What makes a startup accelerator work? And why regional accelerators need to change.

Business Angels and entrepreneurs are increasingly meeting in the context of a startup accelerator programme, so it matters greatly – to all of us – if the accelerator works or not.

(In fact, I have a vested interest here as I run Idea Alive – startup accelerator in Manchester, Liverpool and the NW of England.)

The doubt of whether accelerators work or not is beyond dispute in the US – where Y Combinators leads the way. However, doubts have been raised in the UK (and equally Europe) about whether this startup accelerator format can be transferred out of the USA.

The answer to which, I believe, is yes – but not in the same format!

Firstly, Y Combinators is a silicon valley based accelerator and as such is coloured by the nature of its local investor community.

After all, accelerators do exist because of – and for – their investor community whilst also being of great value to the local entrepreneurs.

The investor community in San Francisco might be contrasted with the business angel or early VC community in (say) Manchester, England. In Manchester, the business angel and early stage VC community wants to see revenue before investment.

Compare this to West Coast USA where hot ideas are backed with large sums of money before revenue. In the north England, it just isn’t like this.

Hence, entrepreneurs – based in Manchester – should move to Silicon Valley or Boston (or perhaps now London) if they want their project backed – pre-revenue.

The consequence of this difference is significant. Firstly, the scope of ambition in a pre-revenue startup in Silicon Valley – can be global or enormous – especially when the point of the business paying its way gets put back – such as Twitter – because additional funds can be raised on high levels of user growth.

Equally, the need to prove revenue early on typically means that the revenue driven business – found in UK regions and across Europe – will focus on a niche and then specialise.

The consequence of the early search for revenue is that the business becomes smaller in ambition.

I think this explains why the best UK startups are still sold to US tech companies.

Now, this fact should inform the startup accelerator in Manchester, Paris, Madrid and Berlin (although London may possibly be an exception) that regional (if I can call them that) startups accelerators would do better if they focused on revenue rather than growth.

Now, Nic Brisbourne recently wrote that all startup accelerators are essentially VC businesses – that is primarily focused on growth (not revenue) with the aim (hope?) that one business will make it big, IPO or sell and that this success will pay for all the failures. I agree with Nic that this is currently the case, but don’t believe it will continue to be so.

Firstly, there is a growing opinion in public sector funding circles that the startup accelerator model developed in the US doesn’t work in Europe.

Secondly, business angels typically want to see revenue and revenue growth before they commit just as they typically look for businesses that expand their area of business influence.

The conclusion is this – non London, Boston, New York or Silicon Valley etc… startup accelerators need to focus on revenue – not equity growth – because that is fundamentally what their local business angel community wants.

This then provides a second challenge – the regional startup accelerators need to stop trying to be Venture Capitalists – focused on a high value equity exit.

Instead, startup accelerators – and my Idea Alive startup accelerator is included in this – need to focus on revenue and earning its income from a share in the revenue generated by the successful companies – not just the hope of a big pay out – some day, way off in the future.

The mistake that startup accelerators in the regions and across much of Europe make is that they haven’t reflected – truly – what investors want.

And, by shifting to a share of revenue – from a share of equity – the regional startup accelerator becomes more like a publishing company working with an author or music group, instead of the venture capital firm that the region never had, and, very probably will never have.

When I look at the success of companies like Penguin, created hundreds of years after the invention of the printing press, or in their heyday (1970s) the music labels (50 years after the gramophone was invented), you can see that the publishing / royalty format works extremely well and that the UK and Europe has achieved and built significant companies with this approach.

It is time – I believe – for the regional startup accelerators to focus on revenue and build themselves as publishing companies – taking a share of revenue – and to stop trying to be venture capital firms.

We need to leave the creating of VC firms to the guys in the centres of hot startup money – or, move to those locations.

We will be making this move with Idea Alive – and will shift from an equity share to a revenue share with our next iteration of our startup accelerator.  Find out more at Idea Alive.

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Five wise men (or women) – one missing

The next iteration of Idea Alive – Manchester, UK’s
startup accelerator – is about to be launched with
five wise men (or women) as the business angels
backing the venture.

We are looking for our 5th and final business angel.
Please contact me via iBusinessAngel if interested.

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  • That’s absolutely right. We don’t have a real pre-seed financing culture here in Europe. There is the huge lack between fff- investments (family, friends, fools who invest in the founders, not the project) and series a rounds when the project starts making revenue, so between 50k- and 250k.
    I always hear from European Investors that we need own Googles and Facebooks in Europe, but there is nearly no investor outside in Europe who is willing to invest in such an early stage to get companies off the ground to become European Googles.
    In addition, we need decentralized accelerator models and hub systems for our local regions, because we have the potential of great business also outside big cities.
  • Pingback: Revenue Share instead of Equity Share | LUZEO Blog()

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