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Why Accelerators Are ‘Graduating’ Entrepreneurs Who Fail To Get Funding

There is a notion of ‘graduation’ in incubators and accelerators that I find amusing.

Entrepreneurs are often expected to ‘graduate’ after 3-months.

Let’s explore what this means …

Out of the over 7,500 incubators and accelerators around the world, most consider ‘funding’ as the key success metric.

As I pointed out in my Harvard Business Review article, The Problem With Incubators and How To Solve Them:

Most incubators use funding as a success metric, which is a somewhat flawed criterion. Over 99% of companies should operate as organically grown, self-sustaining businesses — bootstrapped, without external financing. For them the goal is to achieve customer validation, not financing. Yet if the incubator uses financing as its success metric, it will try to force inexperienced entrepreneurs into an unnecessary financing round. And more often than not, they will fail.

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How To Get Seed Funding From An Accelerator

A number of accelerators offer a good chunk of seed funding these days.

YCombinator, the best known of the lot, invests $120k in fewer than 100 startups, twice a year. For those ~100 slots, they get over 3000 applications. Companies are required to move to Silicon Valley for three months and YC takes 7% equity.

TechStars also offers about $120k in seed funding and takes 7-10% equity, and has offices in multiple cities.

Numerous accelerators offer $15-25k in funding around the world. That is the average at the lower end of the scale.
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YCombinator’s Further Evolution Into A Seed Fund

YCombinator has just announced that it will replace its $17k for 7% pre-seed equity investment with a $120k for 7% seed investment deal. From the WSJ:

Previously Y Combinator’s standard deal was about $17,000 for 7% of the company, plus an $80,000 note from a group of venture investors and firms eventually known as YCVC, which most recently included Andreessen Horowitz, General Catalyst, Maverick Capital and Khosla Ventures.

So, startups will now get $120,000 from Y Combinator, instead of $97,000 from a combination of Y Combinator and select venture firms. That means the implicit valuation for YC startups rises to about $1.7 million from the previous $1.4 million (YC might deviate from the standard deal “in exceptional cases,” presumably for an ultra-hot startup that merited a higher valuation).

The $120,000 will come directly from YC and a fund it manages that has limited partners, though the accelerator itself has no limited partners, Altman said.

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The Funding of Avaz: Some Reflections

Harvard Business Review Series on the Seed Capital Gap

Are We in an Accelerator Bubble?

In a recent special issue on digital startups, The Economist writes:

The exact number [of accelerators] is unknown, but f6s.com, a website that provides services to accelerators and similar startup programmes, lists more than 2,000 worldwide. Some have already become big brands, such as Y Combinator, the first accelerator, founded in 2005. Others have set up international networks, such as TechStars and Startupbootcamp. Yet others are sponsored by governments (Startup Chile, Startup Wise Guys in Estonia and Oasis500 in Jordan) or big companies. Telefónica, a telecoms giant, operates a chain of 14 “academies” worldwide. Microsoft, too, is building a chain.

Predictably, many observers talk about an “accelerator bubble”. Yet if it is a bubble, it is unlikely ever to deflate completely. Accelerators are too useful for that. Not only do they bring startups up to speed, provide access to a network of contacts and give them a stamp of approval. They also perform a crucial function in the startup supply chain: picking the teams and ideas that are most likely to succeed and serving them up to investors.

In this post, we will discuss are we or are we not, and what is the prognosis for the trend?

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Venture Capital in Slow Growth Markets: India, EdTech, Cleantech

There are a number of relatively slow growth markets in which we do a lot of business: India and EdTech are two examples. These are also two markets that I am passionate about, and have covered prodigiously for a long time. In a way, these markets, and many others that have similar characteristics, share very similar trajectories vis-a-vis entrepreneurship, venture capital, and exits. Another market in which 1M/1M doesn’t have much presence, but I have invested in, is Cleantech. The story is somewhat similar there as well. Let’s take a look at these slow-growth markets, and how they will emerge over the upcoming years.

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How To Fund A ‘Fat’ Startup

These days, we focus a lot more on lean startups than startups that require capital to get going. The entire industry has moved away from the ‘fat’ startup category. However, infrastructure software, hardware, networking, chips – they need capital. Even in cloud software, to build complex technology like personalization and analytics requires some investment.

How do people fund those?

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