How Valuable can Accelerators be to a Regional Economy?
Written by Julian Wells, Director at Whitecap Consutling the original article was published here; https://www.whitecapconsulting.co.uk/articles/how-valuable-can-accelerators-be-to-a-regional-economy/
The value to startups and scaleups of attending accelerator programmes is now better understood and recognised across multiple tech sectors. In this blog, drafted prior to the Coronavirus outbreak, we assess the pros and cons of accelerators, identifying exactly what the regions need from them.
Accelerators have long been hailed as a gateway to entrepreneurial success. Winning a place on a highly regarded accelerator scheme can quality stamp a business, opening doors to further investment, support packages and mentorship that can be the catalyst to success.
We know that accelerators – whether they produce ‘billion-dollar’ companies or not – can play a vital role in the development of businesses and ecosystems. We also know that more than half of UK accelerators are based in London, and that has an impact on regional startup and scaleup numbers.
The regions could absolutely benefit from the introduction of specialist accelerators and hubs to kick start their specialist sector ecosystems. But designing and successfully operating these spaces and programmes is not without its challenges. Below, we have summarised some of the key challenges and benefits to be considered when introducing a new accelerator to a region.
There are challenges:
There has to be critical mass: The challenges of operating a FinTech accelerator outside of London are primarily linked to the supply of relevant firms. A BEIS survey of 428 startups that have participated in an incubator or accelerator found the average size of an accelerator cohort was 16 businesses and the average length of a programme was just over 6 months. Given the relatively small number of early stage FinTech companies across the regional cities, it is understandable that most of the FinTech accelerators are based in London. Whether a ‘build it and they will come’ approach to creating a regional FinTech accelerator would be successful is a source of regular debate in all the cities we have researched.
There has to be quality (on both sides): Accelerator performance varies, and not all Accelerators provide the support systems required; experienced mentorship, connection to meaningful networks of expertise and funding, and a quality practical training model. There is no quality check on accelerators, and many end up as nothing more than a workspace. Research in the US has shown that the broader the sample of accelerators in any given test, the fewer success stories they produce – and the less quickly accelerator cohorts reached key milestones, such as time to raising venture capital, exit by acquisition, or gaining customer traction. In less developed eco-systems, quality accelerators are even more valuable and yet harder to find.
Accelerators can create false-starts: Research has shown that while startups on accelerator programmes are more likely to get their first round of funding, that pattern doesn’t continue in subsequent rounds. For startups that obtained more than one round of funding, the impact of accelerators was generally lower or even negative post Round A – the advantages gained from being on an accelerator don’t always carry that business through the long term. Equally, if companies pay money or give up equity to be on the programme, this leaves them with less control going forward.
But the benefits can serve the ecosystem as a whole:
They are valued by the people that use them: BEIS’ survey found that most considered the programme to have been significant or vital to their success. The startups perceived direct funding to be the most useful support they received as part of the programme. This was followed by access to office space, lab space and technical equipment.
They translate to higher investment: The BEIS report also found the launch of an accelerator is associated with a significant increase in the number and value of investments made by VCs into non-accelerated seed and high-tech companies, relative to non-accelerated seed but non-high-tech firms. For VC funds sorting through thousands of applicants a year, membership of an accelerator cohort can act as an important quality stamp in the filtering process.
They can accelerate learning and fast-track new businesses: Research has shown that while investor-introductions and expert advice are highly valued, the real benefit of being part of an accelerator cohort is the speed of the learning curve. The best accelerators offer an intense and immersive education, condensing lessons learned over years to a few months. Business milestones occur at a higher rate on accelerator schemes, meaning that entrepreneurs are forced to make difficult business decisions earlier than they would otherwise.
They are important in the development of the ecosystem: Whether the individual companies in an accelerator cohort succeed or fail, the local eco-system still benefits. Firstly, they contribute in numbers, developing an initial layer of start-ups, needed to form the critical mass for an ecosystem’s development and growth. Secondly, they facilitate connections between entrepreneurs, angels, investors, talent and professional services, which go on to form networks that, over time, feed back into the business community with real, tangible impact. Research shows that places with an established Accelerator see more seed and early-stage entrepreneurial financing activity which goes on to benefit companies not part of the cohort.
What do the regions need from accelerators?
Good startups choose their accelerator, so why would they come to one of the country’s regions? Accelerators outside the capital need to provide access to rich ecosystems – i.e. HealthTech in Leeds or quantum computing in Bristol – where the chance of working with key industry leaders is provided. They need access to data sets that are not available elsewhere. They need investors, mentors and of course, ideally, they need aspiring and successful unicorns.