Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire. Startup Spotlight is a regular feature in TechWire’s Startup Monday report.
CARY – I have spoken and written a lot about why corporations need to be more engaged with their local startup communities and early stage innovation in general. Their preferred way to do this has been through in-house accelerators. A few years ago the Harvard Business review published a list of over 7500 corporate accelerators. Although I have not been able to validate that number recently, I’m assuming it is even higher today.
There are several good reasons for a startup to want to be a part of a corporate accelerator program. There tends to be full time staff assigned to work with the companies. Many of these have solid curriculums and methodologies for getting the right product to market. These accelerators can be a gateway to the massive resources and customers a corporation has to offer.
David Gardner
Still, the track record of successful companies coming through these programs is well below that of companies backed by early stage venture capital. Although their successes are highly touted, only 18% of companies going through corporate accelerator programs succeed compared to over twice that success rate on average for venture capital portfolio companies. I have often discussed the value of having strategics involved in our startups but if strategics are so valuable for a startup then why don’t corporate accelerators have a much better track record than financial-only investors?
I think there are several reasons for this:
Limited Time Commitment
Most of these programs run for a set number of months each year and then end with very little if any company follow-on support. The accelerators themselves tend to come and go with the various leadership teams. They have an average lifespan of around 2.5 years. A typical venture fund runs seven to ten years. A startup company can get into trouble, need more capital or a leadership infusion at any stage and it is a professional investors duty to stay involved and protect that company from initial investment all the way through an exit.
Staff Disconnects
Corporations tend to either run their programs with internal staff or bring in an outside program like TechStars to run it. Both of these approaches have big disadvantages. Internal staff may have the familiarity and relationships within the corporation to pull resources in but typically have little experience with startups or launching ventures from scratch. External consultants typically understand startups but they do not have the knowledge or relationships within these massive corporations to engage the resources that might be utilized.
None or Ultra Expensive Capital
Corporate accelerators typically bring little to no investment capital to the table. Startups need both solid mentoring and capital to succeed. One without the other is just not going to get the job done. Even when corporations bring in external groups to run their accelerator program that do provide some capital, the terms are typically horrendous. TechStars for instance takes 6% ownership for a $20,000 investment i.e. a valuation of $333,000. Even the most ruthless early stage venture capitalists typically offer pre-money valuations of $1,000,000 or more on a pre-revenue startup plan.
Misaligned Goals
A final issue with most corporate accelerators is simply that their goals are not perfectly in line with startup founders. If you read the mission statements of most corporate programs, they will list “access to innovation” and “identify potential early acquisitions” or even “recruitment opportunities” as their primary goals for their accelerator programs. Making these startups successful is often not even listed as one of the accelerator’s goals or metrics. This is in sharp contrast to the goals of venture capital investment which is to make portfolio companies as valuable as possible which is perfectly aligned with founder goals. Startups often need to pivot, sometimes to an entirely different industry that is more open or receptive to their emerging value props. This may not be in line with what a corporate accelerator wants to see. For example, what happens if you are in an insurance tech corporate accelerator program and discover that you need to move your SaaS offering into the higher ed or healthcare IT space?
Restrictive Terms
Some corporate programs and investments include terms that can create problems for startups such as a first right of refusal. It can be very difficult to get a potential acquirer to invest a lot of time in diligence when they know such terms exist which could snatch the deal away from them at any moment. Other such terms might include the inability to sell to a competitor of the sponsoring corporation. To be fair, many corporate accelerators have no such terms in their accelerator agreements.
Conclusion
Even with these potential drawbacks, corporate accelerators can be a good option especially for some startups that are unable to raise venture capital. We have sought out and negotiated many corporate strategic investments and partnerships for our portfolio companies. Corporations know that if a professional VC firm is involved, their terms will need to be in line with the portfolio company’s goals and strategy. Strategics can bring tremendous industry insight and connections to a startup if these relationships are managed appropriately. Often the best relationship is not an accelerator program or a direct investment but rather a partnership whereby the corporation becomes a value-added reseller or technology licensor from the startup.
The best outcomes for all of these stakeholders seem to occur most often when the founders, venture capitalists and corporations all work together to bring what they do best to the synergy of a startup.
