Tuesday, May 1, 2012

Startup Accelerators

In addition to its annual Midas List ranking of Venture Capitalists, Forbes recently came out with rankings for startup accelerators. Not surprisingly, Y Combinator topped the list with a total value of all the companies that have gone through Y Combinator estimated at $7.8 billion (or an average of $45.2 million per company, which is, of course, skewed by the big successes). The good news was that two of the other startup accelerators in the top 10 are based in Chicago: Excelerate Labs and TechNexus.

The other startup accelerator in Chicago that I’ve mentioned before is Healthbox, which is focused on the digital health space, similar to Rock Health in San Francisco, but it is still fairly small and in its first year (although they have announced that they are expanding to Boston as well), so it was not listed in the Forbes rankings. However, it was recently announced that NY is starting a digital health program as well called New York Digital Health Accelerator (NTDHA), which will be accepting 12 startups. This new accelerator is different from both Healthbox and Rock Health because they will be much more focused on care coordination and ways to help healthcare providers. They have also lined up 18 healthcare providers as partners and each startup chosen will receive up to $300,000, which is significantly more than what the other two accelerators are offering.  However, the initial press release didn’t mention how much equity the accelerator will take in the startups, so it will be interesting to see what rules and conditions are attached with the $300,000 initial seed funding.

This new healthcare accelerator in NY and the Forbes ranking of startup accelerators just proves how important these new accelerator models are in the early-stage investing landscape and startup community. Tech Crunch came out with an article last week about the Seven Forces Disrupting Venture Capital, and one of the forces mentioned was Y Combinator. The article claims that these accelerators give companies more flexibility and leverage when negotiating with VCs and also leads to higher valuations. It also acts as an important filtering mechanism for the VCs because these accelerators have become very competitive programs that sift through over 500 applications/interviews for each startup class. Through this selective process, once a company is accepted to an accelerator, VCs know that they’ve received a stamp of approval and are often more comfortable and confident investing in the management team and the company.  However, I do think that having too many accelerators (some can argue we might be seeing a startup accelerator bubble) can lead to a similar problem as having too many VC funds. Only a small percentage of VC funds make good returns because there are a limited number of good companies and talented management teams.  When there are so many startup accelerators and only a select number of good ideas, more and more companies that go through these smaller accelerators will fail if they are unable to receive additional funding after the accelerator program ends. Of course, just like top-tier VC funds, we’ll start to see a similar distribution between top-tier startup accelerators, such as Y Combinator versus other less well-known accelerators.

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