ACCELERATORS THE BIRTH OF ACCELERATORS The reluctance of venture capitalists to invest after the Internet bust of 2000 left angel investors to carry the burden and risk. However angels are individuals who tend to invest much smaller dollar amounts compared to venture capital firms. As a result of the reduced investment and capital potential, many new ventures were left without sufficient money to launch their businesses (Mitchell, 2010). This gap stimulated a new breed of investment firms to emerge, known as accelerators. Hoffman and Kelley - 56 Small Business Institute® Journal - Vol. 8, No. 2, 54-70 In the late 1980’s and 1990’s incubators and accelerators were commonly known as research laboratories instead of seed funding firms for entrepreneurs (O’Connell, 2011). However, in early 2000 a new type of accelerator was established and led by experienced, successful entrepreneurs who mentored and guided nascent ventures with the intention of reducing high failure rates (O’Connell, 2011). Accelerators are groups of experienced business people who provide services, office space, guidance, mentorship, networking, management services, knowledge, and expertise to nascent firms on an as- needed basis to help them succeed in the early stages of venture life (Fishback, Gulbranson, Litan, Mitchell, & Porzig, 2007). Accelerators assist with building the venture team, fine-tuning the idea, and mentoring the business from idea, prototype, through product development. Accelerators provide intensive, boot-camp training comparable to entrepreneurship classes at the collegiate level (Fishback et al., 2007). Boot camp and accelerator contestants are selected from a pool of qualified candidates led by start-up teams with stellar ideas. Like venture capitalists, accelerators fund along themes and in specific industries with which they are familiar or knowledgeable. Some of the most well-known and successful accelerators nationally and internationally are the Foundry, Inc., Techstars, Y-Combinator, YEurope, and the Accelerator Corporation (Fishback et al., 2007). More startups are applying to accelerator programs to help them launch and grow their ventures (Mitchell, 2010). Paradoxically, accelerators view today’s uncertain economic environment as an excellent time to invest in innovation, especially technology, because costs are decreasing and open development platforms are more robust (Launch Box Digital, 2010). The founders of TechStars stated that they started their company to help provide the assistance that they could not find when they were starting ventures as entrepreneurs (TechStars, 2010). They explained that their motivation was to “give back” to the entrepreneurial community. Interestingly, TechStars viewed accelerators as much more than incubators (Cohen, 2010). There is no evidence in the literature that accelerators examined incubators for guidance. However, incubators are the historical antecedents of nascent firm assistance. Incubators were started in the U.S. at the Batavia Industrial Center in Batavia N.Y. in 1959 (National Business Incubation Association, 2011). Currently, the National Business Incubation Association (NBIA) has 1,900 members in 60 countries that include for profit, nonprofit, economic development, and government incubators (NBIA, 2011). They provide office space, financial, technical, managerial support, and access to investors (Katz & Green, 2009). Qian, Haynes, and Riggle (2011) report that in the year 2005, 2,007 incubators assisted 27,000 start-up companies, created more than 100,000 jobs, and generated revenue of $17 billion. The University of Michigan (1997) claims an 87 percent success rate after five years. In contrast, the Small Business Administration reports a 50 percent success rate for small businesses after five years of operations (SBA, 2007). HOW ACCELERATORS WORK The five prominent accelerators selected for this study include (in alphabetical order): Capital Factory, Launch Box Digital, Start@Spark, Tech Stars, and Y Combinator (Davidson, 2011; MacManus, 2010). They all provide a combination of assistance: an intense in-house program of mentorship, mentoring, office space, access to legal advice, internet access, assess to a network of entrepreneurs who help entrepreneurs tweak and improve their business concepts, and opportunities to pitch their ideas to VCs and angels. Specifically, the intensive “boot camp” is intended to provide office space, access to successful entrepreneurs, mentors, and other technology experts, a place to socialize with other new venture founders, and a safe environment to share ideas or methods. The boot camps vary from 10 to 12 weeks in length and provide the time and support for the start-up founders to build or tweak their Hoffman and Kelley - 57 Small Business Institute® Journal - Vol. 8, No. 2, 54-70 prototype (Arrington, 2007; Avery, 2007; TechStars, 2010). The selected founders/participants take time away from jobs and families to interact with others and receive encouragement, additional knowledge, and greatly needed assistance. All the accelerators provide encouragement, assistance, and help with technical issues. In addition, they all provide seed money ranging from $18,000 (TechStars, 2010) to $20,000 (Capital Factory, 2010). However, Start@Spark provides funding above $20,000, with a combination of conventional loans up to $250,000. This loan converts to equity during a subsequent round of funding at a 20 percent discount. Start@Spark also retains the right to provide 50 percent of the next round of financing if needed (Start@Spark, 2010). EQUITY VERSUS CONTROL In exchange for funding, accelerator companies take a 5 percent to 6 percent equity stake of their participating boot-camp venture. Most of the accelerator companies state that they have no interest in controlling the nascent firm. Virtually all of the accelerators require a small portion of equity with an increased equity requirement for additional angel or VC rounds of funding. VALUE ADDED-WHAT ACCELERATORS PROVIDE: EARLY STAGE FUNDING AND ASSISTANCE Accelerators provide value to their participants with early stage funding and, equally important, intensive mentorship. While the average start-up needs early stage funding, it is not a massive amount of capital (Bluestein & Barrett, 2010). The financial assistance mentioned in the previous section provides enough support for the start-up to survive while attending a Techstars boot camp or similar type of accelerator program. TechStars (2010) limits the amount of funding they provide to $6,000 per company founder, with a maximum of $18,000 funded per venture. In addition to the above, accelerators provide value with their assistance to startups. Once a startup is selected for seed capital, the founders are immersed in a boot-camp style environment with intensive training/workshops, networking, education and high-level mentorship. This environment is established to provide nascent entrepreneurs with an opportunity to learn from key experts or mentors in their field. Mentors work with startup founders throughout the duration of the program, dispense advice, and provide valuable feedback based on personal experience as business owners and entrepreneurs. The accelerator companies select mentors based on their level of expertise, experience, profitability, and desire to help new entrepreneurs succeed. This type of assistance is invaluable for new entrepreneurs. According to the founders of accelerators, the key ingredient for a successful start-up is early, high quality mentorship (Bluestein & Barrett, 2010; TechStars, 2010). Similarly, SBDCs report that for their small business clients, success rates are highest where mentorship was involved (Katz & Green, 2009). It is important to note that most accelerator companies studied operate in a similar manner. All provide boot camps with extensive mentoring. As a result of their hands-on approach, accelerator companies are extremely selective in choosing their boot camp participants. Each company’s idea merits careful consideration, along with whether mentorship is available to help the firm itself. While capital investment is kept to a minimum, the overarching goal of accelerators is to foster the entrepreneurial ecosystem, aid in opportunity generation, and help with sustainment (Bluestein & Barrett, 2010). Hoffman and Kelley - 58