Startup / Seed Accelerators
The formal definition of a startup or seed accelerator was first conceived by Cohen and Hochberg, and they define it as a “…fixed-term, cohort-based program, including mentorship and educational components, that culminates in a public pitch event, often referred to as a ‘demo-day.’” In essence, start-up accelerators are a one-stop shop for entrepreneurs looking to grow a promising new business idea. In addition to these benefits, some accelerators even give startups small equity-free grants or seed investments for their participation in the program. Based on data collected by the Seed Accelerators Rankings Project, the average sum of grants and investments an accelerator participant receives is $22,000, and ranges from $0 to as much as $150,000. In respect to seed accelerators that actually invest in its participants, the average equity stake that accelerators receive is typically between 5-7%. Many of these accelerators select and invest in new businesses across a variety of industries, while other accelerators are tailored towards certain industries.
Some have described startup accelerators as organized versions of the “dealmaker,’ which refers to the process in which startups strike investment deals with venture capitalists. Fehder and Hochberg argue that one of the value propositions of seed accelerator programs is that they consolidate multiple distinct services that were once individually costly for an entrepreneur to obtain into one place, such as education, mentorship, professional network, and more. On the other hand, they also argue that it reduces search costs for venture capitalists, because accelerators select and consolidate a portfolio of potentially investment-worthy businesses. Given these potential benefits and the recent spread of accelerators, startup accelerators and their effects on firms, as well as regions, have been an increasingly popular topic of research.
Although there definitely has been a recent craze around these programs, startup accelerators as a concept is actually one that is relatively new. The first accelerator program ever, Y Combinator, was established in Cambridge, Massachusetts around 2005.Since then, the startup accelerator model has spread to virtually all regions of the world, and there are estimated to be more than 3,000 different accelerator programs.However, it is important to note that an overwhelming majority of startup accelerators are still located in more developed regions of the world. Many attribute the spread of startup accelerators to a recent trend that has seen the costs of experimentation fall significantly in the past decade. This reduction in experimentation costs has allowed the startup accelerator model to invest in and support an entire portfolio of promising tech startups at once, when its budget might have been able to support just one new venture a few decades ago.
In terms of the efficacy of startup accelerators, a growing body of research attempts the evaluate the potential effects of accelerators upon firms. Some researchers have studied the outcomes of accelerated companies versus non-accelerated ones, and results suggest that graduating from an accelerator can result in less time to raise venture capital funding, exit by acquisition and gaining customer traction. In addition, some researchers have evaluated the outcomes of specific accelerators program and found positive effects upon venture performance. However, variation between accelerator models and contemporary nature of the issue means that the factors that actually make accelerators successful are still unclear. In addition, the majority of literature on accelerators only evaluate their effects on the participant level. However, recent research shows that startup accelerators may have potential spillover effects for non-accelerated companies, such as greater access to venture capital and more entrepreneurial activity in the region. These findings are particularly promising as researchers aim to understand how accelerators can not only help individual entrepreneurs and businesses, but also in stimulating the development of geographic clusters of entrepreneurial activity and innovation.
Given that preliminary research shows positive signs of the effects of startup accelerators, some have begun to suggest it as a potential intervention to create entrepreneurial activity and clusters. Especially for economically depressed regions, the promise of innovation and economic growth has led many policymakers to consider their options to intervene upon entrepreneurship. As discussed earlier, a multitude of variables associated with entrepreneurship as well as limited evidence of successful policy interventions has led to little consensus on whether institutions foster entrepreneurship or not. However, in addition to the dearth of literature examining entrepreneurship and innovation policy, the few studies that found accelerators having spillover effects upon regional entrepreneurship clusters were limited to the scope of the United States and developed countries. A confluence of gaps in the literature and data sources used has led to many questions for future research: Can policy be utilized to stimulate the development of entrepreneurial clusters? Are startup accelerators a potential policy intervention towards this aim? Will theoretical assumptions and empirical findings that show positive effects of startup accelerators hold in entrepreneurial clusters found in emerging markets and the Global South?
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