Who You Calling a Jesse?

Accelerator Metrics and Developing Entrepreneurial Talent

I spent a little time at StartupWeekendHamilton3 in April as a mentor and was talking to one young founder that proclaimed that there was one great accelerator in Canada. Who he said it was surprised me a little and got me thinking, what makes an accelerator “the best” and why should an eager founder care? The baseline in my mind is Y-Combinator. No one can argue it is the best seed stage accelerator based on its results. What is difficult for everyone to agree upon is what does it do to achieve those results or even harder, what defines success?

In my opinion the key things it does:

• Social Capital via Paul Graham – how he teaches founders and the hacker culture he has built provides entrepreneurs with access to the very best social capital that exists for anyone starting a technology based company.
• Peer mentorship – the structure of the 12 weeks enables peers to hold each other accountable. This competition amongst comrades is powerful as it turns around the human nature of playing to our own strengths and pushes founders to “keep up with the Jones’s.”
• Hungry founders – funding is minimal. After a bit of a bump it has since been decreased and I would bet if you look at the successes out of YC the biggest ones started off with the least amount of financial resources.

There is some striking similarity to what YC does and the thinking/observations behind the Goldmine Effect by Rasmus Ankerson (watch it, it is interesting). The basic point is that if you can find the talent that has the potential vs the talent that already been refined you will get a better result. Money and facilities do not make a difference, identifying underdeveloped talent does. I think there are three core factors that go into determining the quality of a given program.

• Where is the program located? Are there companies in the immediate area just a stage or two ahead that can help you grow?
• Who is backing the program and what did they invest to make it happen? Do they get involved in the companies they invest in or do they “spray and pray” with their investment?
• What type of companies have been successful in the accelerator in the past? Who gets funding afterwards? Are the B2B or B2C, SaaS or something else, etc.

What is less important:

• Demo Day: The rock show nature of Demo Days is not a good environment for investors but you need to take advantage of the intros and the social capital on offer to build those connects yourself.
• Money: Funding amounts from the accelerator should not influence your decision to go there. Good companies will get funding, build a good company and spend as little as possible doing it.
• Mentor walls: In Canada there is a relatively small pool of people with both time and capital but there are a lot of people that can help you move the needle in different ways.

Right away some might say that the above “less important” items are what builds momentum and if you look at the YC companies momentum being 3x that of TechStars then how can I say that is less important? These things have the greatest effect after the startup object is already in motion, in my opinion. The less important items are used all too often as *the* way to get the startup object moving.

A simple score card to find out who’s best for you

If a score card was set up to measure a program it should look something like this:

• The program is located near companies that I am interested in working with
  • 1 – none that I know of
  • 3 – some interesting founders
  • 5 – who we would exit to and/our would like on our advisory board are within walking distance
• Investors in successful companies that have been in the program are
  • 1 – Not involved in investments
  • 3 – one of 12 investors in the companies that graduate
  • 5 – take a board seat and/or a significant position in the financing round following completion of the program.
• Companies that have been successful in the program in the past are
  • 1 – nothing like us, we are B2B SaaS and all the successful companies are gaming companies
  • 3 – some are similar to us, there is no particular pattern to the type of company
  • 5 – just like us, we are a hardware company and everyone that has done well post-program are hardware companies
• Funding we receive from the accelerator program is enough to
  • 1 – we can go 6-12 months no problem, its great to not have to raise or find revenue right away
  • 3 – it is ok but in 6 months if we don’t have revenue or financing we are done.
  • 5 – we can pay rent while in the program but we have to move and stay lean to survive.

This is by no means research quality metrics but it does start to assign some way to weight rankings… for you. If I was going to score YC I would give them a 5, 3, 4, and 5 which would total at 17/20.

What else should be on this scorecard?

The “Accelerator Bubble” will pop but not for the reason you think it will

The incubator/accelerator market has a growing number of people watching and waiting for it’s bubble to pop. The reasons sighted for this looming pop should be obvious: most accelerators aren’t going to perform as well as some TechStars (TS) programs and not even close to Y-Combinator (YC). Poor performance (measured in the number of short-term wins) along with the short-term nature of the funding behind most of the accelerator programs will cause them to run out of money and simply fade into startup history. But that won’t pop the bubble.

As accelerators have become an increasingly popular way to scatter seed funding among a large number of companies, critics have noted two key developments: Companies of lesser promise are gaining acceptance, and often funding, and the quality of mentoring in the programs has decreased.

When David Tisch, former managing director of TechStars’ New York City accelerator, stepped down from his role with the program, he complained in an interview that “the majority of accelerators are not good for companies.” - http://www.businessweek.com/articles/2013-03-14/waiting-for-the-accelerator-bubble-to-pop

I think the bubble pops when the application numbers and quality of the people applying drops. That will happen when people no longer feel they need what accelerators offer. The leading indicator will be poor performance of the companies coming out of the program, which is likely a result of the poor quality of entrepreneurs in the program. 

The Angel and VC community reacted to YC’s early success and latched on to the TechStars model that was viewed as a copy of Paul Graham’s YC model but open (there are only two models for success). This experimentation with the TechStars worked in terms of building a big lead list of early stage companies and “founders to watch” that have a baseline education and network. Education is something investors used to have to do on their own for their early stage investments, the TechStars model allows investors a way of scaling that early stage knowledge transfer.

The problem with it is that everyone copied the 12-week TechStars model and didn’t look at what brought Y-Combinator it’s early success. It isn’t the DemoDay or the great list of mentors. It is the education process (which includes holding people accountable) that built the success and now the alumni network that is allowing it to scale to a point.

When looking at the demand (indicated by the ever growing pile of applications), it isn’t just fuelled by the popularity of tech startups and the sexiness of the moment. The demand for accelerator programs is fed by a gap in the services or product that is currently offered in the education system – globally. As building companies that require highly skilled and educated employees has become ‘easier’ the higher education system that was optimized to train PhD candidates hasn’t adjusted to the new reality.

The education industry gets this and it has been learning how it can meet the need. There are a lot of experiments out there in higher education that have a long history but more recently the focus on experiential learning has seen the accelerator model meet education. The common place to find them spreading in higher education globally is to google “Venture Lab” and skip passed the .ca reference. There 25+ of them across the globe and growing.

The first generation of programs are a few years along and the next generation of programs is emerging. There is a range from innovation and entrepreneur streams in undergraduate and graduate programs to full blown programs that are accelerator-like but heavily integrated into the educational experience of students. There are still a lot of unknowns to be worked out but it is clear to me that the education system is better positioned to educate students and will eventually make most accelerator programs obsolete.

These programs will exist at every school and if they are done right at a few key schools the applicant pool will degrade for expensive accelerators.

Finally, this is the Creative Destruction Lab at Rotman

Today Thalmic Labs announced it’s amazing MYO device is now available for pre-order. Techcrunch highlights their Y-Combinator backing, which is only part of the story. A community is supporting this company from San Francisco to Waterloo to Toronto — like so many companies in Canada. That community has grown a lot over the last few years. I am really excited to continue to have a part in its growth. Over the last 6 months I have had a lot of fun in developing a part that had a key role to play with MYO, connecting them to world class talent in Canada that invested both time and money to accelerate their growth.

Enter the Creative Destruction Lab:

The Creative Destruction Lab at Rotman is a venture lab that leverages: the business school’s leading faculty and industry network; inventions and talent from the world-class, technology-oriented faculties at the University of Toronto such as Computer Science, Engineering, and the University Health Network; and, its location in the heart of Toronto – North America’s third largest financial centre and one of the world’s most culturally diverse cities, to achieve its mission.

What do we do for Thalmic (and 9 other ventures)?

“Thalmic quickly leveraged the Creative Destruction Lab and raised the majority of their seed capital from the Lab’s G7 (coaching and investor group) including some of Canada’s leading entrepreneurs like Daniel Debow, Senior Vice President of SalesForce.com, founder of Rypple and Rotman JD/MBA graduate, Tomi Poutanen, founder of Optimized Search Algorithms and Rotman MBA graduate, and Lee Lau, Director and Co-Founder of Alignvest Capital Management and founder of ATI, and their network,” says Rotman Prof. Ajay Agrawal, Peter Munk Professor of Entrepreneurship and Academic Director of the Creative Destruction Lab.

How we do this is by starting off with 18 ventures that were a mix of everything from software to hardware, many in life sciences, consumer, and B2B. From there the G7 (a board of amazing Canadian Entrepreneurs) set milestones for them and have them meet with our G7 every 6-7 weeks like any funded startup would to its Board of Directors. Each meeting at least one company must be cut. What we experienced so far is that four were cut at the first meet, three at the second, and then two at the third meeting. Then we added one. You will hear about them in the future I am sure.

Thalmic is cool (and early) example of what the lab is about, there will be others coming out over the next while. Over the last few months we have developed our program, tweaking here and there, while on a crazy steep learning curve. This is the start of something awesome and yes, we put the founders first. Another company is looking at funding options now and the message to them from us is that they decide what is best for them. If they don’t take the funding we will support them. No one should feel pressured to do anything but focus and create awesome companies.

How does research spending in higher education translate to startups?

The issue of startup funding falling short in Canada is talked about in startup circles just as much as the weather in this country. This topic is something I have shared my opinion on before but that post was aimed at early stage companies. I am not sure if there really is a problem with funding or just with the companies in Canada that are at that stage. A more serious worry about this conversation is the rational that academic research (ergo the institutions that conduct them) are less important than VC investment in economic development:

“We’ve bought into the idea that academic research is the engine of economic development and that’s a fallacy,” says Dr. Patricia Lorenz, chair of NAO.

Canada spends roughly $11.3 Billion on Higher Ed based research. The top school on research spending is the University of Toronto with $915 Million of that. The next highest school is at $575 Million (UBC) then at #6 it drops to $325 Million.  This isn’t far off from US schools but there are a lot more schools with research spending over $100 Million. Alumni from ‘top schools’ in the US have received $12.5 Billion in funding across 559 deals since 2007. These are people that have been exposed directly or indirectly to the environment that is created around the research spending of those schools. We don’t have similar data in Canada (that I know of).

What were the Federal (government) research dollars spent at the “top schools” in the US?

• Stanford University ($840 million)
• Harvard University ($686 million)
• University of California, Berkeley ($694 million)
• New York University (I couldn’t find a number)
• University of Pennsylvania ($770 million)
• Massachusetts Institute of Technology ($677 million)

If you assume NYU is a bit above the average of the above in spending, that amounts to an annual of roughly $4.5 Billion in research spending at just 6 schools. Schools develop the talent that builds the companies that require the funding. Those are big number unless you contrast that with Canadian company R&D spending which is pegged at $10.9 Billion last year (I don’t know what amount of that goes to sponsored research in universities). RIM and Bombardier, top of that list, account for $1.54 and $1.34 Billion each.

In total, three times the research spending of the University of Toronto is going to closed research to aide mobile devices, snowmobiles, planes, and trains. I am not saying that is a bad thing at all. What I wanted to point out is that, relatively speaking, Universities really don’t spend that much on research factoring in the diversity of the research and the number of people that benefit from it directly or indirectly.

The persistant question that people tend to oversimplify, how much of that research spent at Universities translates into economic development? The answer to that depends on your metrics. Typically I think people point towards the commercialization results of a university. That is a only a part of the picture. The numbers above from 6 schools in the US that spend $22.5 Billion over five years ($4.5/yr) turned out students that raised $12.5 Billion in financing. Are you going to question any of those top US schools commercialization or their role in being an “engine of economic development?”

btw, ATI was founded in a dorm room at UofT in 1984 and exited for how many billions after changing the world of computers? Ebay? WattPad? Do we need to list them all? We probably do.

Startup “ecosystems” in Canada are doing well but…

The Startup Genome released another report mapping top startup cities but this time a bit more specific than it’s heat map from April of this year. Canada did well depending on how you interpret it with Toronto at #8, Vancouver at #9, and Waterloo at #16. In its previous report, Startup Genome ranked Toronto at #4, Vancouver at #16, and Montreal made the list at #25. Oddly Waterloo wasn’t listed in the previous ranking but made it into the top 20 in the new report while Montreal remained outside of it.

Focusing on my Ontario centric nitpick – the separation of the Toronto and Waterloo “ecosystems” when they are anything but separate is not going to give an accurate picture of Canada’s awesome startup communities. They are unique communities but their strength comes from how they work together in the same ecosystem. The emotional energy (and money) burned in defining how they are different is holding Canada back from an even better and sustainable growth curve. A symptom of that energy is in the report.

In Toronto’s profile:

“Toronto competes for startups with regional competitors such as NYC, Boston and nearby Waterloo.”

Then in the Waterloo profile:

“In the near future, it will be interesting to see whether Waterloo is able to hold on to its talent base or whether it will be sucked into Toronto.”

Would you say that about Palo Alto sucking talent to San Francisco and vice versa? No. It’s the valley. A huge area that is far more developed but very similar to Toronto – Hamilton – Waterloo. The problem, I think, is that at some point in the past when local economic development groups were competing on a similar scale for tax dollars (and manufacturing plants) they narrowly defined regions (Golden Triangle, Golden Horseshoe, etc) where everything above the escarpment is barbarians and the urban modern folk live below next to the cold blue lake.

There can be (and there are) healthy communities inside the larger Toronto – Hamilton – Waterloo ecosystem. Every success in the larger ecosystem helps the entire ecosystem and they also share the same problems.

The reported big problem the ecosystem faces (in Toronto):

Startups in Toronto receive 71% less funding than SV startups. The capital deficiency exists both before and after product market fit. Toronto startups receive 70% less capital in Stage 2 (Validation) and 65% in Stage 4 (Scale).

The ecosystem most likely lacks a sufficient quantity of all kinds of startup capital sources: angels, super angels, accelerators, micro VCs, VCs etc. As a result Toronto startups rely more on self-funding, or rounds from family/friends.

The reported other big problem (in Waterloo):

Waterloo has a funding gap (96% less in the second stage) for early stage startups before product market fit, probably due to a lack of super angels and micro VCs. There are high numbers of accelerators and much lower numbers of super angels and VCs than SV.

Solving the funding problem in Toronto also solves the problem in Waterloo. The more companies that are able to find the money and the talent to scale in either or both communities helps both or am I missing something?

Building a strong economy, community, and ecosystem isn’t a zero sum game.