Why Startup Accelerators Are Dead & Venture Studios Will Thrive

You always know you're on to big idea when not everyone agrees with you. In an email exchange a few days ago, I made the statement that accelerators are dead. I've been feeling this way for a while, based on my first-hand experience with a number of startup accelerators in Chicago and San Francisco. It was the first time I said it out loud.

I happened to say it in an email to Brad Feld, Boulder mastermind and creator of Techstars. Of course he responded.

Brad: I strongly disagree with the statement "Accelerators are dead."

Of course you do, I replied.

I respect Brad's opinion, of course. His challenge made me think harder about this. Here are the top three reasons I think Accelerators are dying and will soon be dead.

As a caveat, I should mention most of my experience with Accelerators is as a mentor at Techstars Chicago. Troy Henikoff started this program as Excelerate Labs in 2010. Excelerate Labs became Techstars Chicago in 2013. Demo Day is coming up next week for the 2015 class making it the sixth group of entrepreneurs and startups to go through the program. I don't know how Techstars Chicago is different from other Techstars programs or from other Accelerators. So, my observations are limited to this single city example.

As a serial entrepreneur, here's why I think Accelerators are dead as startup launchpads for high-growth technology companies.

Why Accelerators Are Dead

1. The Accelerator model is incredibly inefficient and generates a lot of waste by focusing on the wrong things.

Like most Accelerators, Techstars Chicago is 12 weeks long. The three months are essentially broken into the following blocks of activity.

a) Mentor dating

b) How To Classes

c) Pitch Training

Mentor matching is where entrepreneurs select mentors who are registered with the program and are available to give free guidance to startup teams. Techstars Chicago has a massive list of mentors, which exceeds over 350 at last count. It's an impressive volume of well-intentioned people who want to help startups. A big part of the first month is meeting with mentors and getting "mentor whiplash" as entrepreneurs get quickly confused by contradictory advice on what they should do with their startups. 

As the proponents suggest, this confusion eventually leads to "clarity" as the convergence of opinions between mentors and startup teams generate a clear strategy and path for success.

How To Classes are required seminars that cover a wide-range of subjects, partially inspired by Troy's experience as an adjunct professor at Northwestern University and from a variety of guest speakers he brings in to conduct the sessions. Some of the topics include Search Engine Optimization, How To Run A Successful Email Campaign, Unit Economics, etc. This collection of classes could be considered a mini-MBA for startups. There seems to be a lot of variety in what is offered from year-to-year. Depending on your priorities, the seminar is right on target or totally irrelevant. 

Pitch Training occurs in the last month of the program and it's intense. Pitchmen and Pitchwomen spend 12 to 14 hours a day for at least 30 days on their pitch. The give the pitch, get feedback, talk to a good portion of the 350 mentors, iterate the pitch endlessly until they turn goofy. All this work does pay off as the pitches are usually compelling and highly entertaining. They are great pitches, although they are more entertainment designed to pique investor interest rather than to close the deal on the spot.

While these activities have merit, I've always felt there is something missing that is not emphasized at all -- talking to customers! 

In my experience as a 6x entreprenuer, the most important thing an entrepreneur needs to do is validate her business model. By validate I don't mean by talking to mentors or investors to discover what sounds good in a pitch. I mean by actually validating your problem hypothesis, solution hypothesis and path-to-customer hypothesis by running real experiences with real customers. This is imperative for a startup to succeed. It's just not emphasized in an Accelerator. I think that is a fatal flaw in the design of the Techstars program.

In an Accelerator, there just isn't enough time for talking to customers. The exchange below is an actual conversation I had in 2013 with the CTO of Social Crunch, part of the Techstars cohort that year.

Exhibit A. Actual conversation with a founder of a Techstars startup on Demo Day.

Exhibit A. Actual conversation with a founder of a Techstars startup on Demo Day.

I know from first-hand experience Troy has never understood or embraced the lean startup philosophy. He was quick to pan it in 2013 when everyone started talking about MVP's and pivots. Troy's startup experience came mostly from SurePayroll, a company that took payroll services online and from OneWed.com, a company he struggled to grow before starting Excelerate Labs.

I think the reason Troy doesn't see the value of testing underlying hypotheses is that he is an exceptional Execution CEO. He's not a Creative CEO. Troy's preference is to find business models that are already working and then copy them. In this case, you don't need to validate your model because someone else has done it for you. In fact, if you look at how Troy built Excelerate Labs, he admits it was a carbon copy of Techstars in Boulder. Instead of inventing a new way to help entrepreneurs succeed, Troy copied a program that was already successful. There's nothing wrong with this approach, but I don't think it works well in an Accelerator where startups are often inventing business models for markets that don't yet exist or if the startup is trying to be truly unique.

In my opinion, 90% of the energy spent in an Accelerator is waste. I'm not alone in this belief. If you talk to serial entrepreneurs, many of them agree that Accelerators are really a huge distraction from what really matters in making a startup successful. Accelerators are a fun way to spend the summer and a great way to connect with entrepreneurs for life in the alumni network, but they are not the best way to build a startup.


2. Investor returns seem to be poor.

David Cohen, the Founder of Techstars, is without a doubt one of the world's best experts on the Accelerator model. In March of this year in Forbes, Cohen said...

"Some people get mad when we ask why they want to start accelerators,” says Cohen. “They think it should be obvious: to make money. But there’s no evidence you’re going to make any money.”

In May 2013, Business Insider analyzed Y-Combinator, regarded as a highly-successful Accelerator in San Francisco. After looking at the YC startup portfolio, Business Insider concluded the success rate was a dismal 0.4%. That means the failure rate of the what is arguably the best Accelerator is 99.6%. Is that the best we can do?

To their credit, Techstars publishes funding levels of each startup in its program, listed by company name. In 2013 and 2014, Techstars Chicago companies raised about $16MM in total capital across 10 companies in each year. According to their site, there has been 1 failure, 3 acquisitions with the rest listed as "active." Unfortunately, Techstars doesn't publish exit values, making it impossible to calculate investor returns. They could also include the first few years of startups at Excelerate Labs, which would give investors a more accurate view of the historical returns of the Chicago-based program. Most of the companies listed in Chicago 2013 and 2014 classes are shown as "active" meaning the outcome of these investments is not known. 

Finally, investor sentiment is starting to harden towards startups that come out of Accelerators. Some of the things I've heard from Chicago investors in the past few weeks are listed below. I think these statements are telling of their overall concern about startup quality coming from Accelerators in general, most of whom are worst than Techstars.

"I would never invest in any of the companies that come out of Techstars or any other Accelerator."

"Who invests in newbie entrepreneurs? I only back someone who's done it before."

"Investors are so frustrated with the flood of crappy startups, they've given up on early-stage investing." 


3. Accelerators rely almost exclusively on newbie entrepreneurs.

Don't get me wrong, I love real entrepreneurs of all kinds, newbies included. I've mentored and trained about 50 newbies at a startup school I created called FounderSensei. I love working with new, aspiring entreprenerus.

Newbie entrepreneurs are unique in that they don't know what they don't know. In teaching newbies how to build startups from scratch, I've observed two big differences between newbies and serial entrepreneurs. 

A) Newbies have never experienced failure, so they don't understand the importance of validating their business model hypotheses with real customer experiments; and

B) Newbies are sure their idea is awesome, and that they are right. They just need to build a product and the customers will come to them.

These are two massive challenges for almost every newbie entrepreneur I've ever interacted with. By definition, newbies are naive. They have tremendous faith in what they are doing, but to a fault. Until an entrepreneur fails, she doesn't understand what failure looks like and how it happens.

In some cases, failure comes from changing market conditions. These things are outside of our control. But what is in our control, is our ability to recognize these changes and to take proactive action, before it's too late.

In other cases, failure occurs because the startup team didn't realize some of their big assumptions were totally wrong. They realized these errors after it was too late and they were out of money.

This is exactly the kind of mistake a serial entrepreneur is less likely to make. Why? Because she has experienced the pain of failure before. Pain is life's great teacher for all of us. The pain of a failed startup is not a lesson an experienced entrepreneur ever forgets.

In my work at FounderSensei, I learned that there are two things an entrepreneur needs to succeed 1) skills and 2) judgment. 

Skills I can teach. If you want to learn how to validate your business model, I can teach you how to do that. I can teach you how to talk to customers, what experiments you should run and how you should think about validating your assumptions. What I cannot teach you is judgment. Judgment helps you interpret foggy data and experimental results. Judgment is what forms your instinct about your business model and helps you understand if it feels right or doesn't feel right. Judgement comes only from experience. I can't teach you that; no one can. You have to learn that on your own, through experience, and failure.

The decisions on what markets to pursue, who your early adopters are, what your solution should be, when it's working and when it's not working, and when to pivot, proceed or restart are all entirely judgment calls. No one will agree with you on these questions, not your co-founders and certainly not your mentors. Ultimately, it's up to you. You need to make a judgment of where to go, what to do and how you are going to get there.

Newbies have a lot of resistance to changing their business models and they are reluctant to test their assumptions rigorously. They don't know what they don't know.

Accelerators rely almost exclusively on the judgement of newbies. While I love the opportunity this presents for newbie entrepreneurs, leaving these decisions to first-time entrepreneurs is not your best chance at startup success if you are an investor in that startup.

In summary, these are three reasons why I think Accelerators are dead. They are a distraction because they focus on the wrong things, investor returns are poor and they rely exclusively on the judgment of newbie entrepreneurs. 

I think Accelerators will continue to be a training ground for newbie entrepreneurs for some time, but eventually the money will dry up. 80 to 90% of the funding for Accelerators come from partner investors. I don't see them sticking around. I think they are going to move on to another model, which I think will be the venture studio.

Accelerators will continue to do well in the corporate market. This is because corporations think the Accelerator model is how successful startups are built. To me this is just another example of how little established businesses understand about startups and what makes them successful. There may be a huge market for corporate-sponsored Accelerators, but these aren't real startups as we know them today. Established companies still have too many cultural and structural barriers to overcome which will continue to destroy their ability to innovate.

The Emergence Of Venture Studios

I don't have a crystal ball, but my guess is that Venture Studios are just now starting to come out of the woodwork, and they will be everywhere. At some level, they will take some of the support that is currently going to Accelerators. 

So what is a venture studio? 

I think this is the best definition of a venture studio I can think of at this time.

A venture studio is a company run by serial entrepreneurs that creates new startups using its own ideas and resources.

The best and longest running example of a venture studio is Idealab. Bill Gross is a "creative" CEO. By this I mean he continually looks for new problems to solves and for creative ways to solve them. When he finds a problem/solution combination that looks like a big market opportunity, he creates a startup around it.

So far, Idealab has created 70 companies where the outcome is known. Of those, 45 have had successful exits or IPO's. That's an incredible success rate of 47%! Considering Idealab starts these companies from scratch, that is an unbelievable success rate for a seed-stage portfolio.

Now compare Idealab's 47% success rate to YC's 0.4% success rate. It's not 10 times better. It's 100 times better! If you were an early-stage investor, where would you put your money?

I believe the keys to Idealabs success are the following.

1. Bill Gross, a creative CEO who has a keen ability to identify a never-ending supply of new problems and innovative solutions. 

2. They seed the company with house money, once the business model has been validated with real customers.

3. They spin the company out using an Execution CEO to turn the startup into an established business, recognizing that they are really good at startup "creation" not large scale execution.

Idealab's model is completely different from the Accelerator model.

The chart below illustrates some of the activities for each model, to show how different these two approaches really are.

Exhibit B. InsightStudios, a venture studio, versus Angel Groups and Accelerators

Exhibit B. InsightStudios, a venture studio, versus Angel Groups and Accelerators

The timing for venture studios has never been better. Firstly, there is an abundance of venture capital in the market today, and most of the big money follows serial entrepreneurs who have a track record of successful exits. Secondly, the costs of rapid prototyping and early customer validation have never been lower. What used to cost $10MM can now be done for $5 or $15K. Serial entrepreneurs are adept and quickly evaluating new ideas, and using their unique and valuable entrepreneurial judgment to make a "go" or "no go" decision on an idea before wasting too much time or money on it. This process eliminates a lot of dogs and allows the venture studio to quickly find winning concepts based on experiments with real customers.

Unlike newbie entrepreneurs, serial entrepreneurs don't care about being right. They care about being successful.

While entrepreneurs at Accelerators are meeting with mentors, going to MBA-style classes and learning how to pitch, serial entrepreneurs at venture studios are running customer experiments to discover blockbuster ideas. It's not even a fair contest. Venture studios win.

Notable Venture Studios, So Far...

In my research for analogs for InsightStudios, I discovered several large funding events that have recently closed.

1. March 2014 - Expa raises $50MM

2. June 2015 - HighAlpha.com raises $35MM

3. October 2015 - Pioneer Square Lab raises $12.5MM (led by Brad Feld)

So, there appears to be some momentum forming around venture studios.

Given Brad's comment about Accelerators not dying anytime soon, perhaps he sees venture studios as an incremental opportunity. I love how Brad continues trying new things. He's a natural explorer.

I could see this outcome in the startup ecosystem and how these two models could co-exist.

Accelerators - go here to get your first startup experience and join our alumni network

Venture Studios - work here as part of our founding team, validation team or as CEO of one of our startups after you have some startup experience. Think of it as startup grad school.

This makes sense to me. I could see how these models together could strengthen the ecosystem overall. This assumes investors continue to bankroll the newbie's entrepreneurial education with little expectation of a return.

In the end, I still think Accelerators are dying and will be dead in the next few years. For my money, I'd rather put a newbie entrepreneur under a serial entrepreneur as an Apprentice than waste her time at an Accelerator forcing her to spend countless hours in pitch training. But that's just my personal preference and what I think is the best way to learn entrepreneurship - as an Apprentice under a serial entrepreneur.