glossary of the Princeton University

investor is someone who commits capital in order to gain financial returns6. We can make a distinctions

among the investors based on the maturity of the company where they invest and they can be also

categorized whether they are establishing legal entities like venture funds or angel funds by becoming

formal investors or staying informal and investing their own money in companies. Angel investors,

seed funds and venture capitalists are the most associated types of investors with business

accelerators. In this reseach we are using the following categories:

Seed investor

Seed investor is providing the money that is used to move on with the idea and start a business – to

provide the first set of premises or to patent a piece of intellectual property or develop a prototype. It

is often the financial contribution of the entrepreneur or his family or friends to getting the enterprise

off the ground (3F financing). It can also be provided by specialized funds (frequently affiliated to a

university or a government ‘enterprise’ initiative) or from private individuals or philanthropic trusts. It

will usually require continuing equity participation in the business, but on vastly diluted terms; if it

doesn’t, because for instance it comes in the form of a government grant, then in consequence the

term ‘capital’ is sometimes misleading. (Bloomfield, 2005)

5 Source: http://www.forbes.com/sites/brettnelson/2012/06/05/the-real-definition-of-entrepreneur-and-why-it-matters/ Dowloaded: 29.04. 2013. 6Source: http://wordnetweb.princeton.edu/perl/webwn?s=investor Dowloaded: 29.04. 2013.

19

Business Angel

Angel investors, angel funds and affiliated forms of seed capital provide an early access to investment

opportunities for ventures. An angel investor or a business angel is an affluent individual or a group of

individuals that provides capital for a business start-up usually in exchange for convertible debt or

ownership equity. (Forbes.com, 2012b) Angel investor groups are composed of wealthy individuals or

hign-net-worth individuals (HNWIs) who pool resources and investment expertise. The number of

active angels in the United States is reported to be about 125 000, between 10 000 and 15 000 angels

are belong to angel groups (Ramshinghani, 2011). According to Ramshinghani, over 550 angel groups

exist worldwide and nearly 300 of which are based in the United States.

Boosting business angel investments is really important especially in Europe where seed accelerator

programs help to fill in the gap in start-up financing between friends and family and formal venture

capital.

Business angel investments can range from USD 5 000 to USD 500 000 or more. At the early stage of

the business, angels become very real and serious investors and owners with high expectations looking

for solid results and willing to actively involve themself in setting up the company.

Venture Capital

Most business people know something about venture capital or more likely some of the myths about

venture capital. This invaluable actors are often the currency of business conversation, but much of

the details what happens during an investment is unknown by most of the people. Since nature abhors

a vacuum, myth rushes in to fill the gap left by the absence of knowledge according to Bloomfield

(Bloomfield, 2005)

Venture capital is the originated from the United States in the 1960s and 1970s, when individuals put

money behind bright ideas – that later grew into disruptive businesses like Apple Computers, Cisco

Systems, Netscape, – without any certainty of return. It is closer to seed capital than other forms of

funding. Venture Capital is the sub-section of private equity. The portfolios of venture capital investors

typically involve risk taking with a potentially expected high return. They are often organized as limited

liability companies with the investors as partners of the corporation (Privco, 2012). VCs invest in

companies in exchange for equity and provides the startup with access to a wider network of

specialists. (Barrehag et al, 2012) According to Berglund (2011), VCs try to get to know the startups as

a part of their due diligence process. The reasoning is that they want to be able to say no to potentially

poor deals as soon as possible. In addition, the purely technical skill of the teams is evaluated and their

previous accomplishments are assessed (Privco 2012). Venture money is the supposed plug for the

equity gap. (Ramsinghani, 2011) Accelerators can provide validated and pre-screened dealflow for VCs

as Venture capital industry has high administrative and management costs and high risks.

As a result of these trends VCs are having crucial part of the success of the accelerators by providing

follow-on funding after the accelerator program.

3.2.3 Mentors/advisors

20

Mentors are experienced entrepreneurs or investors who contribute time, energy and knowledge to

startups and can be a key part of a startup community. (Feld, 2012) There is a difference between

mentor and advisor as the advisor has an economic relationship with the company he is advising. The

mentor is helping startups without a clear set of outcome goals or economic rewards. Mentors play a

crucial role in accelerators by providing guidance and ongoing support for the teams.

Well known mentors can bring value to an accelerator besides working with startups by marketing and

exposure that can result in attracting the most appropriate startups. As a consequence, by helping to

recruit the best startups the mentors will eventually promote the ambition of the accelerator to meet

the investor expectations, namely well prepared startups (Barrehag, 2012 p45)

21

4 The new economics of startups

4.1 How companies grow?

Before explaining what the phenomenons are behind the growing numbers and importance of startups

it is worth to define the phases that organizations go through as they grow. All kinds of organizations

experience these challenges for a certain extent. Each growth phase is made up of a period of relatively

stable growth, followed by a "crisis" when major organizational change is needed if the company is to

carry on growing. (Greiner, 1988)

This is not a negative phenomenon rather the needed structural change in order to further develop

the company. It is more like a ’turning point’ when the company needs transition. We consider Phase

1 and Phase 2 in the scope of the study as they are the typical startup lifecycles.

3. Graph How companies grow? Based on Greiner 1988 Source: www.exponentialtraining.com

Phase 1 is the stage when entrepreneurs who founded the firm are heavily involved in creating

products and opening up markets. There aren't many staff, so informal communication works fine,

and rewards for long hours are probably through profit share or stock options. However, as capital is

injected production expands and more staff join, there's a need for more formal communication. This

phase ends with a Leadership Crisis, where professional management is needed. The founders may

change their style and take on this role, but often someone new will be brought in. (Frimodig, 2012)

22

At the Phase 2 growth continues in an environment of more formal communications, budgets and

focus on separate activities like marketing and production. Incentive schemes replace stock as a

financial reward. However, there comes a point when the products and processes become so

numerous that there are not enough hours in the day for one person to manage them all, and he or

she can't possibly know as much about all these products or services as those lower down the

hierarchy. (Frimodig, 2012)

This phase ends with an Autonomy Crisis: New structures based on delegation are called for.

At the seed stage focus is on the business conception and idea development. The startup phase

emphasizes product or prototype development, whereas early growth consists of small-scale

commercialization and focus is on scalability. (Kubiš, 2009, Frimodig, 2012)

4. Graph The transition from a startup to a company, Source: Blank, 20137

There is also a transformation from the scalable startup that is looking for the right business model to

a company that executes the suitable business model at this stage as you can see on the 4. Graph.

Seed and startup stages are usually funded by informal investors. “Traditionally, informal seed money

has been gathered from 3Fs (founders, family and friends or fools) or 4Fs (founders, family, friends and

foolhardy investors) that have close relationships with founders and they believe that the company can

progress well based on the founders’ experience and capabilities.” (Frimodig, 2012 p42.) Moreover, at

the startup phase investors are still informal and are defined as informal venture capitalists. The main

difference compared to informal seed money is that formal venture capital investors invest in unknown

companies without close personal involvement. (Frimodig, 2012)

Generally, informal venture capitalists are angel investors; micro angels, business angels and super

angels. At later growth phases funding is raised from formal investors such as venture capital

companies. (Rasila, 2004). Development stages of growth, cash flow and sources of finance are

visualized below (Frimodig, 2012)

7 Source: http://blogs.wsj.com/accelerators/2013/04/01/steve-blank-should-i-get-an-m-b-a/ Dowloaded: 29.04. 2013.

23

5. Graph The investment need and lifecycles in Frimodig, 2012

4.2 The early stage startup challenges

Throughout the stages of the development the basic needs of the company are also differ. The startups

have a lack of knowledge and there are difficulties in finding the working business model, have access

to the market and raise funding after their launch. (Harding, 2002; Rasila, 2004.) Filling the gaps

demands that information and knowledge flow between startups and investors. Business angels can

fill the gap through a supportive approach, including mentoring, providing expertise, and also mental

and financial support. (Harding, 2002, Frimodig, 2012) Business accelerator also can contribute by

helping founders to bridging the gap between starting up and the market reach.

Startups have knowledge and an equity gap in the early stage of their existence. At the beginning the

founders usually need help on product and customer development when they are looking for the

suitable and sustainable business model. Obviously the more knowledge and experience they have,

the less support is needed. Parallelly with that, the need for capital is arising as the company is

developing and reaching the milestones step by step. In this development process the emerging need

of seperating different functions as IT, product management, marketing, sales, business development,

etc is appearing.

24

6. Graph Equity gap vs. competence gap (Rasila, 2004; Ala-Mutka 2005) in Frimodig, 2012

4.3 Changes in the business environment

As a result of the globalization and market- oriented business thinking, domestic markets have lost

significance and businesses going to global markets from day one. Operating in an extremely complex

environment makes the starting up process even more challenging as a result of different cultures,

politics and technological solutions. (Hisrich, 2010, Frimodig, 2012)

Globalization is a natural process that could be defined as “universal mechanism that grew out of the

naturally occurring order-exchange process”. Globalization has roots deep in history, but nowadays its

pace has been accelerated. (Beer, 2011 in Frimodig, 2012 p13). The global business environment has

changed according to Frimodig (Frimodig, 2012) during the last few decades and therefore has affected

the internationalization process of companies leading to the emergence of born globals in the 1990s.

(Laanti et al., 2007. in Frimodig, 2012)

The global aspiration of the startups is demanding management challenge because of the unbalance

between goals and resources. Usually the relatively young and inexperienced founders’ lack of relevant

knowledge, which is needed to gain high- growth in the global market. (Knight and Cavusgil, 2004;

Gabrielsson, 2007, in Frimodig, 2012). However, enthusiasm and vision can give limited compensation

in filling the knowledge gap (competence gap). The startup should seek appropriate resources and

knowledge outside the company to cover the knowledge gap. (Frimodig, 2012)

According to P. Miller and K. Bound (Miller, Bound, 2011) the changes in the environment had

significant effect both on the startup side and on the investor side as well. Those are decraising startup

costs, better access to customers and more efficient monetisation by using different online channels.

According to P. Miller and K. Bound „the falling costs of hardware and software (are) one of the main

25

drivers in the proliferation of startups over the last five years and an important factor in the growth of

accelerator programs” (Miller, Bound, 2011 P. 21.)

The cost of launching a start-up is decreasing

As a result of the technological developments, the new ICT business models and the decreasing service

costs startups can start their operation with rented resources instead of having significant initial costs

by hardwares for example cloud services could be a cost effective solution instead of buying a server

and paying for the maintenance in-house. These alternatives are affordable compared with the solid

hardware infrastructure needed before the dot com bubble to start a new company.

Dot-com Era Lean startup era

Buy own servers and drive them to the

datacenter

Using services from the cloud

Buying software licenses for all the employee Activate Google Apps for your domain

Agree and sign an office lease Working from/meeting at a coworking space

Launch a billboard campaign Google Adwords or Facebook advertisments

Take years to build software and then release Iterative agile software development with

daily updates

3. Table Starting up in the dot-com era versus the lean startup era (Based on Miller, Bound, 2011)

The trend turning towards open source softwares also helped a lot by making the startup more „lean”.

Licenses for software used to cost a lot, now there are alternative tools in most cases for free or very

reasonable prices.

Another favourable trend is the pay as you go business model or monthly subscriptions for online

services like online CRM, project management, workflow, cloud ERP and other related softwares and

services.8 Small companies should not have to pay significant money on upfront. Certain sofwares are

available in the cloud for them that would not be affordable otherwise. Startups can start using

services for free and if they decide to use the premium functions they can pay a monthly fee.

Leased offices could be replaced by working in coffee houses or paying daily or hourly fees at co-

working spaces that gives extra flexibility for startups especially at the very beginning of their customer

validation and development process. Meeting room rental services are also available at the co-working

offices.

The initial costs of setting up a business has changed dramatically in the last couple of years. The major

cost of early-stage companies are not related to technology nowadays but more like human resource

expenses. One of the initial problems for founders how to cover their daily expenses while they are

8 You can find cost effective tools for startups in the following article: http://www.inc.com/tom-searcy/start-up-on-a-budget-14-cheap-tools.html Dowloaded: 29.04. 2013.

26

developing the first product, trying to acquire new customers or working on finding investors. (Miller,

Bound, 2011)

Easier to find and address new customers

Not just the decreasing cost of the starting up process that has changed in the last decade but the

customer acquisition methods and costs too. There are new online channels of reaching the target

audience and these channels also give better results based on the better measurability and more

effective targeting. By using Google Adwords, Facebook or LinkedIn advertisements it is possible to pre

validate products, services on low budget and continuing spending just on the effective channels,

campaigns. There is another reason starting up is cheaper as competitive analysis is getting easier and

cheaper now by using online channels like LinkedIn, AngelList or Crunchbase on the competititors

funding, employee count, and sales.9

Getting the revenue inflow is easier

Beside the growing number of potential customers by the result of the easier starting up, reach and

targeting there are effective ways on getting paid for products and services via direct payment

transactions through e-commerce channels, app stores or subscription based models. Based on these

facts online channels that makes a much more cost effective alternative than traditional commercial

channels.

Changes in the investment market

The economics of startup companies changed dramatically and the entry barriers to the technology

intensive markets have decreased significantly during the past decade that can be considered as one

of the main factor behind the growth of the business accelerator programmes.

Beside the lower costs of starting up a venture, the venture capital industry is having hard time to

adapt and find their place in the ecosystem. VC has retreated from early-stage investments,

particularly in Europe, and the way of early-stage investment is changing. In the US a number of multi-

stage investment funds have emerged, but in Europe, bar a few newly developed ‘feeder funds,’ like

Index Seed and Atomico, an investment gap is growing both the US and Europe, business angels have

stepped in to fll this gap since 2000. (Miller, Bound, 2011)

Yet despite positive signs that the gap in venture performance between the US and Europe is

narrowing, it is likely that the gap will widen again as US investors are set to reap the social media

boom. “The problem with the European investment market is not that European investors aren’t as

good at growing companies, but that the environmental conditions, and particularly the pipeline of

companies is inadequate. This is proved by venture performance data – UK VCs perform better than

average when they invest in the US and US VCs perform worse than average when they invest in the

UK.” (Miller, Bound, 2011 p23.)

9 Source: http://davidquail.com/2012/05/11/another-reason-starting-up-is-cheaper-now/ Downloaded: 29. 04. 2013

27

The fundraising is critical for the growth of a born global company. Generally the companies that have

gained external funding grow faster. On the other hand, investors and venture capitalists search

founders that are able to create global visions, have international business experience and global

networks, and therefore competence, knowledge and experience are all important. (Laanti, et al.,

2007) (Frimodig, 2012)

Technically, in the early phases of a born global company, the product development has a significant

role. It is crucial to have a clearly focused product portfolio and keep the customer focus. (Barringer et

al., 2005, Gabrielsson, 2007, Frimodig, 2012) The right combination of engineers, designers, marketing

and sales makes a team an interesting investment targets.

As a result of the costs of starting a new venture coming down, venture capitalists increasingly making

smaller seed investments and seed investments in internet companies are becoming more prevalent

when it comes to early stage investing.10

7. Graph Seed deals by vintage quarter Source: www.cbinsights.com

On the other hand, regarding the follow-on investments for seed funded companies there is also an

interesting trend. The next investment level after the seed funding called Series A that remains

relatively steady in the past few years despite the boom of the seed investments. The gap between

the two funding round called the Series A Crunch that is an excessive demand for a limited supply of

10 Source: http://www.cbinsights.com/blog/trends/seed-investing-report Dowloaded: 29.04. 2013.

28

Series A financings. This trend would mean that “many startups will be orphaned and that some

investors will lose their money”. (cbinsights.com, 201311)

8. Graph Series A Deals by Vintage Quarter Source: www.cbinsights.com

The Series A crunch is one of the biggest challenge that the early stage VCs and business accelerators and their portfolio companies are facing with in the next few years.

11 Source: http://www.cbinsights.com/blog/trends/seed-investing-report Dowloaded: 29.04. 2013.

29

4.4 The background of the shift between business incubators and business

accelerators

The seed accelerator (or business accelerator) derives many of its characteristics from the business

incubator. Therefore it is recommended to start the description by introducing the concept of

incubation.

Incubators, the predecessors of the business accelerators have proven to be an economic development

tool for the communities they serve since 1959. The general idea behind the incubation concept to

create an institutionalized environment that assists and enables startup companies and business ideas

to grow. (Barrehag et al, 2012) Incubated companies have created numerous jobs, thereby increasing

the tax base, occupying additional commercial real estate space, contributing to local business

infrastructures and creating even more jobs in other industry sectors (van Huijgevoort, 2012 p4.

Wiggins & Gibson, 2003)

Business incubators are institutions that support entrepreneurs and the process of starting a venture,

helping to increase survival rates for innovative companies and also for small and medium enterprises.

The process of developing a startup company within an incubator can be extensive and could take

several years. (Barrehag et al, 2012)

There is no widely accepted standard definition of business incubation. There are several definitions

available in the academic literature and just as many have been adopted by industry associations and

policymakers in different countries, reflecting local cultures and national policies. According to

Hamdani, Germany targets innovative start-ups, while France and the Netherlands promote the

university-incubator model. (Hamdani, 2006)

The American National Business Incubation Association defines a business incubator as “an economic

development tool designed to accelerate the growth and success of entrepreneurial companies through

an array of business support resources and services. (Bollingtoft, 2012) According to Sherman &

Chappell (Sherman & Chappell, 1998), these support services include assistance in developing business

and marketing plans, building management teams, and obtaining capital and access to a range of other,

more specialized, professional services. They also provide flexible space, shared equipment and

administrative services

The main purpose of a business incubator, is to create a favorable business environment for start-up

firms to compensate for the lack of financial, knowledge and networking resources they generally have

(Commission, 2002). The start-up firms in an incubator are provided offices for moderate price, shared

equipment, administrative services (legal advisory, accounting etc.) and other business related

services. (Bollingtoft, 2012).

30

9. Graph The Role of Business Incubators Based on: Sahay, 2004,

According to Sahay the author of the Role of Technology Business Incubator, Angel Investor and

Venture Capital Fund in Industrial Development ’Business incubators accelerate the successful

development of entrepreneurial companies through an array of business support resources and

services, developed or orchestrated by incubator management, and offered both in the incubator and

through its network of contacts. A business incubator’s main goal is to produce successful firms that

will leave the program financially viable and freestanding. These incubator graduates have the

potential to create jobs, revitalize neighborhoods, commercialize critical technologies and strengthen

local and national economies.’ (Sahay, 2004 p5.)

The US Small Business Administration defines incubators as: physical facilities that provide new firms

with the supportive network necessary to increase their probability of survival during the early years

when they are most vulnerable. (Cornelius, 2003)

Business incubators are institutions founded to be the catalysts of the entrepreneurial process, by

helping to increase survival rates for innovative startup companies. Entrepreneurs with feasible

projects are selected and admitted into the incubators, where they are offered specialized resources

and servicesthat might include such elements as (Sahay, 2004):

Providing available spaces (office, production space, laboratories for discounted renting fee)

Consulting and Management services (consulting for business planning, financial

management, taxes, marketing, advertising, advice on intellectual property, access to funding)

Administrative services (juridical assistance, accounting, shared bookkeeping)

31

Logistic support (office services, utilities, usage of equipments, IT services)

Technical assistance (laboratory services, instruments, research services, assistance with early

engineering & prototype, quality management services, technological services)

Business networking (access to different actors, institutions, universities, corporates, chamber

of commerces, investors)

Training and education (professional business training courses, fine tuning business

management skills (planning, organizing, directing & controlling), coaching, mentorship and

personnel training services, entrepreneurial training programs)

(Based on Sahay, 2004, Van Huijgeevort, 2012, Vasilescu, 2008)

Efforts to determine how incubators assisted firm development quickly became an examination of

incubator categories. Based on the extent of value added services there is a continuum from real estate

incubators to purely business development focused programs. (Cornelius, 2003, van Huijgevoort, 2012,

Bøllingtoft & Ulhøi, 2005; Christiansen, 2009; Commission, 2002; Grimaldi & Grandi, 2005; Hansen,

Chesbrough, Nohria, & Sull, 2000.)

10. Graph Continuum of added value services provided by incubators and accelerators (Price, 2004 in Frimodig, 2012)

In short, there has been a shift from real estate provision and appreciation to for-profit enterprise

development, as the main starting point of business incubators (Aerts et al., 2007 in van Huijgevoort,

2012).

At the time before the dot-com bubble in 2000, a lot of networked incubators12 started with a focus

on IT-based startups. These very specialized and received significant funding from investors at a rapid

12 Networked incubator: A networked incubator is a type of business incubator model which is a suited model of the Internet economy. The ‘Networked Incubator’ model emphasizes the dynamic working environment, with start-up firms constantly working together,and informal interactions of co-founders and participants (van Huijgevoort, 2012)

32

pace. The model was based on large investments in single projects, which suited venture capital and

had previously been successful (Miller, Bound 2011).

As the dot-com bubble inflated, many promising IT-based were unable to generate revenue and

collapsed (Blank 2005). Within two years starting from 2000 to 2002 NASDAQ lost 80% of its former

value because of the dot-com bubble. This collapse in valuation meant that many investors lost their

capital in companies that had only succeeded in burning through their money without creating anything

of value. (Barrehag et al, 2012) Critics of the networked incubator investment model coined the term

“incinerator” to emphasize the problems of investing large amounts of capital at once without

demanding measurable results (Miller, Bound 2011), (Barrehag et al, 2012).

As the investment climate began to recover a few years later, the new frameworks and approaches

initiated by entrepreneurs such as Paul Graham started to gain the attention of the investors. Key

changes in the model were shorter incubation cycles, as most IT based products can be developed

faster than physical products. (Miller, Bound 2011)

5 years after the peak of the dot-com bubble Paul Graham launched Y Combinator in Silicon Valley.

This represented a business idea that had a lot of common characteristics with traditional incubator

but there were also significant process innovations. Most importantly, the acceleration period is

usually no longer than three months that is suitable for ICT related applications. In addition, the cost

and structure of investments differ in that they are much smaller in each individual startup. (Barrehag

et al, 2012). Y Combinator for instance offers twice a year 40 companies 11-20 000 USD investments

for 6-7 percentage of its stake.

4.5 Business accelerators

The traction of business accelerators is much shorter, originating from 2005 (Christiansen, 2009; Miller

& Bound, 2011). A very small amount of scientific literature exists on business accelerators, however

the growth in the number these programs is significant. According to Bloomberg Businessweek, in

2011 around 110 business accelerator programs were operating around the world (Van Huijgevoort,

2012) and for 2013 it has grown to 153 (seed-db.com, 2013).

According to Susan Cohen who is a researcher at the University of North Carolina at Chapel Hill:

Accelerators are organizations that provide cohorts of selected nascent ventures seed-investment,

usually in exchange for equity, and limited-duration educational programming, including extensive

mentorship and structured educational components. These programs typically culminate in “demo

days” where the ventures make pitches to an audience of qualified investors. (Forbes.com, 2012)

33

11. Graph Different types of accelerators, Source: Frimodig, 2012

34

5 Key elements of the business accelerator programs

Business Accelerators have several distinctive features that set them apart from existing incubators

and other programmes to support startups.13

12. Graph The intersection of accelerators and incubators Source: www.launchause.com

Since the establishment of the first business accelerator program (2005) they were driven almost

exclusively by private investors, and concentrated in the web and mobile sector.

In the past few years not-for-profit accelerator programs also started to operate (eg. Startup Sauna,

Startup Chile, etc.) There is some variation between programmes, but they comprise five main

features. The research uses the approach of Miller and Bound by describing business accelerators.

(Miller and Bound, 2011)

An application process that is open and highly competitive.

Provision of pre-seed investment, usually in exchange for equity. (There are a few not-for

profit programs as well usually supported by the governments)

A focus on small teams not individuals.

Time-limited support comprising programmed events and intensive mentoring.

Startups supported in cohort batches or ‘classes’. (Miller, Bound, 2011 p3.)

13 Read more about the differences at van Huijgevoort’s thesis: The ‘Business Accelerator’: Just a Different Name for a Business Incubator? http://www.dutchincubator.nl/uploads/Documents/49.pdf Dowloaded: 29.04. 2013.

35

5.1 Easily accessable open application process

Accelerator programmes have web-based application processes and they are expecting applications

from teams coming from anywhere in the world. The application process is simple, by keeping minimal

paperwork needed. The form often focuses more attention to the founders and the team rather than

the business idea and concept. If the team managed to get through the pre-selection, they are invited

to an interview that are pretty short (10-20 minutes in most cases). The process of selection from the

application deadline through to a decision is often very short compared to many routes to funding or

business education programmes. (Miller, Bound, 2011)

5.2 Intensive competition

Programmes are highly selective and exclusive, involving serial entrepreneurs, investors, experts to

choose the most talented teams that worth to participate in the accelerator program. Most of the

accelerators are having applicant success ratio of less than one in ten. Accelerator programmes often

invest considerable time in speaking and running events internationally to reach out to potential

applicants to maintain the quality of the applicant pool (eg. Startup Sauna, Seedcamp). For high profile

accelerators, less than 1 per cent of applicants will be successful.

Accelerators usually decide on a limit on the number of startups they can support in each cohort based

on the amount of office space they have available or the number of mentors and operational staff

needed to handle larger numbers. One of the most successful one, Techstars has decided to work with

ten companies per batch whereas Y Combinator has been less constrained. They now fund over 60

companies per cohort.

5.3 Offered pre-seed/seed investment

The investment provided by accelerator programmes is different, in most cases it depends on how

much it costs per co-founder to live during the period of the programme and for a short period

afterwards. Programmes usually provide a minimum of USD 20 000 and a maximum of USD 50 000

investment during the first three months. This can be in the form of a non refundable grant, convertible

note or an equity investment. (Miller, Bound, 2011)

5.4 Focus on teams

Accelerator programs are focusing on teams not individuals. They usually prefer teams not larger than

three or four person. Larger teams needs more initial investment to cover the living expenses and

make the co-founders ready to work on solely on the startup.

36

5.5 Time-limited support, intensive mentoring

Accelerator programmes provide support for a set period of time – usually between three and six

months. According to Miller and Bound this is linked to the decreasing length of time it takes to launch

a web startup, but it’s also about creating a high pressure environment that will drive rapid progress.

(Miller and Bound, 2011)

While a number of programmes do offer ongoing support for graduated companies there is always a

more intense interaction with the programme for the giving time frame of acceleration. Regular

meetings and discussions with mentors, experienced founders, investors and other relevant

professionals is a significant added value of the business accelerator programs.

Business accelerators should have enough incentives or opportunities that make them attractive for

startups as the competition is growing. In other words, any new accelerator programme must be

distinctive and compelling to entrepreneurs (Cristiansen, 2009).

There are introductions where mentors present their ideas and experience and then spend time with

teams on a one-to-one basis. According to Miller and Bound the aim of this kind of mentoring is two-

fold

1. to challenge the teams and give them honest feedback on where they’re going right and

wrong

2. to give them a chance to create longer-term relationships with mentors who could take on

the role of an advisory board over time. It’s not uncommon for angel investors who act as

mentors to become investors in the companies they work with. (Miller, Bound, 2011)

It is essential for an accelerator programme to develop an extensive network of prestigious mentors,

serial entrepreneurs and investors with wide range of expertise around the batches.

In the accelerator programs startups have the opportunity to be educated on business topics and on

product-specific topics that are applicable in their industry. Accelerators that operate in regions

without a strong history of entrepreneurship will need to create a more comprehensive educational

programme, while accelerators that focus on more experienced entrepreneurs can likely be successful

with a more tailored educational programme. (Cristiansen, 2009)

According to personal interviews with entrepreneurs access to respected high professional mentors is

one of the most important element of the competitiveness among the programs. Attracting high

quality mentors requires filtering and admitting only high quality startups. (Miller and Bound, 2011)

Accelerator programmes usually offer regular professional and get together events between the

participating companies/mentors and external partners. The accelerator programs finish with the

demo day where the teams having the opportunity to present their progress in front of business angel

and Venture Capital investors.

The demo days are at the end of the programs and they are designed for angel and venture capital

investors to come and see what has been developed during the accelerator program. It can also give

companies a chance to launch their product or service to the outside world – media coverage is

37

common. These events give participant teams access to a large and high quality group of investors in

a way that would be very difficult to achieve without the accelerator programme. (Miller and Bound,

2011)

13. Graph The Accelerator Cycle, Source: Barrehag, 2012

5.6 Batch of startups and alumni network

Accelerator programmes differ from business angel or seed fund investment since batches of

companies are getting investment at the same time. Startup founders are the ’raw materials’ in the

accelerator process putting them through the same process and mass producing them by resource

efficient way that can be achieved by helping companies all at the same time.

One core advantage of cohort working is the peer support that startup teams provide each other. This

can take the form of technical co-founders helping each other out with problem solving through to

early feedback on pitches that avoids embarrassing mistakes ahead of more vital presentations to

investors or clients. By encouraging the startups to support one another, some of the burden is also

taken off the accelerator management team, allowing them to focus on bringing in outside expertise.

Co-working is a key part of the accelerator programme although not all the accelerators provide desk

space. Y Combinator organize meetings once or twice a week. In spite of not having office face-to-face

meetings and events between peers and mentors are essential. (Miller, Bound, 2011)

For accelerators the intangible value of the alumni network will becomes a distinctive in the future.

The more startup they fund, the faster the alumni network grows and they can be mentors, investors

and advisors for future cohort companies. Being a mentor/investor after becoming a successful

entrepreneur by the help of a business accelerator could be the pillar of the sustainable development

of these programs.

38

14. Graph Key elements of the accelerator program, Source: Van huijgevoort 2012

It is also interesting to have a look at on the business accelerator cycle. If they can attract high profile

entrepreneurs and mentors that results in successful startups. Successful startups are the most

important outputs of the accelerator process and the base of the valuable dealflow. If the follow on

investments are relatively frequent that helps to build a brand around the accelerator that results in

better batches in the future.

15. Graph The vicious circle of the accelerators, Source: Frimodig, 2012

39

6 Introduction of international best practices of seed acceleration

6.1 Y Combinator

Y Combinator14 is the first seed accelerator program in the world by established in 2005. Y Combinator

is a hybrid venture capital fund and business school that invests in, advises around 40 early stage

businesses twice a year. (Wired, 2011) The HQ is situated in the center of Silicon Valley, in Mountain

View. Twice a year the company hosts a three-month boot camp. Each team that is accepted receives

seed funding 11 000 USD for the group plus 3 000 USD more for each member of the founding team.

In exchange Y Combinator gets a small stake in the startup, usually 6 or 7 percent. Only 1% of the

startups are admitted that were applied to the program. There are approximately 2000 applicants for

each Interview Days. (Wired, 2011)

Y Combinator supplements the money with advisory and coaching services, introductions to later stage

investors, technical help, and have an extended community. Over the 13 weeks the members of the Y

Combinator getting valuable feedbacks from industry experts, innovators and investors. Their model

has produced many promising startups, couple of significant acquisitions and many seed accelerators

with similar business models all around the world. The founders of Dropbox, Reddit, Loopt and Scribd

were all discovered by Y Combinator. As a result of the ongoing successes of the Y Combinator

companies, tech blogs always covers the launches of the new ventures coming from Y Combinator

(Wired, 2011)

According to Paul Graham - the founder of Y Combinator - founding a company is the most efficient

way to create wealth for investors, for founders, for society at large despite the difficulties. As Paul

Graham15 told Inc. Magazine ‘There’s a classic pattern that has happened over and over again

throughout the history in which something is made one at a time, very expensively and unreliably by

hand, and then someone comes along and figures out how to make large numbers of them cheaply and

reliably. (…) We are pulling this kind of transformation with venture funding. We’re mass-producing

the start-up’ (Chafkin, 2009)

Y Combinator offers free incorporation services from its in-house lawyer. Investors from Sequoia

Capital, one of the most respected VC company according to Techcrunch (Schonfield, 2011) giving one-

on-one coaching. Free office space at AOL’s Palo Alto headquarter is also given to one of the YC

startups. A partner of YC Rackspace also supplies each company with web hosting worth 20 000 USD.

Y Combinator companies are officially launched after the first press release at one of the significant

medium of the technology scene (eg. TechCrunch, Inc, etc.). Over the past six years, about a quarter

of Y Combinator companies have folded and many more are barely existing. That is a relatively small

14 Y combinator is a mathematical function that makes other functions, just as Y combinator is a company that makes other companies (Chafkin, 2009) 15 Paul Graham is the Founder of Y Combinator. He holds a Ph.D. in computer science and has several years of formal training as a visual artist. Before starting Y Combinator he founded Viaweb, a dot-com software company that helped retailers sell online. Viaweb was acquired by Yahoo in 1998 for 49 million USD.

40

failure rate in the startups scene. As a result of the high quality companies the investors are really open

minded to be the part of the Demo Day. In 2005 15 investors showed up to the first Demo Day; in 2011

more than 365 attended to the 2 days long Demo Day.

Speakers and coaches of YC are include Salesforce.com CEO Marc Benioff, Facebook founder Mark

Zuckerberg and eBay CEO John Donahoe.

Founded 2005

Location Mountain View, California

Founders Trevor Blackwell, Paul Graham, Jessica

Livingstone and Robert Morris

Companies per class 46

Total startup alumni to date 513 companies

Notable Alumni AirBnb, Reddit, Dropbox, Scribd, Heroku

4. Table The basic facts of Y Combinator Source: NESTA and seed-db.com, Ycombinator.com

6.2 Techstars

TechStars is a mentorship-driven seed stage investment program. TechStars runs a three month long

program in Boston (MA), Boulder (CO), Cloud (San Antonio, TX), New York City (NY) and Seattle (WA)

once a year since 2007 and in London from 2013. (Techstars.com, 2012). The programme lasts 12

weeks, for which the companies have to move to the Techstars office space and completely focus on

their projects. (Miller, Bounds, 200x)

TechStars uses a franchise model. TechStars is also spredading their global network by creating Global

Accelerator Network in partnership with Startup America. As a result of that they outsource their

model and help launch other accelerators. The seed stage investment program is pretty selective. They

choose the 10 best companies from hundreds of applicants. Those companies get 18 000 USD in seed

funding. Moreover, companies accepted into the program are offered a 100 000 USD convertible debt

note by well known investors. Total of 114 companies has gone through the program and in 2012 Q1

98 were still active. (Forbes, 2012c) About 80% of TechStars companies go on to raise venture capital

or a significant angel funding round. Companies managed to raise an avarage 1.1 million USD. Around

40% of startups come from the neighbouring cities of each program. (Forbes, 2012c) Mentoring is one

of the most important added value of the Techstars approach and the first month of the programme

consists almost entirely of meeting experienced tech entrepreneurs and investors and receiving often

41

honest feedback on their businesses. Unless a team can attract five mentors to help them, Techstars

feel they’re unlikely to succeed. (Miller, Bound, 2011)

As David Cohen, the founder of TechStars said „The venture community has started to see high quality

accelerators as a filtering mechanish, It’s become a new college for entrepreneurs because we’re so

elective on front end” (Forbes, 2012c). TechStars uses the mentorship driven model (10 to 1 mentor

to startup ration) in order to assure that each company could get enough feedbacks and attention from

various professionals. The management of TechStars is emphasizing the transparency of their

activities. They have published a list of every companies that have gone through TechStars with funding

information, number of employees, failure rates, etc. The differentiative strategy could be found by

keeping the incubator batches small and giving more attention to the participants. They hold one

program each year. As the founder declared: „For us we focus on quality over quantity. We want all

companies we fund to be successful. We have kept our class sizes small” (Forbes, 2012c) One more

differentiator is that the founer David Cohen also invests his own money in startups.

Founded 2007

Location Boston, Boulder, New York, Seattle, London

Founders Brad Feld, David Cohen

Companies per class 10 per location

Total startup alumni to date 189 companies

Notable Alumni CrowdTwist, Occipital, Orbotix, SendGrid

5. Table The basic facts of TechStars Source: NESTA and seed-db.com, techstars.com

42

6.3 500 Startups

500 Startups is a seed fund and incubator program focusing on early stage startups founded by Dave

Mclure. 500 Startups is located in Mountain View, CA. They invest primarily in consumer & SMB

internet startups, and related web infrastructure services. (crunchbase.com, 2013)

Selected areas of interest include financial services & e-commerce, search/social/mobile platforms,

personal & business productivity, education & language, family & healthcare and web infrastructure.

The program offers between USD25 000 and USD100 000 funding in exchange for 5% equity (with

some exceptions), and lasts for three to six months. (Businessinsider.com, 2012) In addition to funding,

the 500 Startups Accelerator program also offers access to 120 mentors, sponsorships from

infrastructure providers like Microsoft, Rackspace, and Amazon Web Services, and office space at 500

Startups headquarters in Mountain View. 500 Startups also organizing events like SmashSummit,

UnSexy, and GeeksOnaPlane. 500 Startups investment team and mentor network has operational

experience at companies including PayPal, Google, YouTube, Yahoo, AOL, Zynga, LinkedIn, Twitter,

Apple & Facebook.

As of April 2012, 500 Startups had invested in 257 companies, including myGengo, Artsicle, Visual.ly, E

la Carte, and Udemy.

Founded 2010

Location Mountain View

Founders Dave McClure

Companies per class 30

Total startup alumni to date 126

Notable Alumni myGengo, Artsicle, Visual.ly, E la Carte, and

Udemy

6. Table The basic facts of 500 Startups Source: seed-db.com, 500.co

43

6.4 Seedcamp

Startup companies that need business acceleration shouldn’t go directly to the Valley in order to grow

and develop into a meaningful venture. Seedcamp is Europe’s most well-known accelerator fund

focuses on European startups with high growing potentials. (Forbes, 2011 seedcamp) Founded by Saul

Klein (former Skype VP) and Reshma Sohoni (previously worked for a private equity firm 3i) Seedcamp

is a combination of investment firm and entrepreneur boot camp. (Techcrunch, 2012) (Forbes, 2011)

The participants receive 50 000 EUR (70 000 USD) and the opportunity of joining Seedcamp’s weeklong

training camp in London. There they will be able to get access to volunteer mentors –product

development specialists, lawyers, accountants, financial experts, investors and other entrepreneurs-.

Seedcamp also offers one-day meet-ups throughout the year and also organizes one week long trip to

the US for boot camp graduates. Seedcamp is organizing one day workshops in different cities in order

to find the best entrepreneurs at different parts of Europe (Italy, Israel, Latvia, France, Estonia, Hungary

etc.).

The best companies are choosen to participate at the Bootcamp. Seedcamp offers 50 000 EUR in

exchange for about 9% equity. (Forbes, 2011 seedcamp). Seedcamp has around 40 investors roughly

half of them angel investor, and half of the VCs. As a result of this structure seemingly the ecosystem

owns (the investment parties at least) Seedcamp not just a few business angel, one VC and the owner

like in case of YC. Its goal is creating a better startup „ecosystem” for Europe, in the region of diverse

languages, cultures, economies that make difficult growing fast and getting global within a short run.

Seedcamp is also working on creating bridges to the Valley by partnering with American seed fund,

500 Startups, founded by Dave McClure. Seedcamp also have negotiations on building other

partnerships in New York, Boston and Berlin.

Founded 2007

Location London

Founders Saul Klein, Reshma Sohoni

Companies per class 15-20

Total startup alumni to date 88

Notable Alumni Mobclix, Zemanta

7. Table The basic facts of 500 Startups Source: seed-db.com, 500.co

44

6.5 Startup Sauna

Startup Sauna is a Finnish not for profit accelerator founded in 2010. Startup Sauna is funded by the

Startup Sauna Foundation that is backed by SITRA, Teknologiateollisuus, Aalto University and private

companies. Startup Sauna connects the pre validated startups from Northern Europe, Russia with

experienced serial entrepreneurs, investors and media from around the world. In practice, Startup

Sauna consists of three different operations:

An internship program for university graduates to intern at high-growth companies in Helsinki and

Silicon Valley. More than 60 interns have been employed through the program to date

An accelerator program for early-stage startups from Northern Europe and Russia, where the

startups get coached by experienced serial entrepreneurs and investors in an intense one-month

program in Helsinki. More than 90 companies have graduated from the program since 2010

The Slush conference, which brings together the early-stage startup ecosystem in the region to

meet top-tier venture capitalists and media from around the world. In 2012, Slush gathered more

than 3.500 attendees, 550 companies and 250 investors and journalists for two days in Helsinki

Startup Sauna seeks the most promising early-stage startups learn, grow and help them become

successful ventures with the help of their extensive network of coaches since 2010. Startup Sauna is

physically located in its own co-working space found on Aalto University's campus in Espoo, Finland.16

Startup Sauna is funded by Aalto University, Tekes (The Finnish Funding agency for technology and

innovation), Teknologiateollisuus and Sitra.17 Startup Sauna is using a mixed ownership structure as

the Finnish accelerators and incubators usually tend to do. (Turi, Koranyi, 2010)

Founded 2010

Location Helsinki

Founders Kristo Ovaska, Captain, Juha Ruohonen

Companies per class 15-20

Total startup alumni to date 80

Notable Alumni Ovelin (USD 1,4mil from TrueVentures, Futureful

(USD 2 million including founder of Skype Janus

Friis), Advacam, Blaast, Videolla (Virool), Asema

Electronics, Dentatube, Audiodraft, Infogram,

Froont, Mcule.com, SooMeta, MailMill

16 Source: www.startupsauna.org Dowloaded: 29. 04. 2013 17 Source: angel.co/startupsauna Dowloaded: 29. 04. 2013

45

8. Table The basic facts of Startup Sauna Source: seed-db.com, startupsauna.org

6.6 Startup Wise Guys

Startup Wise Guys is an international 3 months intensive and mentorship driven accelerator program

for early stage technology startups. The program is hosted twice a year and up to 10 new teams are

accepted to each cycle of the acceleration that means investment in 20 startups a year. The program

is tailored for startups who want to take their prototypes to new level and work hard for business plan,

product development and get mentorship, guidance. Startup Wise Guys network consists 70+

international mentors and patch of international teams. Startup Wise Guys is based in Tallinn, Estonia.

The program ends with Demo Days in Estonia and in London. Startup Wise Guys gives chosen startups

up to €15 000 investment based on the number of founders. In return Startup Wise Guys take 8% of

equity. (startupwiseguys.com, 2013)18

SWG has an agreement with SmartCap for 1M EUR investment for alumni and the team is currently

working on a follow up US program for selected teams.(angel.co, 2013)19

Mentors are divided into 3 categories - local, corporate and international mentors. Each team is having

their personal mentors, and given access to others as well. The startup companies are supported by

13 angel investors who actively participate in the selection process to get experience in co-work and

confirmation to continue their individual investments.

Founded 2012

Location Estonia, Tallinn

Founders Jon Bradfor, Herty Tammo, Mike Reiner

Companies per class 8

Total startup alumni to date 15

Notable Alumni Brandiegames, Monolith VitalFields, Brickflow

9. Table The basic facts of Startup Wise Guys Source: seed-db.com, Startupwiseguys.com

18 Source: www.startupwiseguys.com Dowloaded: 29. 04. 2013 19 Source: https://angel.co/startupwiseguys Dowloaded: 29. 04. 2013

46

6.7 StartupBootcamp

Startupbootcamp is a three-month European startup acceleration program providing seed funding, co-

working space with other startups and a significant mentorship program - which focuses on getting

your startup the right exposure, the ability to scale across European to global markets and funding

from potential investors. Startupbootcamp accelerates ten early stage tech startups per program with

€15k in micro funding, free office space, 100+ serial entrepreneurs, mentors and exposure to hundreds

of investors on Demo Day. In return Startup Bootcam receives 8% equity from the startuppers.

Founded 2010

Location Copenhagen, Madrid, Dublin, London, Berlin,

Haifa

Founders Alex Farcet, Luis Riviera, Eoghan Jennings

Companies per class 10 teams/city

Total startup alumni to date 60

Notable Alumni Archify, balconytv.com, Viewsy, TheEyeTribe,

Poikos, Skynet Labs

10. Table The basic facts of StartupBootcamp Source: seed-db.com, startupbootcamp.org20

6.8 Startup Highway

StartupHighway is a European start-up accelerator, aspiring to be the best of its kind in the wider CEE

region. It is designed for those with the best business startup ideas to provide them with the tools,

network and knowledge necessary to get in shape for angel or venture capital funding. The support

comes as pre-seed funding, office space and a network of experienced mentors to help the admitted

20 Source: seed-db.com and startupbootcamp.org Dowloaded: 29. 04. 2013

47

teams’ business idea become a successful business, or to prepare your young business for the next

round of funding.21

Three months of intense work, combined with the regular mentoring sessions together with the weekly

guest visits seems to be a great recipe for all the companies participating in this program. In addition,

each startup receives up to €14,000 in seed funding, free office space and other essential services

(accounting, legal, hosting, etc.) in return StartupHighway asks for 7,5% of the startups equity.

According to the terms of this new partnership with Practica Capital, each of the teams composing

StartupHighway’s spring class in 2013 will be eligible for a EUR 30 000 convertible note.22

Startup Highway was founded by the local startup community builder – Rokas Tamosiunas. By

exploiting his wide network of connections, Rokas was able to attract only the most promising startups

in the region. Hundreds of applications were received; nine startups have started the first program.

The accelerator program is finishing with the Demo Day. The accelerator is having a number of high-

profile mentors, including Jon Bradford (co-founder of Springboard), Lauri Antalainen (co-founder of

GameFounders), Lopo Champalimaud (CEO and co-founder of Wahana), and Toivo Annus (co-founder

of Skype). StartupHighway is having 19 months of existence, it has accelerated 10 startups over two

classes. Within 12 months after graduation three out of four startups from the first batch raised follow

on funding.23

Founded 2011

Location Vilnius, Lithuania

Founders Rokas Tamosiunas, Indré Milukaité

Companies per class 5

Total startup alumni to date 10

Notable Alumni Sellfy, Relead, Lamas Valley, Utilimon

11. Table The basic facts of Startup Highway Source: seed-db.com, startuphighway.com

21Source: http://www.startuphighway.com/en/team Dowloaded: 29. 04. 2013 22Source: http://goaleurope.com/2013/04/15/lithuanian-startup-accelerator-startup-highway-announced-partnership-with-practica-capital/ Dowloaded: 29. 04. 2013 23 Source: http://techcrunch.com/2013/01/29/accelerators/ Dowloaded: 29. 04. 2013

48

7 Qualitative and quantitative research

7.1 Interviews

During the research I have conducted interviews with executives of business accelerators. Regarding

the qualitative research it was focusing on accelerators focusing on Northern Europe, Central-Eastern

Europe and Baltic countries as these areas are more relevant to the main questions and sub-questions

of the research.

The interviewees were Antti Ylimutka, CEO of Startup Sauna (Finland), Mike Reiner from Startup Wise

Guys (Estonia) Agnė Adomaitytė from StartupHighway (Lithuania). There are a growing number of

interviews on the success stories (Y Combinator, TechStars, Seedcamp, Startup Bootcamp etc.)

therefore I have decided to have a deeper view on the leaders of accelerators that works differently

mostly because of their geographical position but in some cases uses different „business model”.

Startup Sauna was interesting as they are focusing on the whole Nordic region and Russia besides

looking at ventures in CEE. They are operating on a not-for-profit basis that makes them also unique.

Startup Wise Guys is one of the most successful business accelerator of the Baltic region. Startup

Highwas is also progressing well regarding their traction on building the entrepreneurial ecosystem in

Vilnius. Peter Kadas, serial entrepreneur startup blogger also gave us interesting insights on why

accelerators are important and how they are creating value for the economy from the entrepreneurs’

point of view.

7.1.1 The importance of accelerators

Regarding the importance of accelerators Peter Kadas told that „Accelerators are important because

the business education is overly theory-focused and isn’t able to teach entrepreneurs how to build up

businesses from the very beginning of the pre-seed phase. Business accelerators could be considered

as corrections or amendments of the business school education to cover the practical know-how

building up ventures from scratch”

The need for establishing an accelerator came after similar motions coming from entrepreneurs

following the bottom up approach. The founders are volunteer startup-enthusiasts,that have been

running accelerator activities for few years in their region in case of StartupHighway, Startup Sauna

and Startup Wise Guys as well.

7.1.2 The birth of accelerators

As Antti Ylimutka, the CEO of Startup Sauna highlighted the birth of Startup Sauna was an initiative led

by a student "Back in 2008 a couple of students, namely Kristo Ovaska, went on a study trip to visit US

universities (e.g. MIT, Stanford) and what struck them was the amount of students who wanted to build

their own company that would become a global success. In Finland the mentality was very strongly to

finish your university degree and go work for a big company (e.g. Nokia, Kone, Stora-Enso, Metso,

49

McKinsey...) and be „safe”. So coming back home these couple students started thinking that ok, Aalto

University will be formed a year from now and there’s really nothing else than the Design Factory that

brought the students from 3 distinct schools together. So they put a Facebook event regarding startups

to measure if there was any interest. Well, over 200 people showed up and they only had a case of beer

to offer!”

Antti Ylimutka also emphasized the importance of having the successful entrepreneurs involved in the

ecosystem building process

„Quite quickly they started organizing different kind of pitching events etc. but the most important

thing was that they started to find these „hidden” serial entrepreneurs who didn’t have a

forum/program/etc. to sit down with startups and help them out . The entrepreneurs discussed with

the students and ended up helping with the vision – what needs to be done to kickstart a startup

ecosystem.”

Zdenek Komena from Startup Wise Guys outlined: "We wanted to provide the huge pool of technical

talent in Eastern Europe with an accelerator that understands the culture and the market, and also

provides teams with access to global expertise and networks that they would not otherwise be

connected to. Mike Reiner, Jon Bradford, and Herty Tammo are the founders of Startup Wise Guys.

Mike is the head of Startup Wise Guys. An ex-IBMer with a passion for bright ideas and business model

innovation, Mike previously worked in M&A, managing large transformation programs and innovation

projects. He is also the strategic advisor and lead coach at the Tehnopol Startup Incubator and mentor

at different startup networks in Europe.Jon is founder of Springboard, Difference Engine, Ignite100

accelerator programs in the UK. Herty is the lead investor of Startup Wise Guys. He is serial

entrepreneur and currently owns several companies.”

7.1.3 Creating entrepreneurial ecosystem by using best practices

One of the examples that was used as a base work in case of Startup Sauna’s birth the TIKARI-report

that discussed the university based acceleration and tech transfers. They concluded that a university

based accelerator with a non-academic mentality was needed – this was based on the Israeli model.

At the same time on the ecosystem level Yozma-program worked as an example for TEKES’ VIGO-

program and later for the idea of a bigger fund of funds that would produce private micro-VC funds to

boost up the ecosystem.

As a result of that Bootcamp was formed in the beginning of 2010 in order to help commercialize

research based projects from Aalto University with the help of serial entrepreneurs and investors.

"From the very beginning there started be pull from outside of Finland. One example was that the guys

who went on to co-found Virool and raise the biggest seed round of any Y-combinator alumni as of

2013 were in Bootcamp back in 2010 as a team called Videolla with the initial idea that became the

backend of Virool. So in 2011 when Ville Simola joined he said that the only condition is that we’d

expand outside of Finland. That’s what we did and quite soon realized that the vision of covering an

economic area of 300 million people made a lot of sense in terms of attracting investors and media to

attend our events." Antti Ylimutka told us.

50

For Startup Highway in Lithuania the impetus was the fact that a number of Lithuanian teams or teams

with Lithuanian team members in other European accelerator have reached more than 10 as Agnė

Adomaitytė told from Startup Highway so they have realized the potentials of the entrepreneurs in the

country.

7.1.4 Criteria of selecting teams

The criteria of selecting the teams are pretty common in all cases. These are the followings for Startup

Sauna, Startup Highway, Startup Wise Guys,

⦁ Strong team who is able to execute startup;

⦁ Start-up idea which solves real problem;

⦁ Have a globally scalable business idea and model

⦁ Have a working prototype

⦁ Shared drive and work ethic

⦁ International outlook

Beside the common criterias Anti Ylimutka added that it is important that „Startup Sauna must

be able to help (expertise found in our coach pool)”

7.1.5 Value proposition for startups

According to Peter Kadas, serial entrepreneur „business mentoring, including business development and lean development is the most important value of an accelerator, but I also consider access of various industries, the given network and community as really valuable resources provided by these initiatives” Most of the business accelerator offer, incubation and office, extended advisory and mentor network, basic funding (except for Startup Sauna), access to follow on funding, heightened visibility, other smaller perks (IT infrastructure, free legal, etc).

7.1.6 Mentors/coaches

All the interviewees outlined the importance of the mentor network. Startup Sauna, Startup Highway

and Startup Wise Guys were really proud of their mentor/coach network (Startup Sauna prefers using

coaching) As Antti Ylimutka told „The quality of our coaches is known in our alumni pool. And even if it

sounds like a joke, it most definitely isn’t. That causes us a bit of a problem since it’s super hard to

communicate what Sauna is about but luckily we have a pool of alumni who are do a pretty good job

of setting an example for other companies. Sauna is a bit different for each company participating and

we do customize it a bit for some of the teams. Petteri Koponen (Lifeline Ventures, Chairman of the

board at Supercell), Moaffak Ahmed, Jussi Harvela, Micki Honkavaara (Veturi Venture Accelerator),

51

Mårten Mickos (MySQL), Pasi Ilola, Ilkka Kivimäki, Timo Ahopelto, Ville Miettinen are our coaches

among the others”

Startup Highway has also well known experts as coaches, like Toivo Annus (Skype co-founder), John

Bradford (Founder of Springboard), Alex Farcet (Founder of Startup Bootcamp) are also among the

mentors of the program held in Vilnius.

As Mike Reiner (Startup Wise Guys) outlined: „Our primary value is found in the mentor network that we have built in developed markets in the UK and the US. Our mentor base is really strong and we believe that is one of the strongest arguments why startups should be interested in us. We do not have only mentors from Estonia we can boast with mentors from the UK, US, Germany, Netherlands and with well-known in startup world like: Jon Brandford, Alan Moore, Michael Geer, Richard Newton and many others.”

7.1.7 The core program

StartupHighway and Startup Wise Guys have a similar core program by providing an intensive 13 weeks

acceleration program consisting of three stages: Shape, Build, Sell

Shape Get your businessplan in place. With the help of mentors, trainings workshops, brain picking your initial business plan will be revised by you. Think of the details, keep yourself focused, know your target, and plan your product.

Build Development of your product is the main focus during the program. Communicate with potential customers, showcase the product, build it fast, and get feedback to know if you are on the right track.

Sell The Startup Wise Guys program ends with a Demo Day in Tallinn and in London where each team presents their business proposition for angel investors and venture capitalists.

Startup Sauna has a shorter program for the admitted companies that is only 6 weeks long and end up

with a Demo Day. They offer pitch coaching, product development and sales support beside regular

status reports of the progress made by the teams. Startup Sauna also emphasizes the importance of

social „bundling” events and they also took their best companies to the Silicon Valley for one week.

52

7.1.8 The geographic areas covered

In case of Startup Sauna around half of the companies are Finnish (simply due to quality) and 50% are

foreign. They have had companies from Finland, Sweden, Russia, Estonia, Latvia, Lithuania, Belarus,

Poland, Hungary, Italy, US, Canada for example.

SWG is focusing the marketing on Eastern Europe and the Baltics, but at the same time they are open

to ideas and teams from anywhere in the world. In the first batch, they had companies coming from

Croatia, Netherlands, Ukraine, the UK and Estonia of course, while In the second batch, Startup Wise

Guys had teams from Chille, Hungary, Poland, Russia and Estonia.

Accordint to Peter Kadas „Startups going where the knowledge and events are and financing is going

where startups are. It should be a governmental initiative as it is in Chile or Italy, where non-equity

finance is a seductive offer to draw many startups around such centers However, it requires a large

sum of capital, not necessarily working on the traditional profit-oriented basis. It is not manageable for

private money. „

7.1.9 Success and metrics

Regarding the success of accelerator Mike Reiner is highlighted: „ Currently there are more than 250

startup accelerators worldwide. There are also many more startup projects which can be accepted but

we see the competitive fight among accelerators is slowly increasing. Everything is connected - when

an accelerator wants to attract investors to fund the accelerator, it needs to have something to offer -

success stories of alumni teams including teams which got funded, publicity, top class mentors, top

excellence management team who runs the accelerator and promising new teams/projects which are

going to get accepted for the upcoming batch. All together it makes a clear signal not only for investors,

that the accelerator stands out, but also for the potential applying teams, partners, sponsors, mentors

and media.

Peter Kadas has outlined that „The Key Performance Indicators of an accelerator are primarily the ratio

of the projects financed with a follow-on round divided by the projects accelerated. Naturally, the

follow-on financing must occur in a reasonable time frame from the end date of the acceleration period,

which is typically 3-6 months. Another KPI could be the exit volume in USD. Since the typical exit time

is the 6th or 7th year of a startup, this is a longer-term measure. The cumulated exit volume until the

7th year of startups shows long-term survival capabilities. Also, the number of exits makes performance

of accelerators comparable if it is defined in net numbers (no. of startups exited til year 7 divided by no.

of startups accelerated). Finally, the cumulative number of workplaces created might show how quick

an accelerator can turn a startup to be a member of the local economy and how much the hockey stick

growth rate potential is utilized.”

53

In case of for profit accelerators exits and profit could be the KPI but the model is much more complex.

As Antti Ylimutka outlined „For us we can choose endless metrics and be happy with them: people

employed, revenue generated, funding raised, does the company turn into a viable business, impact on

our society (e.g. politicians start considering startups and legislation regarding them), the culture for

entrepreneurship (more people want to create/work for startups creating chances for truly new

economic growth... Or maybe it's the footprint that once a team went through Sauna, they grew as

founders and their next startup or whatever project will have a higher chance of success. I guess our

bigger purpose is to see whether we did such a good job that we can kill Startup Sauna in the next 5-10

years because the ecosystem produces a big number of good companies that have talent and funding

available.”

The failure rate will be one of the most important measures in the following years for accelerators. According to the current statistics Startup Sauna has 80 graduates and only 10-20% of them failed. On the other hand a Wall Street Journal article highlighted based on Shikhar Ghosh, a senior lecturer’s research at Harvard Business School that out three-quarters of venture-backed firms in the U.S. don't return investors' capital.24

7.1.10 Skills

Each entrepreneur, when gets accepted to the program, has a different level of managerial,

entrepreneurial and other skills. „It is always interesting to see how they develop in hand in hand with

their projects and other team members. Basically, the critical skills which are usually developed during

the time spent in the program are: lean startup methodology, customer development thinking, ability

to work under pressure, presentation and rhetoric skills, financial and analytical skills, leadership and

how to be visionary.” told Mike Reiner from Startup Wise Guys.

According to Antti Ylimutka „the teams struggle with their business models because they think the

know how their industry works and end up coming up with not working value props to the completely

wrong people in target companies”

24 Source: Wall Street Journal http://online.wsj.com/article/SB10000872396390443720204578004980476429190.html Dowloaded: 29. 04. 2013

54

7.2 Survey

The survey was conducted in order to evaluate and validate the key added values and characteristics

of the accelerator programs from the entrepreneurs’ perspective. The secondary sources and

interviews gave the framwork and the needed theoratical knowledge on accelerators but the key

added values and their perception was not validated since Cristiansen’s research. (Cristiansen, 2009).

The survey was filled in by 94 entrepreneurs. 29 out of them have already participated to business

accelerator programs.The other 65 entrepreneurs could be considered prospective applicants of

accelerator programs as running their own startup companies. The questionnaire was spreaded by

online channels including direct emails to entrepreneurs and social media sites (Facebook, LinkedIn,

Reddit). The alumni network of Startup Sauna and Startup Chile were addressed directly as a result of

the kind help of their executives and alumni. The survey was create by using the Google platform. The

full survey can be found in the attachment (5. appendix)

7.2.1 Demographic limitations

Despite asking near 100 relevant entrepreneurs (accelerator alumni or perspective participants) the

survey has a couple of limitation therefore it is not representative on the age distribution, nationality

and the maturity of the ventures running by the surveyed entrepreneurs. The age distribution is one

of the limitations as the research was based on random sampling instead of systematic, quota base or

other sampling methods. The age distribution of the sample could be seen on the 13. Graph

16. Graph The age distribution of the surveyed entrepreneurs N=94 Source: own research

13

11

4

6 6 6

8 8

5

10

2

4

2 2 2

6

2

4

23

1 2 1

20 21 22 23 24 25 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 41 44 45

The age distribution of the surveyed entrepreneurs N=94

55

There is one more significant geographical bias ith the survey that most of the responses came from

Hungary. Beside the 47 respondants from Hungary there are other 22 nations represented with a low

number of cases. The second most common nationality among the responders is US, the third is Finland

and the fourth is Russia.

17. Graph Nationality of the surveyed entrepreneurs N=94 Source: own research

2 2 2 1 1 2 1 2 6 1

47

3 1 1 1 1 1 1 2 1 4 2 9

Nationality of the surveyed entrepreneurs N=94

56

7.2.2 The surveyed sectors

The research has covered entrepreneurs coming from 23 different sectors. More than the half of the

surveyed entrepreneurs are working in IT/ICT related sector (45 cases). The second most common

sector was Education (12 cases), the third one was Biotechnology and Life sciences (5 cases) and the

fourth one was social entrepreneurship (5 cases). You can see the distribution of the entreprenerus

participated in the survey by sectors on the 15. Graph

18. Graph Number of entrepreneurs by their sector N=94 Source: own research

7.3 Analysis of the survey results

The surveyed entrepreneurs came from 23 countries and 80% (75 person) of them are living in their

home countries while 20% (19 person) are relocated and living in a foreign country at the moment.

This figure is important in order to get an insight into the relocation willingness of the surveyed

entrerpeneurs that will be an important part of the survey in terms of the business accelerators

location.

45

12 5 3 5 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Number of entrepreneurs by their sector N=94

57

19. Graph The proportion of the surveyed entrepreneurs regarding their current stay N=94 Source: own research

Regarding their previous experiences 31% of the surveyed entrepreneurs have already participated in

startup accelerator programs. The programs that they mentioned were Gamefounders, Startup Sauna,

Startup Chile, Seedcamp, TechStars and Startup Wise Guys. 69% of the entrepreneurs haven’t

participated any accelerator program yet so they were considered as prospective participants.

20. Graph Have you ever participated in a startup accelerator program? N=94 Source: own research

The questionnaire surveyed the type of funding regarding the current venture of the entrepreneurs.

The most common type of funding was bootstrapping (32 cases) and 3F (Family, Friends, and

Founders). We have had several combinations of funding also combining bootstrapping, 3F, grants,

angel investments and seed investors. Only 7 of the 94 surveyed entrepreneurs were VC funded that

could bias the results as most of the examined entrepreneurs running early stage companies.

19; 20%

75; 80%

The proportion of the surveyed entrepreneurs regarding their current stay N=94

Relocated Home country

29; 31%

65; 69%

Have you ever participated in a startup accelerator program? N=94

Yes No

58

21. Graph Types of funding N=94 Source: own research

After the funding history we have examined the most important decisive points of choosing the

accelerators. In order to identify the right categories of the survey we have used the results of the

interviews and existing literatures (Cristiansen, 2009, Miller, Bound, 2011). The results were surprising

as 73% of the respondents considered Mentors as the most important decisive points of choosing an

accelerator. The second most important added value were the stake that they want in return of the

initial investment and the VC/angel connection of the given accelerator.

22. Graph The most important decisive points of choosing an accelerator N=94 Source: own research

32

17

12

7

7

7

5

3

2

2

0 5 10 15 20 25 30 35

BOOTSTRAPPING

3F

OTHER

BOOTSTRAPPING+3F

VC

BUSINESS ANGEL

INSTITUTIONAL SEED INVESTORS

3F+INSTITUTIONAL SEED INVESTORS

BOOSTRAPPING+GRANT

3F+BUSINESS ANGEL

Types of Funding N=94

73%

47%

47%

40%36%

36%

35%

33%

0%10%20%30%40%50%60%70%80%

Mentors

How much percentagedo they want in return

for the investment

VC/Angel connection

Location

The track record of theAlumni startups

Amount of investment

The founders and theirexperience

The core acceleratorprogram

The most important decisive points of choosing an accelerator N=94

59

The location of the accelerator was important for only 40% of the respondents. The less important

points were the curriculum of the accelerator program (33%) and the founders and their experience

(35%) beside the amount of investment (36%) and the track record of the Alumni startups (36%).

Regarding the self evaluation of the added values of the business accelerator programs there are also

interesting findings. The respondent evaluated the added values of the accelerator by voting on the

importance of the Financial support and initial funding, Product development support, Business

development support, Brand connections, Mentorship and whether the accelerator is located in a

business hub or not.

The entrepreneurs could rate the above mentioned elements from 0 (less important) to 10 (the most

important. The results shows that the most important added value of an accelerator is the Mentorship

(8,168 in average out of 10) the second most important added value is the Business development

support (7,789 in avarage out of 10) and the third one is brand connections (7,063 in avarage out of

10).

The less important added value according to the surveyed entrepreneurs are whether it is located in a

business hub (6,252 in avarage out of 10) and product development support (6,905 in avarage out of

10) that is one of the most important goal of the accelerator programs according to the literature of

the business accelerators.

23. Graph Please evaluate the most important added valua of an accelerator N=94 Source: own research

6,905263158

6,863157895

7,789473684

7,063157895

8,168421053

6,252631579

0

2

4

6

8

10

Financial support and initialfunding

Product development support

Business Development Support

Brand Connections

Mentorship

Located in a business hub

Please evaluate the most important added value of an accelerator

N=94

60

We also surveyed the perception of the professional educational elements of the program. According

to the results the most important elements are the business development education (8,376 in avarage

out of the maximum 10) and sales and marketing education (8,095 in avarage out of the maximum 10)

Strategic elements and fundraising/financial education are in the middle of the ranking (7,957 for

strategy and 7,617 for raising capital/financing). The most surprising result is that the product

development, pitching, business modeling educational elements are perceived as the less important

elements despite these are the skills that are missing in most cases according to the interviewed

experts.

Product development finished with 7,483 out of 10, pitching had been rated 7,423 out of 10 and the

less important element, the business modelling reached 7,414 out of 10 according to the survey.

Nonetheless all the evaluated elements considered as reached 7,4 out of the scale of 10 that means

that all the above mentioned elements are considered as important parts but their relative importance

perceived differently than it is seen by the experts.

24. Graph Please evaluate the following educational elements of the accelerator program N=94 Source: own research

7,414893617

7,423913043

7,483516484

7,617021277

7,957446809

8,095744681

8,376344086

0 1 2 3 4 5 6 7 8 9 10

BUSINESS MODELLING

PITCHING

PRODUCT DEVELOPMENT

RAISING CAPITAL, FINANCING

STRATEGY

SALES AND MARKETING

BUSINESS DEVELOPMENT

Please evaluate the following educational elements of the accelerator program N=94

61

7.4 Summary of the survey results

7.4.1 Accelerators and their location

31% of the surveyed entrepreneurs have already participated in accelerator programs and 82% of them

have already took part in any kind of business education program, workshop etc. The respondents are

interested in being part of an accelerator program as they think that they would need further

education towards being a successful entrepreneur. Despite that only 33% of them would be ready to

pay for such programs. The results of the summary shows that the surveyed entrepreneurs are willing

to relocate as 20% are currently living in different country than where they are coming from.

88% of the respondents told that they would move to another country if it would be needed in order

to find investor or have a better market access.

7.4.2 The most important decisive factors of selecting accelerator

The most important factors of selecting an accelerator are not the location or the amount of funding

provided but the professional support and mentorship (73% thought mentorship as the most

important decisive point) 47% of the respondents considered the angel/VC connection and the equity

in return for the investment as key factor of the entrepreneurs decision by selecting business

accelerator programs.Location is only important for less than the half of the entrepreneurs (40%).

7.4.3 The key added values of an accelerator program

Despite the previous hypothesis of many business accelerator experts not the provided funding and

it’s amount and not the proximity of a business hub is the key for entrepreneurs but working with the

best mentors of their industry and the business development support provided by the accelerators

(How to find customers, how to reach the target audience etc.) The brand of the business accelerator

(consisting alumni, previous track record, success stories etc.) is the third most important added value

as perceived by the entrepreneurs

7.4.4 Other preferences of entrepreneurs regarding the length and program elements

The optimal length of a business accelerator program is 6 months long according to the entrepreneurs.

That is more than the most of the accelerator programs that are between 1-4 months. The importance

is to get an office provided only 5,8 out of 10 that is far less than the perceived importance of other

educational elements of the program. The product development, pitching and business modelling

were the educational elements that have been evaluated the less important by the entrepreneurs

despite the experts of the industry highlighted that these are the fields where the companies really

need support (Interview with Peter Kadas, Antti Ylimutka and Zdenek Komena also outlined this fact)

62

8 Conclusion

Business accelerators are effective tools of „testing” the teams and business ideas with minor fundings

at a very early stage. The founders create accelerators in order to boost the entrepreneurial ecosystem

of a certain geographic area and support talents to have the opportunity of running their own ventures.

The founders of the business accelerators also having economic expectations as in most cases they

invest their own or their networks money in the admitted projects. They usually take moderate equity

(<10%) for a reasonable seed funding that usually give the opportunity for the 2-3 co-founders to pay

their living costs during the program and focus on the starting up process of their ventures. Most of

the surveyed and interviewed entrepreneurs and accelerator representatives implied that the network

of mentors, investors and startups surrounding the accelerator is one of the greatest value and can

result in competitive advantage for the accelerator.

Throughout the program, startups and mentors connect, which may turn out to be essential for the

startups’ ability to become a profitable company and giving the mentors the opportunity to get to

know the new trends of their industries. An interaction between startups and mentors is the main

educational element provided by the accelerator for the startup. (Frimodig, 2012)

Achieving the same development path is also possible without the accelerator programs for startup

but it takes more time and efforts to find the mentor network that is provided from the day one by the

accelerators.

As it turned out both from the qualitative and quantitative research, the most important incentive for

startups to take part in an accelerator program is the connection to a network of investors and

mentors. In order to to fulfill that need accelerators have to find and engage the best mentors and

investors to the accelerator and make them an active part of the network.

Investors are evaluating accelerators based on their selection and filtering process, the number of

applicant pool and the credibility of their mentors that are supporting the educational process. Early

stage VCs and angel investors as typical follow-on investors of post-accelerator startups.The most

accelerators using a competitive application process therefore the accelerator functions as a filter for

investors (Frimodig, 2012) The quality of post-accelerator startups and graduated entrepreneurs is

remarkably higher and therefore more interesting to investors. The most successful accelerators are

partnering with investors to provide partial or full funding for the graduated companies (eg. Y

Combinator, Startup Highway, Startup Sauna) In this way the investors become a natural part of the

network and thus a stakeholder to the accelerator.

The more experienced and better networkers the co-founders are, the better the chance to engage

high quality mentors that attracts the valuable and promising startups. After finishing up a high quality

batch that ends up with good follow-on investment rates the better the chances to engage top-tier

investors that has a really important branding consideration as well. The better branding the

accelerator has, the more applicant would like to get into the program that results in working with the

most talented entrepreneurs.

63

9 The findings of the research

The main question of the research was what are the key success factors of a business accelerator? The

success factors of the business accelerator programs could be measured in various way, it depends on

which stakeholders are we focusing on.

From the startup and entrepreneurs point of view there are intangible measures as access to mentors,

knowledge, capital, network etc. The tangible measures including the amount and the probability of a

follow on investment, successful exit, valuation of the portfolio companies.

From the accelerators perspective the tangible measurement could be the value of the accelerator,

value of portfolio, number of investments, number of exits, stock market listings. The intangible

measures can be the brand value and goodwill beside the knowledge, networks, and competencies.

For the investors the quality of the dealflow is the intangible success factor and the number of

successful investments is considered as tangible measure. From the society the number of accelerated

companies, the number of created jobs are the tangible measures while promoting entrepreneurship

and creating entrepreneurial ecosystem is the intangible success factor of business accelerators.

Frimodig used financial and non financial dimensions and differentiated tangible and intangible

categories:

25. Graph How to measure accelerators Source: Frimodig, 2012

64

Despite the positive effects of certain business accelerators that has the needed traction (eg. Y

Combinator) it is too early to evaluate the success rate of accelerators as they graduates often need

more time to prove their validity or even fail. According to Brad Feld creating an entrepreneurial

ecosystem takes 15-20 years (Feld, 2012) the success story of Y Combinator has developed within 8

years so all the other accelerators needs at least 5-10 years before being evaluated.

Regarding the main question of the research we can conclude that the hypothesis is partly valid, the

success of a business accelerator program is not determined by the geographical location but there is

a strong correlation with the success of the accelerator and the maturity of the local investment

environment where it exists.

As most of the entrepreneurs participated in this research was Hungarian we can have certain

conclusions regarding how can these results being used in Hungary Even after the launch of the

JEREMIE program that resulted in remarkable VC activities in this country the early stage phase of the

startups is the most risky development stage with high failure rates. There are some initiatives

addressing this niche by lean startup education (mostly led by the recently established iCatapult) but

there is no program that could be called „accelerator” so far in the Hungarian market. Beside Hungary

is having Europe wide recognized VC activities it would be fruitful to give financial governmental

support for such a program and involve business angels and serial entrepreneurs in the framing

processes and even in the execution as mentors, investors, advisors. In order to be a recognized

regional startup hub Hungary should have an internationally competitive program for pre-seed and

seed stage as this is the phase where the knowledge is missing, the market expertise and the

willingness to invest in early stage startups is not suitable therefore this level of the entrepreneurial

ecosystem needs to be further developed to make the whole startup-VC ecosystem sustainable.

65

10 Recommendation for further research

There are several topic for further research in the business accelerator research the long term effects

of business accelerators, the performance of the accelerated companies (graduates), the investment

opportunities provided for accelerators are also interesting questions of further research.

The following research questions would be important to know better the ecosystem around

accelerators.

1. Is the growth of the business accelerator a sustainable trend? What happens on the long run

with business accelerators? Are they working with a sustainable business model?

2. Longitudinal research into the accelerator alumni and their traction. Where are the graduates

now? Are they succeeded or failed with their startup? If they have failed what happens with

them afterwards?

3. Comparing companies participating in accelerators with those that are working ’alone’ or by

the help of business angel support

4. Qualitative research with investors providing follow on funding on their experiences with the

business accelerator graduates

5. What happens with the graduates of an „emerging” business accelerator after finishing the

program? Are they relocate or stay at the place of the acceleration (even if it is not a typical

investment/business hub)?

6. What are the offerings of for-profit accelerators to startups? Are they competitive from the financial perspective with other seed investments?

7. What will be the consequences of the Series A crunch? Is it an evolutionary phenomenon or a result of the growing number of seed accelerators?

66

References

(Aerts et al., 2007). Aerts, K., Matthyssens, P., Vandenbempt, K. Critical role and screening practices of European business incubators. Technovation, 27(5), 254-267, 2007

(Ala-Mutka, 2005) Ala-Mutka, J. Strategic management of high growth ventures – A Venture-to-capital framework for professional entrepreneurship. EBRC. Cityoffset Oy. Tampere. 2005

(Arundale, 2007) Arundale, K. Raising Venture Capital Finance in Europe: A Practical Guide for Business Owners, Entrepreneurs and Investors, Kogan Page Publishers, London, 2007

(Barrehag et al, 2012) Barrehag L., Fornell A., Larsson G., Mardström V., Westergard V., Wrackefeldt S., Accelerating Success: A Study of Seed Accelerators and Their Defining Characteristics, Bachelor Thesis in Industrial Engineering and Management, Department of Technology Management and Economics, Division of Innovation Engineering and Management CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden, 2012

(Barringer et al., 2005), Barringer, B., Jones, F., Neubaum, D. (2005) A quantitative analysis of the characteristics of rapid-growth firms and their founders. Journal of Business Venturing. 20, 663-687, 2005

(Beer, 2011). Beer, L. Tracing the Roots of Globalization and Business Principles. Business Expert Press. United States of America. 2011.

(Berglund, 2011) Berglund, H. Early stage venture capital investing: comparing California and Scandinavia. Gothenburg: Chalmers University of Technology, Department of Technology, Management and Economics, Center for Business Innovation, 2011

(Blank 2005). Blank, S. The Four Steps to the Epiphany: Successful Strategies for Products that Win. 3rd ed., Cafepress.com, 2005

• (Blank, 2012) www.steveblank.com Time of the download: 2012. 11. 30. Downloaded from: http://steveblank.com/category/big-companies-versus-startups-durant-versus-sloan/

(Bloomfield, 2005) Bloomfield, S., Venture capital funding: a practical guide to raising finance, Kogan Page Publishers, London, 2005

(Bollingtoft, 2012) Bøllingtoft A and Ulhøi J.P., The business incubator in a network perspective, Aarhus School of Business Department of Organization and Management, 2012

(Businessinsider, 2011), Rossof M. , Super Angel Dave McClure Launches Incubator Program, Dismisses "Bubble" Talk, Business Insider, 2011, Time of the download: 2013.04.23 Downloaded from: http://articles.businessinsider.com/2011-02-10/tech/29957514_1_accelerator-program-early-stage-startups-companies#ixzz25z2Pap1u

(Chafkin, 2009) Chafkin M., The Start-up Guru, Inc Magazine 2009 Time of the download: 2013. 04.23. Downloaded from: http://www.inc.com/magazine/20090601/the-start-up-guru-y-combinators-paul-graham.html

67

(Commission, 2002). Commission, E. Benchmarking of Business Incubators. Personnel, 2002

(Cornelius, 2003) Cornelius B. Cracks in the Egg: improving performance measures in business incubator research, A paper for the Small Enterprise Association of Australia and New Zealand 16th annual Conference, Ballarat, 28 Sept-1 Oct, 2003.

(Cristiansen, 2009) Cristiansen J.D., Copying Y-Combinator A framework for developing seed accelerator programmes, MBA Dissertation, Judge Business School, & Jesus College, University of Cambridge, 2009

(Exponentialtraining.com, 2013) Time of the download: 2013. 02. 03. Downloaded from: http://www.exponentialtraining.com/Downloads/Resources/Example%20Module%20-%20CBS/page_08.htm

(evca.eu, 2012) European Venture Capital Association Yearbook 2012, Activity Data on Fundraising, Investments and Divestments by Private Equity and Venture Capital Firms in Europe Time of download 2012, 12. 10 Downloaded from: http://www.evca.eu/uploadedfiles/home/press_room/Yearbook_2012_Presentation_all.pdf

(Feld, 2013) Feld, B. Startup Communities: Building an Entrepreneurial Ecosystem in Your City, 2013

(Forbes.com, 2012a) Stangler D., Evaluating the Effects of Accelerators? Not So Fast, 2012 Time of download 2013. 03. 04. Downloaded from: http://www.forbes.com/sites/kauffman/2012/08/08/evaluating-the-effects-of-accelerators-not-so-fast/

(Forbes, 2011a) Olson P., Y Combinator Challenged by growing Seedcamp, Forbes Magazine 2011, Time of the download: 2013.04.23 Downloaded from: http://www.forbes.com/sites/parmyolson/2011/09/09/y-combinator-challenged-by-growing-rival-seedcamp/

(Forbes.com, 2012b) Nelson, B. , The Real Definition Of Entrepreneur---And Why It Matters, Time of the download 2012.12.10 Downloaded from: http://www.forbes.com/sites/brettnelson/2012/06/05/the-real-definition-of-entrepreneur-and-why-it-matters/

(Frimodig, 2012) Frimodig L. , Success Factors of Accelerator, Research Report, LAPPEENRANTA UNIVERSITY OF TECHNOLOGY, Faculty of Technology Management, Department of Industrial Management 2012

(Geldren et al., 2005) Geldren, M., Thurik, R. & Bosma, N. Success and Risk Factors in the Pre-Startup Phase. Small Business Economics. 24, 2005

(Greiner, 1988) Greiner, E. Evolution and Revolution as Organizations Grow: A company’s past has clues for management that are critical to future success. Harvard Business Review. 76, 3, 55-67.

68

(Hamdani, 2006) Hamdani D., Science, Innovation and Electronic Information Division Conceptualizing and Measuring Business Incubation Science, Innovation and Electronic Information Division, 2006

(Harding, 2002) Harding, R. Plugging the knowledge gap: an international comparison of the role for policy in venture capital market. Venture Capital. 4, 1, 59-76. 2002

(Hemingway, Balint, 2004) Hemingway F. G., Balint A., Vállalkozástan a gyakorlatban, Budapest, AULA Kiadó, 2004

(Hisrich, 2010) Hisrich, R. International Entrepreneurship. Starting, Developing, and managing a global venture. Sage Publications, Inc. United States of America, California. 2010

(Knight & Cavusgil, 2004) Knight, G., Cavugil, S. Innovation, organizational capabilities, and the born global firm. Journal of International Business Studies. 35, 124-141. 2004

(Kubis, 2009) Kubis, R. Policy Options and Instruments for Financing Innovation – A Practical Guide to Early-Stage Financing. United Nations Economic Commission for Europe. New York and Geneva, 2009

(Laanti et al., 2007.) Laanti, R., Gabrielsson, M., Gabrielsson, P. The globalization strategies of business-to-business born global firms in the wireless technology industry. Industrial Marketing Management. 36, 1104-1117. 2007

(Launchhouse.com, 2012) The Rise of the Business Accelerators, Time of the download: 2013.04.23 Downloaded from: http://www.launchhouse.com/news/the-rise-of-the-business-accelerators/

(Miller, Bound, 2011) Miller P., Bound K., The Startup Factories: The rise of accelerator programmes to support new technology ventures, Discussion paper, NESTA 2011, Time of download: 2013. 01.23 Downloaded from: http://www.nesta.org.uk/library/documents/StartupFactoriesv18.pdf

(Price, 2004) Price, R. The role of service providers in establishing networked regional business accelerators in Utah. International Journal of Technology Management. 27, 5, 465-474, 2004

(Privco, 2012) Privco (2012) Private Equity & Venture Capital, Time of the download: 2013.03.23 Downloaded from: http://www.privco.com/knowledgebank/private-equity-and-venture-capital

(Ramsinghani, 2011) Remsinghani M., The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, John Wiley and sons, 2011

(Rasila, 2004). Rasila, T. Venture-to-Capital – A new Framework for Growth Venturing and Professional Ownership. Tampere University of Technology. Tampere, 2004

(Ries, 2011) Ries, E, The Lean Startup. Pearson. Penguin Books. England, 2011

69

(Sahay, 2004) Sahay, A. The Role of Technology Business Incubator, Angel Investor and Venture Capital Fund in Industrial Development, 2004

(Schonfeld, 2011) Schonfeld, E., The Top 10 VC Firms, According To InvestorRank, Time of the download: 2012.12.04. Downloaded from: www.techcrunch.com/2011/05/25/top-10-vc-firms-investorrank/

(seed-db.com, 2013) Aggregator website of business accelerators created by Jed D. Cristiansen. Website: http://www.seed-db.com/ Data downloaded, 2013. 03. 03.

(Sherman & Chappell, 1998), Sherman, H. and Chappell, D. S. 1998. Methodological Challenges in evaluating business incubator outcomes. Economic Development Quarterly, 12 (4): 313-321., 1998

(Turi, Koranyi, 2010) Dr. Turi M., Korányi L. Innovatív induló izraeli kisvállalkozások fejlesztési modellje ennek adaptálása Magyarországon, Mőhelycsoport: EU Modellek 25 Műhely: Izraeli innovatív induló vállalkozások. Downloaded from: http://www.kormany.hu/download/f/05/10000/inkubator_Turi.pdf Time of the download 2013. 04.29.

(van Huijgevoort, 2012) Van Huijgevoort, T. The ‘Business Accelerator’: Just a Different Name for a Business Incubator? Utrecht School of Economics, research paper, 2012 Time of download: 2012. 12.03 Downloaded from: http://www.dutchincubator.nl/uploads/Documents/49.pdf

(Vasilescu, 2008) Vasilescu, L. G. Business incubators in CEE countries – new coordinates for development, Annals of University of Craiova - Economic Sciences Series, 2008, vol. 2, issue 36, pages 674-684, 2008

(Vecsenyi, 2011) Vecsenyi J. Kisvállalkozások indítása és működtetése, 72H.com, Budapest, 2011

(Wiggins & Gibson, 2003) Wiggins, J., Gibson, D. V. (2003). Overview of US incubators and the case of the Austin Technology Incubator. Innovation, 3(1/2), 56-66, 2003

(Wired.com, 2011) Levy S., Y Combinator is Boot Camp for Startups, Wired Magazine, 2011 Time of the download: 2013.04.23. Downloaded from: http://www.wired.com/magazine/2011/05/ff_ycombinator/all/1

70

Appendix

1. E-mail Interview Questions for StartupHighway – Agnė Adomaitytė

02. 04. 2013

About the accelerator

1. How came the idea of starting a business accelerator? What was the main initiator? Together with a team from Open Coffee Club Vilnius we've been gradually gearing up to doing bigger

and bigger things. At one point we realized we were throwing mentoring events as big as mini

Seedcamps, number of Lithuanian teams or teams with Lithuanian team members in other European

accelerator passed 10, and number of other catalyst told us it was time.

2. Could you briefly describe the founding team and their background? The few people that started SH were volunteer startup-enthusiasts, who have been running

accelerator activities for few years in the region.

3. What sort of criteria must a company meet in order to get admitted?

Strong team who is able to execute startup;

Start-up idea which solves real problem;

Scalable business model;

4. Do you have governmental subsidy to operate your business accelerator? No, we are privately funded.

5. Do you take equity? If yes, how much funding you can provide? We take 7.5% of equity from the startups that join the program for up to €14,000 investment. From

funded teams we ask of 3.75%, and there is also a follow on optional convertible of €30 000

available.

6. Who are the typical investors you are working with for funding the follow-on round? European angels. We landed follow on investments with TMT industries background individuals who

are now starting or are full time investors into new ventures.

The program

7. How does the accelerator program look like? StartupHighway is an intensive 13 weeks acceleration program consisting of three stages: Shape,

Build, Sell; Aside from funding, we give:

Free office space throughout the program enabling you to focus;

Over 100 high-profile mentors;

An extensive network of investors, alumni and partners;

Demo days in Vilnius, London and other hot locations.

71

8. How many companies are you selecting in a year?

Up to 10 per class, up to 2 classes per year. 9. What are the preferred sectors and industries for startups admitted to your batch?

IT and Mobile

10. What is your value proposition for the admitted companies?

incubation in our office

great advise and network in our mentors

basic funding

access to follow on funding

heightened visibility

other smaller perks (IT infrastructure, free legal, etc.)

11. Where the participating companies are coming from (country of origin)? Baltics, Italy, Russia

12. Which age group are they belong to? 18-24, 25-34

13. Who are the mentors in the program? Could you please mention a few names?

Toivo Annus

John Bradford

Lauri Antalainen

Lopo Champalimaud

Alex Farcet

Traction

14. How many graduate do you have so far? 10

15. What is the estimated failure rate among them? Not available at this point, too little time has passed since first graduation, everyone is still fighting

16. Could you name a few companies coming from your business accelerator that you are proud of? All of them. But loudest sounding names are Sellfy.com, Dragdis and PlaceILive

17. How much funding have the alumni received so far approximately? Under 0.5M EUR

72

2. E-mail Interview with Antti Ylimutka Startup Sauna CEO 17. 04. 2013

About the accelerator

1. How came the idea of starting a business accelerator? What was the main initiator?

- Back in 2008 a couple of students, namely Kristo Ovaska, went on a study trip to visit US

universities (e.g. MIT, Stanford) and what struck them was the amount of students who wanted to

build their own company that would become a global success. In Finland the mentality was very

strongly to finish your university degree and go work for a big company (e.g. Nokia, Kone, Stora-

Enso, Metso, McKinsey...) and be „safe”. Their task was to write a report on university based

startup ecosystems. The pivotal moment was a meeting with Dr. Bengt Holmström who stated

very clearly that if the students would end up writing another report about startup he’d make sure

that no one would support them.

So coming back home these couple students started thinking that ok, Aalto University will be

formed a year from now and there’s really nothing else than the Design Factory that brought the

students from 3 distinct schools together. So they put a Facebook event regarding startups to

measure if there was any interest. Well, over 200 people showed up and they only had a case of

beer to offer!

Quite quickly they started organizing different kind of pitching events etc. but the most important

thing was that they started to find these „hidden” serial entrepreneurs who didn’t have a

forum/program/etc. to sit down with startups and help them out (there was a competition called

Venture Cup in Finland too but quite quickly most of the „experts” ended up being some random

consultants). The entrepreneurs discussed with the students and ended up helping with the vision

– what needs to be done to kickstart a startup ecosystem. One of the examples that was used as a

base work was the TIKARI-report that discussed the university based acceleration and tech

transfers. One of the results was that a university based accelerator with a non-academic mentality

was needed – this was based on the Israeli model. At the same time on the ecosystem level Yozma-

program worked as an example for TEKES’ VIGO-program and later for the idea of a bigger fund of

funds that would produce private micro-VC funds to boost up the ecosystem.

Long story short, Bootcamp was formed in the beginning of 2010 in order to help commercialize

research based projects from Aalto University with the help of serial entrepreneurs and investors.

For the first year the program was headed by the student Kristo Ovaska and a serial entrepreneur

Juha Ruohonen (one of the authors of TIKARI). It became a very obvious model later that the

student power would be used to organize stuff and after they’d learn enough (approx. 2 years)

73

they’d have a follower who’d take over. The credibility and strategic overseeing was brought by

the head coach.

From the very beginning there started be pull from outside of Finland. One example was that the

guys who went on to co-found Virool and raise the biggest seed round of any Ycombinator alumni

as of 2013 were in Bootcamp back in 2010 as a team called Videolla with the initial idea that

became the backend of Virool. So in 2011 when Ville Simola joined he said that the only condition

is that we’d expand outside of Finland. That’s what we did and quite soon realized that the vision

of covering an economic area of 300 million people made a lot of sense in terms of attracting

investors and media to attend our events.

2. Could you briefly describe the founding team and their background? There’s a shit load of people ranging from Petteri Koponen (Lifeline Ventures, Chairman of the

board at Supercell), Moaffak Ahmed, Jussi Harvela, Micki Honkavaara (Veturi Venture

Accelerator) who were there from the beginning but operationally the key people were/are:

2010 – 2011 (Spring ’2010, Fall ’2010)

Kristo Ovaska, Captain, http://fi.linkedin.com/in/kristoovaska

Juha Ruohonen, Head Coach, http://fi.linkedin.com/pub/juha-ruohonen/1/441/4a3

2011 – 2012 (Spring 2011, Fall 2011)

Ville Simola, Captain, http://fi.linkedin.com/in/villesimola

Juha Ruohonen, Head Coach, http://fi.linkedin.com/pub/juha-ruohonen/1/441/4a3

Antti Ylimutka, Wingman, http://fi.linkedin.com/in/anttiylimutka (Fall 2011- >)

2012 – 2013 (Spring 2012, Fall 2012, Spring 2013, Fall 2013)

Ville Simola, Captain, http://fi.linkedin.com/in/villesimola (Until Spring 2012)

Antti Ylimutka, Captain, http://fi.linkedin.com/in/anttiylimutka (Fall ’12 - Spring 13’)

Ilkka Kivimäki, Head Coach, http://fi.linkedin.com/pub/ilkka-kivimäki/0/4a/272 Spring ‘ 12 -

Fall ‘13)

Juuso Koskinen, Wingman, http://fi.linkedin.com/in/juusokoskinen

74

3. What sort of criteria must a company meet in order to get admitted? The ones we communicate out:

- Have a globally scalable business idea

- Have a team that can execute

- Have a working prototype

- Startup Sauna must be able to help (expertise found in coach pool)

Then we do look at the amount of funding raised (pref. max 250k€) and company structure

4. Do you have governmental subsidy to operate your business accelerator? Startup Sauna used to be funded by Aalto University completely which included 50% TEKES-

money. In the beginning of 2013 we took some operations out from the Uni, founded Startup

Sauna foundation, raised 1 million € of private capital for it and managed to get 50% TEKES

R&D project for it (meaning that we get 50% of R&D costs reimbursed). No EU-money involved

as of today.

5. Do you take equity? If yes, how much funding you can provide? Not for now. We give two options to the selected teams.

1) 1500€ of reimbursements for travel, accommodation, service/product purchases. 2) 1000€ of reimbursements + accommodation for the duration of the program.

We have discussed about investing an initial amount of 10000€ against a 3% convertible note

in the future AFTER the Sauna program in Helsinki to x-number of teams but these have been

premiliminary discussions. Our idea is to build a functioning startup ecosystem meaning that

we want investors to invest in the companies and we keep doing Startup Sauna as long as

there’s people who believe in it and fund it. One of the deals we’ve made for Sauna alumni is

the open term sheet with Inventure.

6. Who are the tipical investors you are working with for funding the follow-on round? Finnish Business Angel Network (FiBAN), Inventure, Nexit Ventures, Conor Ventures, private

angels, Lifeline Ventures, Veturi Venture Accelerator, KoppiCatch, TrueVentures etc. There’s a

big list of investors who visit our events.

The program

7. What does the accelerator program look like? Please find some schedules attached from Fall of 2012. Normally we end up doing 4-5 weeks

of intensive coaching with program going on from Tuesday to Friday afternoon. Sessions

75

include topics from funding to legals, to tech to industry insights, design to market entry. 1on1

coaching is essential too.

8. How many companies are you selecting in a year? About 15-20 per batch so 30-40.

9. What are the preferred sectors and industries for startups admitted to your batch? We don’t really care as long as you can benefit from Sauna and fit in the given criteria.

10. What is your value proposition for the admitted companies? We’ll kick your asses around, make you grow as founders, as a team, as a company and take

the easy mistakes out. The quality of our coaches is known in our alumni pool. And even if it

sounds like a joke, it most definitely isn’t. That causes us a bit of a problem since it’s super hard

to communicate what Sauna is about but luckily we have a pool of alumni who are do a pretty

good job of setting an example for other companies. Sauna is a bit different for each company

participating and we do customize it a bit for some of the teams.

11. Where are the participating companies coming from (country of origin)? Oh oh, normally 50% companies have ended up being Finnish (simply due to quality) and 50%

are foreign. We’ve had companies from Finland, Sweden, Russia, Estonia, Latvia, Lithuania,

Belarus, Poland, Hungary, Italy, US, Canada for example.

12. Which age group are they belong to? Nowadays the average age is about 30. We’ve had people from 20 to +50 years old.

13. Who are the mentors in the program? Could you please mention a few names? Check www.startupsauna.com/coaches.

Petteri Koponen (Lifeline Ventures, Chairman of the board at Supercell), Moaffak Ahmed, Jussi

Harvela, Micki Honkavaara (Veturi Venture Accelerator), Mårten Mickos (MySQL), Pasi Ilola,

Ilkka Kivimäki, Timo Ahopelto, Ville Miettinen...

Traction

14. How many graduate do you have so far? 80.

15. What is the estimated failure rate among them? Probably around 10-20% as of today. Will take a bit more time for some more to die ;-)

16. Could you name a few companies coming from your business accelerator that you are proud of? Ovelin (USD 1,4mil from TrueVentures, Futureful (USD 2 million including founder of Skype

Janus Friis), Advacam, Blaast, Videolla (Virool), Asema Electronics, Dentatube, Audiodraft,

Infogram, Froont...

17. How much funding have the alumni received so far approximately? We’re in the process of updating the number but it is somewhere around 20-25million USD.

18. How would you define „success” in case of the accelerator programs? What are the key measures of a successful accelerator?

76

Excellent question and super hard to answer. This is an easy answer for those accelerators that

have a fund behind them - exit and profit (good luck :-D). For us we can choose endless metrics

and be happy with them: people employed, revenue generated, funding raised, does the

company turn into a viable business, impact on our society (e.g. politicians start considering

startups and legislation regarding them), the culture for entrepreneurship (more people want

to create/work for startups creating chances for truly new economic growth... Or maybe it's

the footprint that once a team went through Sauna, they grew as founders and their next

startup or whatever project will have a higher chance of success. I guess our bigger purpose is

see whether we did such a good job that we can kill Startup Sauna in the next 5-10 years

because the ecosystem produces a big number of good companies that have talent and

funding available.

19. What are the most critical skills of entrepreneurs getting admitted to accelerator? Usually it seems to boil down to having at least a bit of an unique idea, a good team (meaning

that you have a good balance of tech and biz), having done your homework on your

market/competition, having a clear history for the company (you wouldn't believe how much

you see these 50% owned by someone totally random etc.) and being coachable

entrepreneurs. Of course the pace that you've gotten shit done in is super important especially

in webapps - there's so many teams that have spent 2 years building something that should've

been done in 3-6 months. In terms of pitching... well it's funny that more than often in the

Startup Sauna Warmups the companies that deliver a solid pitch end up showing very little

substance during 1on1 coaching. And in the Program most of the teams struggle with their

business models because they think the know how their industry works and end up coming up

with shitty value props to the completely wrong people in target companies or end up selling

B2B-software for so little money that it some might find it difficult to take seriously compared

to what an ERP can cost for big company annually.

77

3. Interview with Peter Kadas MD., serial entrepreneur, blogger 13. 04.

2013, Budapest

1. Could you please describe your role within the entrepreneurial ecosystem? I'm an economist, medical doctor, and serial tech entrepreneur for 17 years. I'm currently managing a

new Startup called Brandvocat, a crowdsourced marketing system which allows B2C companies to

reward advocates of their brands in exchange for sharing content through social media. I give advice

for OECD and I am running a blog for entrepreneurs and investors called startupdate.hu. I'm willing to

help entrepreneurs, as I was helped by many that’s why I mentoring startups and talented young

entrepreneurs.

2. What are the most important added values of an accelerator? I think that business mentoring, including business development and lean development is the most

important thing, but I also consider access of various industries, the given network and community as

really valuable resources provided by accelerators

3. Why do we need accelerators? Accelerators are important because the business education is overly theory-focused and isn’t able to

teach entrepreneurs how to build up businesses from the very beginning of teh pre-seed phase.

Business accelerators could be considered as corrections or amendments of the business school

education to cover the practical know-how building up ventures from scratch

4. Which are the accelerators that you know better? I would highlight Plug and Play in the Valley, Startup Wise Guys from Estonia, eFactor and Rocket Space

in San Francisco. They are all market driven accelerators funded by private individuals. Not all the

business angels are good mentors and not all the mentors can afford investing in companies.

5. Is it possible to create internationally recognized, high quality accelerators outside of the traditional business hubs?

Startups going where the knowledge and events are and financing is going where startups are. It should

be a governmental initiative as it is in Chile or Italy, where non-equity finance is a seductive offer to

draw many startups around such centers However, it requires a large sum of capital, not necessarily

working on the traditional profit-oriented basis. It is not manageable for private money.

6. How do you see the role of the state in this process? As explained above, long-term governmental programs can help igniting the process of gathering

startups, but it’s important to emphasize that excluding the earliest stages, startup finance should be

the territory of private money.

7. What would you suggest in Central Eastern Europe? How could be Budapest a regional startup hub?

Spending HUF 20 billion each year during the next 10-12 years period on non-equity finance

programs would help. Startups intend to go global, so the classic idea of building them up, so that

they probably stay on the long term is dumb. But Central Europe could easily be the territory where

startups create employment opportunities with their technical divisions left behind and operated

from here.

78

8. How would you define „success” in case of the accelerator programs? What are the key measures of a successful accelerator?

The KPIs (Key Performance Indicators) of an accelerator are

- primarily the ratio of the projects financed with a follow-on round divided by the projects accelerated.

Naturally, the follow-on financing must occur in a reasonable time frame from the end date of the

acceleration period, which is typically 3-6 months.

- another KPI could be the exit volume in USD. Since the typical exit time is the 6th or 7th year of a

startup, this is a longer-term measure. The cumulated exit volume until the 7th year of startups shows

long-term survival capabilities.

- also, the number of exits makes performance of accelerators comparable if it is defined in net

numbers (no. of startups exited til year 7 divided by no. of startups accelerated)

-finally, the cumulative number of workplaces created might show how quick an accelerator can turn

a startup to be a member of the local economy and how much the hockey stick growth rate potential

is utilized.

4. E-mail Interview with Mike Reiner, Startup Wise Guys 23. 04. 2013

About the accelerator

1. How came the idea of starting a business accelerator? What was the main initiator?

We wanted to provide the huge pool of technical talent in Eastern Europe with an accelerator that

understands the culture and the market, and also provides teams with access to global expertise and

networks that they would not otherwise be connected to.

2. Could you briefly describe the founding team and their background? Mike Reiner, Jon Bradford, and Herty Tammo are the founders of Startup Wise Guys. Mike is the head

of Startup Wise Guys. An ex-IBMer with a passion for bright ideas and business model innovation, Mike

previously worked in M&A, managing large transformation programs and innovation projects. He is

also the strategic advisor and lead coach at the Tehnopol Startup Incubator and mentor at different

startup networks in Europe. Jon is founder of Springboard, Difference Engine, Ignite100 accelerator

programs in the UK. Herty is the lead investor of Startup Wise Guys. He is serial entrepreneur and

currently owns several companies.

3. What sort of criteria must a company meet in order to get admitted?

While there is no one size fits all formula for identifying solid teams, we do look at a few key criteria

during the selection process. Balances of skills within teams, Shared drive and work ethic, Business

model, International outlook

79

4. Do you have governmental subsidy to operate your business accelerator?

We are privately funded through a combination of angel investment and VC investment. The VC firm

is supported by the Estonian government.

5. Do you take equity? If yes, how much funding you can provide?

Startup Wise Guys gives chosen startups up to €15 000 investment based on the number of founders.

We expect teams to have at least 2 founders. In return we take 8% of equity.

6. What does the accelerator program look like?

The acceleration cycles focus on three key activities :

Shape

Get your businessplan in place. With the help of mentors, trainings workshops, brain picking your initial

business plan will be revised by you. Think of the details, keep yourself focused, know your target, plan

your product.

Build

Development of your product is the main focus during the program. Communicate with potential

customers, showcase the product, build it fast, and get feedback to know if you are on the right track.

Sell

The Startup Wise Guys program ends with a Demo Day in Tallinn and in London where each team

presents their business proposition for angel investors and venture capitalists.

8. How many companies are you selecting in a year?

The program is hosted twice a year and up to 10 new Wise Guys teams are accepted to each cycle of

acceleration.

9. What are the preferred sectors and industries for startups admitted to your batch?

We are generally sector agnostic, though we have found a focus on B2B centered startups. Focusing

on a sector is something that we are considering for future batches.

10. What is your value proposition for the admitted companies?

Our primary value is found in the mentor network that we have built in developed markets in the UK

and the US.

11. Where the participating companies are coming from (country of origin)?

80

While we focus our marketing efforts on Eastern Europe and the Baltics, we are open to ideas and

teams from anywhere in the world. In the first batch, we had companies coming from Croatia,

Netherlands, Ukraine, the UK and Estonia of course. In the second batch, we had teams from Chille,

Hungary, Poland, Russia and Estonia.

12. Which age group are they belong to?

Again, we are open to people in any age but from our experience the teams consists from 2 to 6

persons who are usually between the ages of 20 – 30.

13. Who are the mentors in the program? Could you please mention a few names?

Our mentor base is really strong and we believe that is one of the strongest arguments why startups

should be interested in us. We do not have only mentors from Estonia we can boast with mentors from

the UK, US, Germany, Netherlands and with well-known in startup world like: Jon Brandford, Alan

Moore, Michael Geer, Richard Newton and many others.

Traction

14. How many graduate do you have so far?

We have graduated 15 teams from our first two batches.

15. What is the estimated failure rate among them?

We anticipate a failure rate of 10-15% in the first two years after the teams exit the accelerator.

16. Could you name a few companies coming from your business accelerator that you are proud

of?

Monolith (http://www.monolithadvertising.com/)

VitalFields (http://vitalfields.com/)

BrandieGames (http://www.brandiegames.com/)

Have all built world class technologies in their respective fields. Monolith and VitalFields both received

funding after the first batch. BrandieGames has completed the program in the last few weeks, has

already acquired paying customers and begun to explore financing options.

17. How much funding have the alumni received so far approximately?

All together it would be around 500k €.

81

5. The questionnaire

Research on Startup Education and Seed Acceleration

Dear Entrepreneur!

My name is Balazs Szabo. I am doing my Msc thesis (Title: Growing global ventures by

effective seed acceleration -The most important charachteristics of a successul business

accelerator model) therefore I would like to ask for your kind help. Thank you for your

cooperation!

*Kötelező

0. Are you an entrepreneur? *

Yes

No

1. What is your name? (Optional)

2. How old are you? *

3. What is your nationality? *

4. Where do you live? *

5. Are you married? *

Yes

No

6. Do you have children? *

Yes

No

7. What is the name of your venture/project? (Optional)

82

8. In which sector is your venture operating? *

IT/ICT

Biotechnology/Life sciences

Energy

Education

Design

Social enterprise

Egyéb:

9. Have you been funded? Which type of investment you have?*

I am doing bootstrapping. I don't have investors

My co-founders / friends / family

Institutional seed investors

Business angel

Venture Capital fund

Private Equity fund

Egyéb:

10. Could you please name your investor? (Optional)

11. Have you ever participated in any kind of workshop/education

program/ etc. that could help you to move forward your business? *

Yes

No

12. If yes, what was the name of it? (Optional)

13. Have you ever applied for a startup accelerator program?*

Yes

No

14. Have you ever participated in a startup accelerator program? *

83

Yes

No

15. If yes, which one?

16. What are the most important decisive points of selecting an

accelerator? *

The amount of investment

How much percentage do they want in return for the investment

Mentors

The core accelerator program

Location

The track record of the Alumni startups

The founders and their experience

VC/Angel connection

Egyéb:

17. Please evaluate the above added value of a seed accelerator *

1. Financial support and initial funding (If there is pre-seed or seed funding)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Esse ntial, közötti értéket.

Essential

*

2. Product development support (how to develop your product that fits the market needs)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Esse ntial, közötti értéket.

Essential

*

3. Business Development Support (How to find customers, how to reach the target audience etc)

1 2 3 4 5 6 7 8 9 10

84

Not important

Válasszon egy 1, Not important, és 10 ,Esse ntial, közötti értéket.

Essential

*

4. Brand Connections (alumni, previous track record, success stories etc.)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Esse ntial, közötti értéket.

Essential

*

5. Mentorship

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Esse ntial, közötti értéket.

Essential

*

6. Location (to be in a business/entrepreneurial hub)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Esse ntial, közötti értéket.

Essential

18. How long is an ideal venture accelerator program for you? *

19. How important is getting an office provided?

1 2 3 4 5 6 7 8 9 10

Not important at all

Válasszon egy 1, Not important at all, és 10,Very important, közötti értéket.

Very important

20. Would you re-locate your business in order to have better

market/investor access?

Yes

85

No

21. Could you please evaluate the importance of the following elements during the education program? *

1. Business modelling (How to find the right business model for your venture)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

2. Strategy (Defining the goal of your venture, identifying the target audiance, milestones, how to reach the goals)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

3. Product development (How to make a product/service with great market potentials)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

4. Raising capital, financing (How to get funding, how to raise money)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

5. Pitching

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

6. Sales and marketing (Building up sales channels, identifying and targeting the right market audiance)

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

7. Business development (How to reach new customers, how to grow your business)

86

1 2 3 4 5 6 7 8 9 10

Not important

Válasszon egy 1, Not important, és 10 ,Extre mely important, közötti értéket.

Extremely important

22. Would you pay for a non-equity based venture accelerator

education program? *

Yes

No

23. If yes, how much would you pay for the whole program if it is convincing for you?

Would you like to get updates on the results of the survey? If yes,

please give me your email address! Thank you for filling out the

survey!

Küldés