Top European startup accelerators

One London Bridge

There are around 100 startup accelerators in Europe and this number seems to be growing every week; one of the latest new entrants being Pi Labs – a property-focused tech accelerator based in London. Accelerators, despite their business model being relatively young in Europe, seem to have established themselves as an attractive first investor for many early-stage startups. Are they? As an increasing number of startups go through European acceleration programs, we should be getting more data about the value of each program and the viability of the accelerator business model on the continent in general. However, in order to assess these programs we first need to have an answer to the following question:

[Tweet “How do you compare startup accelerators and measure which one is successful?”]

This issue was tackled recently by professors Yael Hochberg and Susan Cohen, who prepared the ranking of the best accelerators in the US. It was based on quantitative data from Crunchbase and qualitative data from interviews, focusing particularly on:

  • valuations accelerator portfolio companies achieved in the years after graduation
  • the number of exits an accelerator has had
  • whether or not startups received additional financing rounds after the programs
  • the percentage of startups still up and running
  • how venture capitalists feel about the programs
  • how the entrepreneurs in the programs feel about their experience.

Looking at these criteria it’s clear that in the US accelerators are assessed primarily as seed-stage investors. How about in Europe? Unfortunately most of the above criteria are difficult or even impossible to apply for European accelerators, primarily because the startup ecosystem in Europe is still very young and there is simply less data to analyze. Great example of this is the exit criterion. According to Seed-DB data, only eight European accelerators have had exits so far. Seedcamp is the leader with 9 exits, LeCamping has two and the remaining six – Eleven, Ignite100, StartupYardStartupbootcamp Mobility, Startupbootcamp Madrid and Searchcamp – each have one. That doesn’t seem impressive, especially if compared with US based Y Combinator or Techstars Boulder, which have had 89 and 20 exits respectively, which is enough data to assess the quality of these two programs.

If not exits, what alternative metrics should be considered when deciding which European accelerators are successful? During this year’s Accelerator Assembly event, which brought together around 80 accelerator directors and managers, policy makers, corporate representatives, investors and entrepreneurs, to discuss best practices, future trends and policy initiatives to strengthen the support for European startups, the key success metrics discussed were startup funding rates, partnerships created, jobs created and the overall impact on tech adoption and growth of local startup ecosystems. The latter criteria were more important to the accelerators operating outside of the main tech and investor hubs, or those at least partially funded by governments or EU money.

Some of that data is however hard to quantify and thus compare. For that reason, in the absence of exits, looks like follow-on funding is the second best metric to determine whether an accelerator is successful. That was in fact a common conclusion from the study undertaken by The Cambridge Accelerator Project, in which all participating accelerators indicated that investor returns (i.e. exits) and follow-on funding are the key success metrics. Why is that? Third party funding provides an external validation that the accelerator team is successful not only in attracting good teams and accelerating them into successful ones, but also getting them to the next round of funding, which should be the most important goal for accelerators when managing their portfolio. Finally, more funding increases not only the startup’s chance of survival, but also the odds of a future exit.

However, even if follow-on funding is a good metric, when determining the quality of the acceleration program, it needs to be analyzed in a wider context:

  • It’s important to look not only at total funds raised, but also the funding ratio i.e. startups that received follow-on funding vs. the total number of startups that have participated in the acceleration program so far.
  • As many of the European programs are very young, the numbers can be easily skewed by outliers. For example, OpenFund in Greece has one big success story with only a handful of graduates. For that reason, it is important to look at the overall number of startups accelerated to-date, as well as the average amount of funding received per startup.
  • Finally, the funding data should exclude funding obtained from the accelerator’s own funds, as it obviously does not constitute external validation.

So, which are the top European accelerators based on the above criteria? Using funding data from Seed-DB (as at 13 Oct 2014), the list of top European accelerators is the following:

  • Seedcamp (London)
  • Techstars (London), which merged in 2013 with Springboard.
  • Startupbootcamp (vertically focused accelerators in 8 cities in Europe)
  • Rockstart Accelerator (Amsterdam)
  • Wayra (accelerators backed by Telefonica in 6 European cities)
  • Bethnal Green Ventures (London)
  • Le Camping (Paris)
  • Eleven Startup Accelerator (Sofia)
  • LAUNCHub (Sofia)
  • Ignite100 (Newcastle)
  • StartupYard (Prague)
  • Axel Springer Plug and Play (Berlin)
  • Propeller Venture Accelerator (Dublin)
  • Startup Wise Guys (Tallin)
  • Microsoft Ventures Accelerator (Tel Aviv)

Screen Shot 2014-10-13 at 12.51.34

Even though Seed-DB (using in large part Crunchbase data) is adding more transparency to that area by collecting information about funding, there is still not enough data to actually rank the accelerators based on external follow-on funding criterion described earlier. However, we have, or will be reaching to these accelerators asking for that information, hoping to present rankings in the near future.

In the meantime we would like to open a debate about accelerator success metrics. Also, if your accelerator is not here and you think it should be, or you can provide more up-to-date information about funding, please let us know below in comments or write to Adam [at] Fundacity.com.

Photo credit: Simon & His Cameravia Flickr under Creative Commons license

Portfolio management for startup accelerators: what to measure and how to do it

Measuring

In the last post we argued that the startup accelerators, due to resource and business model limitations, should not apply the active VC-style model of portfolio management. Instead, they should act as connectors and focus on helping graduates of their programs secure next round of funding, precisely by VC funds. To achieve this objective they should:

  • Present portfolio startups regularly to investors during informal meetings and at various events they attend, not only during demo days;
  • Match mentors with graduate companies, not only with the current batch;
  • Increase the likelihood of connections by promoting all their startups via social media, events, workshops, or in newsletters sent to accelerator’s stakeholders;
  • Keep track of fundraising related KPIs; and
  • Never stop thinking about portfolio startups.

With this framework in mind, let’s see how they can make it happen.

What to measure?

To help their portfolio startups, the accelerator team first needs to have access to relevant and up-to-date information about each of the startups. We suggest requesting regular updates about:

  • Traction. This is a magic word among startup investors and one of the key factors taken into consideration when deciding whether to make an investment. Traction takes form of metrics that demonstrate the attractiveness of startup’s value proposition to customers. To an investor, they are an indication of a startup’s future earning potential or exit value. The metrics themselves depend heavily on the type of startup, stage and business model. For example, key metrics for a SaaS startup are around number/growth of subscribers and their LTV. A marketplace startup should report metrics related to transactions made on their platform. Key metrics for a social network are daily active users and their engagement such as average visit duration, number of activities, etc. The accelerator and a startup should agree on max 2 or 3 metrics that best describe growth for each startup – in money terms, percentage growth or absolute numbers.
  • Fundraising. This should be information about current valuation, how much the startup is looking to raise, who are current investors, what kind of investor profile is the startup looking for, who they are talking to now, etc.
  • Achievements. Investors like to bet on winners and often observe all signs of social proof before making a decision to invest. For example, Mattermark, an analytics company for startup investors, includes followers on LinkedIn, Twitter as well as Facebook Likes and visits to website among the signals determining if a startup is hot. Reporting on the latest mention in TechCrunch, an award, or big milestone reached are all great pieces of information that accelerator staff can share with potential investors and mentors.
  • Cash. Startups fail when they run out of cash; it’s as simple as that. Regularly monitoring cash burn rate and remaining runway allows to raise alarm bells early enough to have time for action.

This is a mix of qualitative and quantitative information that is actionable and can help accelerator staff make introductions to investors and mentors. Some of this information needs to be reported on a regular basis, some only when there are changes, or important news. The additional benefit of requiring such updates is making the founders think regularly of the big picture and keep fundraising firmly on their agenda.

Setting up and managing the process

After agreeing on the metrics, the next step is to set up the process to make sure the reported information is easily accessible and can be acted upon. Most common practices used nowadays involve emails, Excel spreadsheets and shared folders. Such system works fairly well if an accelerator has 5 startups in the portfolio, but what if they have 20 startups… in each cohort? Sending reminders to founders, editing different formats of information, sharing the updates with people, adding new people to share it with is basically a full time job if done right.

The best solution for that problem is using a dedicated tool. The benefits? With solutions available now on the market, including Fundacity, you can set reporting request just once and then:

  • Forget about sending reminders
  • Receive all information regularly and in a consistent format
  • Share it with more people as all information is accessible in the cloud

Once the information starts coming in regularly, the whole focus for the accelerator team should be on making sure it is actually used to help portfolio startups and not left there in the cloud. There are several ways to make that happen:

  • We suggest there is a dedicated person in the accelerator team responsible for reviewing the updates and making sure portfolio startups are always on the agenda.
  • There should be regular staff meetings where the updates from startups are discussed and converted into concrete actions.
  • Finally, helping portfolio startups should be included in annual goals for the whole accelerator as well as in individual goals for individual team members i.e. not only portfolio manager, but partners and e.g. marketing executive too.

Summary

We all hate when we see promotions for “new customers only”. It seems like startup accelerators often have the same mentality, putting much more emphasis on attracting new startups to their programs than on helping the ones in which they have already invested. At the same time startups invest in their Customer Success teams realizing that taking care of existing customers is at least as important for growth as acquiring new ones.

Perhaps it’s time the accelerators learn something from their portfolio startups too.

This is the third part of our series of articles discussing portfolio management for startup accelerators. You can see the first post (“If startup accelerators are real investors, they should behave accordingly”) here and the second (“Accelerators are not VCs: how they should approach portfolio management”) here.

Photo credit: orkomedix, via Flickr under Creative Commons license

Accelerators are not VCs: how should they approach portfolio management?

In the previous post we suggested that startup accelerators should behave more like investors, noticing that many of them could do a better job helping their portfolio startups. Just to summarize, the root of the problem is that they often lose regular contact with their graduates after the program. As they stop receiving regular updates about the progress of these startups, it means they simply cannot help even if they could. The main reasons for not staying in touch regularly are:

  1. Securing a successful exit for portfolio startups is simply not one of the key objectives for many accelerators, especially those backed by public or corporate money.
  2. The operations of most accelerators are focused on the… acceleration process – collecting and reviewing applications, acceleration program, organizing demo day – all of which are very time and resource consuming. As a result, insufficient resources and attention are usually devoted to following what happens with the graduate companies.
  3. Most of the information gathering process is done with tools that were not designed for this particular purpose (email, Dropbox, Excel). It makes managing the process time-consuming and inefficient, each time more so with the ever-growing number of graduates. By the way, we recommend you read this post, even though Fundacity was not mentioned there yet as a solution. (We are working hard for Marcin to revisit;)

Are only the accelerators to blame here? You could argue that it is in the founders’ interest to update their investors too, right? Yes, but think of the cost/benefit analysis they are likely making. Why would they spend time preparing regular updates to their investors if this information is given little attention and rarely acted upon? OK, let’s see how this situation could be improved.

The right focus: are all accelerators investors?

Not all accelerators are judged primarily on the number of successful exits.

The classic accelerator model involves taking a great team with promising idea, giving them office space, enough cash not to worry about such trivial things as food and accommodation, equipping them with knowledge, mentoring and contacts to grow their business during the duration of the acceleration program and then presenting them to investors on demo day. For all of that, an accelerator takes usually 6-10% of startup’s equity (most often in a form of convertible note) hoping for a nice return on investment when it becomes the next big thing.

However, in the last few years the accelerator business model has been evolving quite a lot. One clear trend is that now there is much more vertical specialization, a topic we covered in one of our earlier posts. Take Startupbootcamp as an example: they run a network of accelerators focused on FinTech (London), Internet of Things (Barcelona), Smart Transportation and Energy (Berlin), etc.

Another interesting trend has been an emergence of corporate and government funded accelerators. Unlike privately funded startup accelerators, which look to make money on exits, the primary objectives of those are often different.

Government-funded acceleration programs, especially popular in Latin America, are created to attract talent and promote technology entrepreneurship among their young populations. To become more attractive to founders, these programs often don’t take equity in the participating startups, which means they have no interest in their success post graduation. However, even if they do, the long-term benefits for the funder (growth of equity in startup portfolio) are not aligned with the incentives for the administrators of such programs. These are often private organizations, such as university incubators, that have no equity in participating startups, which means their main interest is in maintaining the flow of money to the program. As a result, their focus is limited to managing startup selection, distribution of funds, delivery of the acceleration program itself and, last but not least, making sure it looks good to the public, now.

Corporate accelerators vary in their approach to acceleration programs, but their general objective is to engage with startups to boost internal innovation and stay in touch with latest trends in technology. The successful exit of a graduate of their program is not necessarily crucial to meeting these objectives. At the end of the acceleration period, the corporation behind the program is thus likely to either acquire the startup, or simply lose interest in its future.

Just to summarise – as long as return on investment is not the primary objective of entities that fund accelerators (LPs), they will not focus on it either.

The right focus: accelerators are not VC funds

Accelerators need to rethink how they can best deliver value to portfolio startups.

Even if portfolio growth is one of their key objectives, accelerators have two types of limitations that hinder them from helping their portfolio startups as well as VC funds can do. The first limitation comes from the structure and value of their investment. Almost all have convertible notes that usually give them right to less than 10% of equity. As a result, they have no board seats and often no explicit right to information. The second reason is lack of sufficient internal resources that can be involved to deliver valuable support. Much of accelerator staff focuses on administrating the acceleration process and mentoring is often “outsourced” to external mentors.

Throwing into the mix a large and fast-growing number of graduates, it is clear that accelerators cannot apply the VC model for portfolio management. They simply have no capability to provide active engagement at high level of detail. What kind of model should they apply then?

We argue that the accelerators should be focusing not on rocket growth of their portfolio startups, but rather on increasing their chances of survival by helping them secure the next round of funding. Then VCs can take over and do what they are supposed to do. Aren’t demo days supposed to achieve that? Well, we all hear stories about those amazing demo days: excited media trying to identify the next big thing of the batch, investors queuing to talk with the leaders of the Google/Facebook/YouNameIt of tomorrow. The fact is that only absolutely top accelerators (mainly in the US) can organize such events. Most of demo days outside of big tech hubs don’t end up with immediate investment offers and the interest and attention of investors is not easy to maintain – there are just so many sources of deal flow these days. So, the next day most of founders go back to basics: coding, hustling and growth hacking (or so they think;).

The main focus for accelerators should be to thus help their portfolio startups raise funds after Demo Day. How to do that? They needn’t do much more than what they are doing now:

  • Match mentors with graduate companies, not only the current batch;
  • Present all startups to investors and potential clients at regular events;
  • Collect startup KPIs relevant to raising the next funding round;
  • Increase the likelihood of connections by promoting all their startups via social media, events, workshops, or in a newsletter send to accelerator’s stakeholders; and
  • Never stop thinking about portfolio startups.

The key is simply shifting focus from the current batch to all startups in the portfolio. There are some good examples out there. Take hub:raum – a Berlin-based incubator backed by Deutsche Telekom. It is in fact one of their main objectives to take their portfolio startups to another round of funding. As an incubator they don’t have cohorts to showcase during demo days, so instead they organize so called Investor Days. They invite selected current participants, as well as graduate companies, to present their progress and give them chance to meet investors.

Another example is SixThirty, a FinTech accelerator based in St Louis. As some of their graduates leave St Louis after the program, Matt Menietti, the accelerator’s Venture Partner, makes sure he knows very well what they are up to. He asks them to send regular updates, with the focus on information and metrics relevant specifically to fundraising.

We will cover how to set up reporting from portfolio startups in the next post. Stay tuned and don’t be shy about sharing this post on social media if you liked it :)

Launching an accelerator – where to start

These days seems like everyone is opening a startup accelerator or incubator, even Coca-Cola has one! To the wider public they may all be similar, but there are surprisingly many differences in the way they operate. At Fundacity we provide selection and portfolio management tools to many accelerators and incubators, seeing first-hand their various operating models and approaches to helping startups grow.

The concept of startup accelerators is still evolving and we want to capture the most important trends by sharing some of our observations and best practices used by incubators and accelerators around the world. We have already written about the importance of finding a niche to attract the best startups and today’s post will be about launching a startup accelerator, through founder stories from a Brazilian post-accelerator (Acelera Partners), a London-based incubator (IncuBus Ventures) and an accelerator from Asia Pacific (Venturetec Accelerator). Each of them has a different profile, founder background and own view about the best way to grow the next big thing.

Let’s see how they started.

Idea

It all starts with the problem.

George and Rishi, entrepreneurs from London in their early twenties, had been involved in the London startup scene for some time as founders and organizers of startup events. What they were missing in the ecosystem was an offer designed specifically for young people, like themselves, which focused on young people who were interested in starting up and looking for guidance how to do it. However, most of the accelerators seemed to be for people with prior business experience. They also saw the lack of focus on developing young entrepreneurs who ultimately are the reason behind the success or failure of a startup. Hence, IncuBusLDN’s focus on building better entrepreneurs via a tailored personal development course as part of the incubator. The initial idea was to create a co-working space for young entrepreneurs. To save rent costs, Rishi and George came up with an idea to set it up on a red double-decker London bus, conveniently fitted with wireless Internet, meeting rooms and mobile – in case they needed to relocate. However, they quickly realized that providing just a co-work wasn’t enough to make a difference to young entrepreneurs and that’s how the idea of the ‘entrepreneur incubator’ was born. The problem turned into a mission.

Trey Zagante is on a mission too. He wants to build a bridge between corporate and startup world in Asia Pacific region. Originally from Australia, while completing his MBA, he became very interested in the rise of accelerators, the movement started by Y Combinator in the US. Later he got involved as mentor in AngelCube, a Melbourne based accelerator and part of the TechStars Global Accelerator Network, as well as in Founder Institute, while working for a large tech company operating in Asia Pacific region. During that time he noticed that a typical three-month acceleration program was not very well suited for enterprise startups that often need to deal with very long product development and sales cycles. For that very reason they may have difficulties to demonstrate enough traction to investors during Demo Day, especially that the only traction that really matters for them is revenue.

At the same time, Trey noticed that many corporations in the region were increasingly interested in connecting with startups to boost internal innovation. Not only that, but corporations were becoming more open to sourcing products and solutions from startups. You no longer had to be a big tech corporation to have another huge corporation as a client. Venturetec Accelerator was born from merging these two observations. It focuses on enterprise startups that sell to telecoms, media and finance companies. The participants spend six months in the program, do not need to attend it in person and what they get is funding and revenue focused mentorship from and introductions to the very type of people as their clients.

In Brazil, the problem identified by Franklin Luzes was still different. While working for Microsoft he noticed there was a funding gap for startups that finished acceleration programs, but were not ready yet to receive VC funding. Many quality startups were dying as a result. His investment thesis was to start what he describes as a post-accelerator, which helps startups that are already generating revenues to scale their operations and grow faster.

So, there we go: an incubator, an accelerator and a post-accelerator. Each different, but each started to solve a real problem. This resembles the advice mentors give to founders – find a problem first and then the best way to deal with it.

Validation

Get out of the building.

Each of the three profiled ventures started with an innovative business model, so the only way for the founders to validate their ideas was by following Lean Startup principles and talking to people, lots of people.

Rishi and George were already known in the London startup ecosystem, having founded startups, worked in some and organized various startup events for startup entrepreneurs. That was a good start, but not enough. Rishi: “Don’t be afraid of chance encounters. You just don’t know which one may take you in an interesting direction.” That’s exactly how the idea of an incubator developed; from the conversations they had with other young entrepreneurs and… basically anyone who would listen.

Obviously, it’s not only the number of meetings, but also their quality that counts. The best ones often start from introductions to the right people. Trey says that for Venturetec, one of the most important people during the validation stage was Felix Lam, a member of the Hong Kong Business Angel Network and the chairman for The Hong Kong ICT Startup Awards 2014, roles that make him one of the most connected people in the local startup ecosystem.

Even if you don’t have the access to all the right connections from the outset, or can’t find someone as pivotal as super-connector Felix Lam, there are ways to build your own network of contacts.

Acelera Partners wanted to focus from the beginning on attracting more mature startups to their post-acceleration program. However, the founders quickly realized that to be able to select the best ones in that stage, they would need to get to know them much earlier. They decided to participate in Startup Brasil, a government program for early-stage startups, which also turned out to be a great way to enter the ecosystem – make valuable connections, promote their brand and validate the idea. Finally, to finish building the whole supply chain for their fund, they became a shareholder in one of the top accelerators in Brazil – Aceleratech.

To validate an idea, the Lean Startup movement not only advocates taking fresh air by talking with people outside of the building, but actually recommends building something to test reactions of future users and customers. Venturetec’s MVP was the soft launch of their program, while they were still fundraising. In the meantime, Trey was also relentlessly networking with key stakeholders of the future accelerator – particularly media, finance and telco corporations – to validate his key assumption about their interest in startups and willingness to get involved in the accelerator.

It’s clear from the experiences of these accelerator entrepreneurs that there is no such thing as talking to too many people when starting up. It may even be truer for an accelerator than a startup, as the numbers of stakeholders for them is higher. A SaaS or a marketplace startup first needs to validate their idea with prospective users, whereas a new accelerator needs to talk to all stakeholders right from the beginning: funders, startups, other accelerators, government, corporations, etc.

If you want to find out how they raised funds and what they learned from their experiences, please see the second part of this post here. To make sure you don’t miss the next posts about accelerator best practices, please sign up to our blog.

How to attract the best startups to your acceleration program

Imagine an accelerator. Their program is amazing, the offer for startups second to none and the mentors assembled are master ninjas in their respective fields. They post the application online, do some buzz on social media and… get a bunch of random applications, some of which are not even from startups. This scenario already happens and is only likely to be more common.

At Fundacity we help many accelerators manage their application processes and wanted to share some of the best practices we learned from them. The first thing that the best accelerators do well is finding the niche, vertical or key differentiator that is strong enough to attract the best startups.

It’s getting crowded

The accelerator landscape is getting crowded and, for every new round, accelerators need to increasingly compete for the attention of best startups. This trend will only be stronger as new types of government-backed and corporate accelerators emerge. First of all, it’s difficult to compete with equity-free grants offered by government programs like Startup Chile, SEED (in Brazil) or Sirius in the UK. This model is being replicated in these countries that aim to attract foreign startups to boost local tech entrepreneurship and economic growth. Also, with each new round the quality of their programs and resources at their disposal tend to improve, which helps attract better quality founders and startups.

Corporate accelerators are still new and their value proposition not always clear. However, it looks like the number of them will increase, as more corporations are looking to startups to help them innovate. Their deep pockets and operational expertise in their respected fields will certainly be attractive to many startup founders. Today, tech giants like Microsoft and Google, consulting companies like Accenture and KPMG, media giants like BBC, telecoms like Orange (Orange Fab), T-Mobile (hub:raum) and Telefónica (Wayra) – all already have or are launching their acceleration programs. Even Coca-Cola has one!

On top of it, the economics of running a private accelerator are tough:

  • Private capital available to fund startups is still limited in many countries.
  • Operating costs of running an accelerator are higher than for early stage seed funds, as there are more resources needed (marketing, administration, workshops, demo days, office space, other perks for startups) to run a good program.
  • Exits take time and are difficult to execute in many countries, mainly due to high costs and legal hurdles to do IPO, as well as limited number of potential acquirers for tech businesses.

This all means that many of the active accelerators of today will not be around in the near future as, similarly to many of the startups in their programs, they will simply run out of cash.

Specialization

For all these reasons, a successful accelerator will be the one that consistently manages to attract the best startups to their program. How to do it? Become one of the top choice accelerators in a vertical or geography. Specialization increasingly seems to be the way to go, particularly in more developed startup ecosystems, mainly the US. Some of the examples include:

  • Mach37 is a US-based accelerator designed to facilitate the creation of the next generation of cybersecurity product companies. With this very niche scope, they managed to attract top experts in the field as mentors and looking for international startups to join their program.
  • Boomtown in the US focuses on the intersection of big data, media, and design. They help their startups with such things as branding and logo design, marketing, code feedback and usability testing.
  • Incubation Station accelerates only market-validated consumer product companies to help them more effectively manufacture, distribute, market and grow their products and services. Among the graduates of their program you won’t find typical Internet startups, but rather manufacturers of wipes, burgers, sauces, etc.
  • Amsterdam based Rockstart Accelerator actually runs two different programs: Web & Mobile and Smart Energy.

Accelerators that choose not to specialize in any vertical must find something else that puts them apart from the competition. This is very important, as most of them offer similar conditions. They are all mentor driven, their standard offer is usually approx USD 20k in cash and additional perks (estimated monetary value of which differs and real value is hard to measure), for 6-8% of startup’s equity, although accelerators in developing countries can take as much as 15%.

For example, Arturo Velez from Naranya Labs, a corporate accelerator from Mexico, says that startups are attracted not only by Naranya’s knowledge of mobile commerce, but also by the fact that they have offices located across Latin America and can help with international expansion.  Similarly, Nxtp.Labs from Argentina is perceived as the best internationally connected early-stage investor in South America and their new office in Silicon Valley will only enhance that standing.

Stand out or…

Accelerators themselves are in a similar situation to the startups they attempt to accelerate. Most of them are young, many have not yet found product/market fit and, as a group, they still need to validate their business model to investors and value to startups. The jury is still out whether the accelerator concept is going to survive, so what they need to do now is learn from their own experience and industry best practices, iterate and potentially pivot.

We are going to share on this blog some more of the best practices used by accelerators from around the world, so stay tuned and… be different. If you are interested in what Fundacity does, check out our website. You can even talk to us there via our Live Chat.

 

Find the right investor for your startup

We are continuing our series on “Hacking your fundraising”. We have already written about where to find the investors if you are an early stage startup and what you will need to give and what you should expect to get from your investor. This time you will find out how to decide if you have found the right investor for your startup.  We will focus on angel investors and accelerators, as they are the most common investors in early stage startups.

Human factor

Signing a contract with an investor is a bit like getting married. You will need to start sharing, meet regularly and commit to many things you may not always feel like doing. Although you are marrying rich, don’t forget it’s almost impossible to get a divorce with your investors and having a no-strings-attached relationship is not an option.

Like with any relationship, times might get tough when things are not going as planned – a fairly common issue in Startupville. It is therefore important that the relationship is based on mutual respect and understanding. A great investor will help you brainstorm when things are bad and will stay out of your way when you need the space to figure things out. For that very reason make sure you select your investor carefully and not go for the first one that flashes you the money. How to do it? Do your due diligence. In addition to using Google search, you can and should:

  • For angels: Ask them to put you in touch with a few of their portfolio companies. You should even go as far as selecting the founders you would like to talk to yourself. Try to go for the successful and the ones that did not go well. In the latter case, you are likely to find out more valuable information, because hard times present a better test of anybody. If the angel investor refuses to give you these contacts, this is a clear warning sign. Surprisingly, very few startups do this.
  • For accelerators: Talk to graduates of their programs. The list can be easily found on their websites. Best reaching out directly to the founders through LinkedIn. Simply ask them if they would do the program again. No response from a number of founders may be a warning sign.

Human factor is much more important when you look for an angel investment. In case of accelerators, you will deal with more people and the relationship will be intense for a relatively short period, during the program.

Terms of investment

In general the most heatedly debated terms in a term sheet relate to valuation. However, whilst financial terms are very important, the devil lies in the details, legal details. Investment terms, presented to you by investor in a legal document called term sheet, are a good indication of the relationship you may have in the future. Some things to be especially careful about:

  • Board seats. In general, if you agree to have investors on your board, make sure their vote is in line with the amount of equity they have.
  • Additional equity not linked to amount invested. Sometimes investors will offer non-cash benefits (e.g. mentoring, office, advisory) in exchange for equity. It is a normal practice for accelerators, but need to be checked more carefully when analysing an offer from angels. We wrote more about it in our previous post.
  • Valuation caps. This is an important point when your investor doesn’t get equity, but rather receives a convertible note for their investment. It is a very common practice when funding early stage startups. You can read more about it here.
  • Trigger events and conversion mechanics for a convertible note.
  • Reserved matters – list of really important matters where the investor has veto rights. Common examples include hiring and firing of key staff and raising additional funding. This means that without the investors’ consent the items cannot be approved by the rest of the board even if they form a majority.
  • Anything that looks weird.

The term sheet and related documents will be overwhelming. This is normal, so it’s better to ask and perhaps look stupid than not ask and actually be stupid. If you have questions about the investment terms like: “Why is your fund registered in British Virgin Islands?” or “What does it mean that you want to cap…?” – ASK. If they are honest, they will be understanding, open and not defensive. Remember, the deal will not fail because you ask questions.

Please do not treat the above as legal advice and, if unsure, show your term sheet to an experienced lawyer or another founder, preferably one who has raised capital from professional investors before.

Additional value

One of the things you should be doing your due diligence on, is how much you will get from the investors in addition to money. The most valuable are mentoring and introductions.

Mentoring

Accelerators are all about mentoring and most make the network of available mentors their key value proposition. That’s great, but mentors are not created equal. Study the list carefully and think if you would be excited to work with some of them. Then, while doing your due diligence, find out how much time mentors will actually have for you and how the mentorship works. The best arrangement is to have a small group of mentors work with you consistently through the whole program. Some accelerators (e.g. Techstars) organise mentor-startup speed dating at the very beginning of the program, which is something founders generally like.

Angels can and should offer mentoring too. If your prospective angel investor has already made investments in your space (not in current competitors!) and/or has operational experience running startups, there is a chance their mentoring will be useful.

Introductions

Your investors should help you grow your network of contacts through introductions. This means introducing you to other investors, potential clients, potential hires and anyone who can help you grow your business.

Even if you don’t secure direct introductions to investors from your accelerator or angel investor, you should not hesitate to name-drop to get introduced yourself. Never underestimate the power of brand and social proof, especially that investors, as a group, are famous for having herd mentality. What it means in practice is that when they see another investor already interested in you, they will more likely look at you with more interest themselves. That works even better, if it happens to be a name they already know well.

Thanks for reading and stay tuned for more. In the meantime, we would love to hear from you in the comments below. You can also subscribe to this blog and receive notifications when we publish something new.

Startup funding – what you get and what you give up

In our previous post we listed the main sources of external financing for early stage startups and where you can find them. Today you will find out what you should be prepared to give in exchange for their money, but also what you should be expecting to get. This is a continuation of our series “Hacking your fundraising”. You can see the whole presentation on that topic embedded at the bottom.

1. FFF – Family, friends and…fools

You get

Unless your friends or relatives are experienced entrepreneurs and can give you relevant business advice, the deal is quite simple – what you get is cash to run your business. On top of it, there is however a non-material bonus included. You will be getting an enthusiastic group of fans of your startup, who will cheer for you and talk about your product to everyone they know.

The amount of money you can get will differ on the number and wealth of FFF you involve, but commonly it will be up to 20k USD.

You give

The easiest arrangement you can make is to take money in a form of a simple loan that you commit to repay, with accrued interest, when you start making money. Another good option is to issue a convertible note, which converts into preferred or common stock at a discount (usually 20 percent, although currently often reduced to 10-15%) to the valuation in the next round, which usually involves professional investors. Granting stock in your company in exchange for the investment is much more complicated and should require involvement from lawyers, which at this early stage can be both expensive and time consuming. In any case, to avoid possible misunderstandings that can harm your relation with your relatives or future funding from professional investors, it is better to sign a legal document.

You need to be aware that there may be additional costs of having your friends or family financing your startup, especially if you don’t reveal to them risks involved, or if they don’t full understand them. If you got money from your relative promising that “this is a sure thing and nothing can go wrong”, in case it does, those family dinners may suddenly become very awkward.

2. Angels

You get

Angels are wealthy people with passion for startups, often being former entrepreneurs themselves. For that reason, in addition to money, you should expect to get valuable insights, helpful advice and contacts to grow your business. That is in fact what angels usually promise as their added value alongside the financial investment. Therefore, when reaching out to angels, focus on ones that actually have contacts or experience in the sector that is relevant to you.

You need to remember however, that in order for their involvement to be useful, your angel investor would need to have time and relevant experience to understand your business really well. That may not be a realistic expectation in many cases.  Angels are very busy as they usually invest alongside their other fulltime commitments such as running their own business. Don’t let that deter you. Keep hustling even after they invest because the non-tangible value is significant and you need to extract it.  Push to arrange regular catch-ups even if it means scheduling several weeks in advance.

Usually, angels invest from USD20-100k, although it may be more if you manage to get an angel group to invest.

You give

In exchange for their investment, angels will want equity or a convertible note, which is a form of debt that converts to equity when pre-defined conditions are met (called “conversion trigger events”). Sometimes angel investors require additional equity in exchange for their advice. If you agree to that, make sure to make granting of equity conditional on them delivering specific results. Otherwise, you risk taking someone on for a free ride. We recommend you use the Founder Institute’s Founder Advisory Template to help you structure the advisory relationship.

Once you have them on board, angels will often require you to send them regular reports about your performance, which means you will need to start sharing details of what you do. Some angels may also require some control of the business, in form of a board seat. It is not a common practice however, so think twice before agreeing to that. It is your business, you take the most risks and you should be the ultimate decision maker. By giving a board seat early on, you also set a precedence for later stage investors to do the same. You also risk that a small investor will have a significant say in the future fundraising rounds. They will push to have their rights protected and their requirements may be in conflict with that of your company, thus negatively impacting your negotiations.

3. Accelerators

You get

In addition to cash investment in your startup, accelerators usually offer office space, access to professional services (e.g. lawyers, accountants) and other business/technical resources such as free or discounted access to servers or various SaaS tools. However, their biggest value-add is supposed to be access to a network of mentors. These are people with relevant business experience, who will work closely with you during your acceleration program to help you grow your business.

Another benefit of accelerators is the connections that startups establish with other entrepreneurs. In each in of the programs there are between 10 and even 60 startups, all in one place and going together through very difficult times. This means that not only professional relationships, but often strong friendships are formed.

Finally, being an alumnus of a well-known accelerator definitely helps with introductions to VC investors, some of whom you might meet at the accelerator’s Demo Day.

You give

Accelerators take equity for their investment and services. It is usually 6-10%, often in a form of a convertible note, although it depends on the country as in some countries it can be significantly higher (20%+)

4. Venture Capital

You get

If you manage to attract VC investors to your early-stage startup, you must be doing a lot of things right. It usually implies you have a good product (usually post MVP) that solves a well-defined problem in a huge market ($1billion+). In addition, VCs look for a talented and balanced team, as well as impressive traction that can translate into hockey stick growth.

As opposed to most angels, VCs are professional investors that do this full-time, so in theory they should be able to give you more valuable advice and make better introductions than other investors. They may also get involved in the operational side of your business, for example by helping you make a high profile hire, analyze a new market opportunity, plan and execute an acquisition or position your company to be acquired by a large player.

VC investors are the ones you go to when you need more than $1m of funding.

 You give

At the early (seed funding) stage you are likely to give away up to 20% of the equity, although many funds, particularly outside of Silicon Valley, would want to take a bigger chunk of the pie. VC funds usually invest more than $500k in a startup, which means they will want some control of your business to make sure you are spending this money on things that help you grow. You can expect them to want to receive regular updates from you and often a board seat.

Remember, with VC investment you are getting a lot of pressure to make it big. They give you rocket fuel for your business and expect you to take them to the moon, then to mars.

Thank you for visiting us. Stay tuned for more posts. If you want to receive notifications for new posts, please subscribe to our blog.

[slideshare id=26785468&doc=hackingyourfundraising-131002084011-phpapp02]

Sources of funding for early-stage startups and where to find them

At Fundacity we want to help connect startups and investors, so we have prepared a presentation to guide startups that are looking for funding. We called it “Hacking your fundraising”. In this blog post we would like to give you some tips about where to look for finance if you are an early stage startup. This means you have at least a team, some form of a validated idea (preferably a Minimum Viable Product) and lots of drive and passion to grow the next big thing!

At this stage your financial needs are probably not that big. Assuming you have technical skills to build your product, you may need money to:

  • Pay basic company expenses like cloud server, non-free software, co-work office space, accountant, etc.
  • Survive: pay your rent, eat and occasionally go out to disconnect (important!)

Even if you can survive for some time from your savings, you will eventually need additional money to keep your business going. There are three main sources of funding for early stage startups:

1. FFF: Family, friends and…fools

The FFF are people who know you well and are ready to support your idea financially, because they believe in you. FFF can be your parents, a rich uncle, or a successful/wealthy best friend. Getting money from them is also a very important first test for you. If you manage to get money from FFF, it should be easier to raise money later.

The amounts will be small (unless your uncle is very rich and not that smart), but good for a start. It is probably best to take money as a loan and not formalize too much. This funding is 100% based on trust, so they know you will repay them nicely when you become the next big thing. Common mistakes here are giving too much equity (10%+) for a non-active role, including non-dilutive rights or agreeing to pay monthly cash interest which is tricky for a growth stage company.

2. Angels

Angels are a bit like FFF in the sense they are individuals with some disposable income who are ready to make a bet on you. The difference is that you probably don’t know them yet. Angels are often former entrepreneurs, who like helping build new businesses. They may also be wealthy people who like startups and want to invest in something with a big potential to diversify their investment portfolio. The important thing is that they are also prepared and can afford to lose this money.

There are several ways to find angels:

  • Angels like to form groups, so check online if there is one in your area. For example in Brazil you have Anjos do Brasil, Angel Ventures Mexico in… Mexico, or Tech Coast Angels in the US.
  • Many will have a formal way to be contacted, through website. For example, Juan Martin from Club de Business Angels de IAE in Argentina told us that startups can contact him directly through their website. He will review the idea, ask for additional information if your business seems interesting and then present the business to the other angel group members.
  • Personal introductions are however the most effective ways to get introduced to angels. For that, you need to network with your local startup community. Go to events, talk about your idea with many people, then establish relationships and ask for introductions. The best events to attend are accelerator demo days. They are generally neither costly, nor difficult to attend and angel investors go there to find interesting opportunities. You don’t have to pitch on stage to get a chance to talk to them.
  • Investors usually have LinkedIn or AngelList profile, where you can see what companies they have invested in. This will not only give you information if the angel is the right fit for your startup, but help you find ways to get introduced to them, for example through someone you know in their portfolio startup.

Securing angel investment depends a lot on personal relations and trust you build with them. They need to believe in your idea and that you are the right person to deliver it. For that reason you cannot expect that securing investment will be a fast process. It can be however really worthwhile as many investors can offer valuable advice in addition to money. Speaking about money, angels will invest typically up to $100k in exchange for equity in your business.

3. Accelerators

Accelerators invest in early stage startups not only by providing money, but, more importantly, by offering valuable services (mentoring, work space and contacts).

The way they work is by inviting startups to participate in short programs, which usually last a minimum of three months and require you to relocate to their offices.  During that time you not only work hard on your business, but go through a structured program of workshops and meetings with mentors. The idea is that in this short time they will help you, well… accelerate your business, by teaching you essential skills and advising you on your business model.

In return for their services and cash (usually around $20k, some offer more), you will have to give up a small amount of equity (6 to 9%).

How can you find accelerators and incubators in your area? The most famous accelerators are in the US, such as Techstars, 500 startups or Y-Combinator. In Europe you have Seedcamp, in Latin America Nxtp.Labs, Aceleratech or 21212 in Asia JFDI, etc. You can look for them on Fundacity or AngelList. All of them can be easily contacted online, some take applications all year round.

4. Others

There are a number of other options you can consider looking for funding.

Venture Capital firms usually do not look for early stage startups, unless you have a rockstar team, previous relevant experience and a product that already has some good results – impressive user growth in a big market is the best.

Take a look at government programs, grants or loans such as CORFO fund in Chile and Startup Brasil. There are also various funds provided for entrepreneurs by the European Union if you happen to do business in one of the EU member states. However be aware that government grants often come with lots of headaches as you need to report your plans and later expenses very diligently and there is little flexibility to pivot your business. However, it is worth investigating them as conditions for some are really attractive (cheap or free money).

Crowdfunding is a good option to get not only funding, but also help to promote your product by your backers or investors. The most popular type of crowdfunding is when people give you money to build a product and then you usually offer them this product on attractive conditions (or for free) once it’s ready. For obvious reasons it works best for consumer products that people can actually buy and use themselves. It is much more difficult, if unheard of, to crowdsource e.g. an enterprise SaaS solution this way.

The most popular sites to get funded by people this way are Kickstarter and Indiegogo. Another option for startups is equity crowdfunding, where sites like AngelList or Seedrs can help you find many small investors who pool their money to fund your business in exchange, you probably already guessed it, equity.

 

Thank you for visiting us, stay tuned for more posts. If you want to receive notifications for new posts, please subscribe to our blog.

 

[slideshare id=26785468&doc=hackingyourfundraising-131002084011-phpapp02]

Incubators are Bullshit, or are they…?

At Fundacity we regularly read an awesome CB Insights newsletter. In addition to really high quality content they put there each time about VC investing, they also include a section with interesting articled about startups and starting up from around the web.

Today an article that caught our attention was called Incubators are Bullshit. We read it with interest, as at Fundacity we work with many accelerators around the world. The author raised some valid concerns about the structure of some programs that pack too much activities, when founders should really be focused on talking to customers, looking for product/market fit, etc. We thought however that the article was quite one-sided and quite unfair to accelerators (which the author kept calling incubators) in general.

Below is our response added in the comments section, which was promptly marked as spam. The admin of this blog of course had the right to do that, but we found that qualification a bit harsh, hence this blog post. Please see for yourself.

“The problem with being that judgmental as you are in this post, is that one tends to include only arguments (or rather opinions) that support their view. There are few of them that caught my attention in particular.

1. At Fundacity we work and know many accelerators, helping them manage their startup selection process and soon portfolio management. The value they give to startups indeed does differ and in many cases I am sure there are too many meetings and not enough actual work being done. However, the vast majority of accelerator graduates are happy with their experience and would repeat it (http://techcrunch.com/2014/03/10/these-are-the-15-best-accelerators-in-the-u-s) Since they are the best people to evaluate if their startups have made any progress during the program, it makes your argument flawed.

2. Track record. Most of the accelerators have been around for short time and Y-Combinator is the oldest one really. I am sure you know that most startups are not an overnight success. At the moment most people agree the jury is still out if accelerators work or not.

3. Networking. Accelerators give you many people to network in one place, which makes it a very time saving exercise. What startups also get is a kind of automatic referral – accelerator’s brand – which opens more doors. Founder that wants to network outside of such ecosystem will inevitably spend more time doing that. Since, as you point out in your post, they need to be primarily focused on building their business, most of them will simply do little networking. Besides, the quality of networking depends primarily on how one does it. You can suck or be good at this regarding of how many people you meet, but meeting more people at least makes you practice. Also, I cannot imagine anybody is forced to network instead of working. Smart founders know hot to balance both.

4. Who are you modelling yourself after? I do not understand this argument at all. So if you join Y-Combinator you will somehow model yourself after Dropbox or Heroku? In what sense – culture, success, client acquisition? Why is it good or bad?

5. Investors. Is it the same investors who go to Demo Days and then invest in graduates of acceleration programmes? What would be a traditional way? It’s the same investors in most cases – graduate startups can just meet them easier and they get a “stamp of approval” from an accelerator, which works as a good referral. Investors do their own one too. Again, time saving for startups. Also, most of startups enter programmes in a very early stage, often too early for an investment by VC funds. Accelerators fill in the early stage funding gap around friends, family, sometimes angels.

By the way, there is a difference between incubators and accelerators, All your examples referred to the latter, so unless you intentionally tried to be dismissive, your research could have been more thorough on fundamentals.”