New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 1) - 01/13/2009

For a while now I have been tracking the growing trend in Business Accelerator Seed Funding programs. Most people have heard of the very well-known TechStars and YCombinator programs, which serve as the benchmark by which many are compared. But these particular programs follow only one pattern for early stage “accelerating” and other models exist. In the next several posts I will discuss the emergence of these programs over the last several years and share my thoughts on why they are appearing, if they are succeeding, and what the future may hold.

“Business accelerator” as a term emerged during the dot-com bubble as another name for business incubators, trying to distinguish them from traditional incubators which primarily provide cheap office space and a host of business services to early stage companies in many industries. The number of traditional incubators has increased very rapidly in the past 20 years, there are now hundreds if not thousands operating in the US alone. For example, browse this partial directory.

In the past few years, the term business accelerator has made a comeback to describe a new class of early stage development program that combines the elements of traditional incubators, small amounts of equity-based funding, and in-depth coaching/mentoring. Other names for these programs are micro-seed funds, business growth accelerators, or boot camp programs. This new type of program has primarily emerged in the software and web space. Typically they deploy a new pool of capital and invest in a new “crop” of companies at least once a year.

For the purposes of this article, I will look at programs that specifically combine “small” amounts of equity funding with a strong training or support program. By “small” equity funding I mean levels that are smaller than any traditional VCs, but which in some cases may overlap with angel investments. The difference between these programs and most angel investments is that these programs often invest in a group of companies all at once, do not rely on individual investors to make decisions (the people running the program decide), and typically provide a higher touch relationship (at least for the length of the program) than a normal angel investor or investor(s) would.

Within that definition, I am currently aware of 27 programs that fit (if you know of others, please share them via comments):

Name Location Typical Funding Notes
YCombinator USA (Boston/Bay Area) $20,000 The first and most well-known
TechStars USA (Boulder) $15,000 Launched early 2007
Seedcamp London/Europe $75,000
Launch Box Digital USA (Virginia) $30,000
My Digital Technician Milwaukee, WI ?? Formation stage
Digital Assets Deployment Madrid, Spain $150,000+
BoostPhase USA (Atlanta) ?? Yet to Launch - Bootphase?
Awesome, Inc. Lexington, KY ?? Launching 2009
Morpheus India ?? Launched July, 2008
UpStart India $12,000 Launched July, 2008
Bootup Labs Canada (Vancouver) ?? Launched Sep 2008
YEurope Vienna, Italy $30,000
CRV Quickstart USA (Boston) $250,000 convertible note
DreamIt Ventures Philadelphia, PA $30,000
Summer@Highland Lexington, MA $15,000
Lgilab.com Isreal up to 1M
iFund Global 100k and up iPhone and iTouch apps
fbFund Global $25,000-$250,000 Facebook apps
Google Gadget Ventures Global $5,000-$100,000 Google Gadgets businesses
SSE Ventures USA (CA-Stanford) $50,000-$100,000 Open to Stanford Students
BetaWorks USA (NY) ??
Obsidian Launch USA (NJ/NY) backend profits?
Founders Co-op Seattle, USA $10,000-$250,000
Flow Ventures Montreal, Canada ??
Monster Venture Partners Seattle, USA $100,000-$500,000
iAccelerator India $24,000
Gangplank Phoenix, AZ $15,000 ?
BlackBerry Partners Fund Global $200,000

The most attention seems to follow the programs with the lowest level of investment funding – what are sometimes called the Micro Seed Funds. That may be because these groups are taking greater risks on unproven ideas at the edge of market innovation. This category contains a number of well known programs such as YCombinator, TechStars, Launch Box Digital, and others which generally focus on micro-seeding a large number of companies (10 or more per year). Micro-seeding means making investments of between 10 and 30k per company for small equity stakes, and hoping a few of them make it. One exception is Seedcamp which gets a lot of attention in Europe and typically makes slightly larger investments.

Even though significant deal vetting and filtering is performed by the teams running these micro seed programs, they have sometimes been described as a “spray and pray” approach: spray little bits of capital onto as many good ideas as possible, help them along, and pray some eventually strike it big. The small funding amounts are combined with an intense bootcamp program usually lasting several weeks to several months, and introductions to angels and VCs helps get the best companies to the next stage. Following graduation from the program, companies are somewhat “on their own” to get to the next level. Portfolio companies usually start at the idea/prototype stage with a team of 2-3 people and a lot of flexibility to live on little income and work 24×7 cranking out code.

Several programs attempt to operate with larger amounts of capital and in some cases put more of a focus to the investment model (iPhone apps, Google gadgets, etc). These programs attempt to make better and fewer selections, and by nature of the fund purpose and/or a longer term company support program hope to succeed with a portfolio of more targeted investments. Development program structures can vary, with some providing support for up to 9 months or more, others only a week, if at all. Funding levels for programs in this category range from 30k to up to 100k in initial capital. Some examples of programs in this category are Bootup Labs, Seedcamp, and the fbFund. The programs may compare most closely with a traditional small angel investment round with one or more very involved investors (guardian angels). This level of program seems less developed and less proven, so far.

The biggest spenders in the general category of seed fund programs are organizations that operate more like mini-VCs by putting 100k to 300k into selected companies, who are then part of the investor’s “portfolio” for an extended period of time. These programs provide regular and substantial customized support to the entrepreneur over time, rather than a one-time structured bootcamp. Examples of these programs are Monster Venture Partners, CRV Quickstart, and Digital Assets Deployment. These programs operate using compensation formulas that differ from the traditional venture model (which is 2% of assets and 20% of profits) but exact specifics are not available. Rough numbers from Digital Assets Deployment show that they deploy 2-3M or so in capital a year with a team of 3, which must put expenses somewhere in the range 5-7% of assets. The justification is based on the larger time commitment and potentially greater returns of working with companies from the earliest stages.

Having watched these programs develop, and keeping many of them on my Google alerts list, I do not see this as a fad or bubble. Factors in the marketplace, particularly related to the software and Internet sector, have significantly shifted over the past several years. Because of that, this new model of early stage investing has emerged to fill a growing need - and is here to stay.

In the next post in this series I will look closely as these market factors, why more of these programs are emerging, and what it might mean for investors and entrepreneurs.

16 Responses to “New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 1)”

  1. Luke Says:

    Hey James, very informative, foundational post. I’m a co-founder of Awesome Inc. and wanted to let you know that we are actually located in Lexington, KY, not India. Also curious why you thought it was India - as I would hate for others to use your same method of research and come to the same (incorrect) conclusion.

    I’ll be subscribing to your blog and look forward to hearing your analysis about this industry, as I myself have been informally researching it for over a year in preparation for A. Inc.’s summer ‘09 launch. We will focus on mobile software and hope to be a feeder to larger funds like the iFund, and the BlackBerry Partners fund (JLA ventures - which you may want to add to your list http://www.jlaventures.com/content/view/139/99/).

    Another one to add to your list:

    Gangplank in Pheonix, AZ
    http://gangplankhq.com/incubator/

    They are both a year round incubator and as well as an accelerator, and seem to be trying to serve almost as community center for entrepreneurs.

  2. Luke Says:

    Also curious as to why you’ve included the KPCB’s iFund and (potentially) JLA’s Blackberry Partners fund as part of this “New Venture Cap Model/Business Accelerator” movement - as they don’t seem much different (save for their willingness do invest less money) than other venture firms focused on specific sectors.

  3. jstjean Says:

    Luke,
    Thanks for the correction, I have fixed it. I will track down the source of information that led me to think Awesome, Inc was in India and let you know (correction: looks like it was just an error when I prepared the table). Maybe you could also help fill in your typical funding range?
    I will take a look at Gangplank and JLA also.
    Jim

  4. Reshma Says:

    Good post, especially as a resource for entrepreneurs to be able to dig deeper and see if any are a good fit for them. I run Seedcamp and actually we work a lot with others on your list too. So, another thing to note is that there is a lot of cooperation across borders. Also, we tend to fund a higher amount given the realities of cost of living to some extent - being in London - and the teams are often 4 or more people even. Look forward to your next write-up

  5. jstjean Says:

    Luke,
    In follow-up to your comments, yes I have added the Blackberry Partners Fund to my list, thank you for highlighting it (and Gangplank as well). Why have I decided to include the iFund, the fbFund, and now the Blackberry fund on the list? Well, yes they do provide small amounts of funding, and thus qualify at the high end of my definition of business accelerator seed funds. The amount of investment by these programs is generally capped (250k CAD in the case of Blackberry) – making them specifically a seed accelerator investment. This compares to traditional venture capital, which is often ‘capped’ in practice on the lower end - with a minimum such as 1M and up. Certainly in the case of the Blackberry program, a support network in invoked when you are selected, and I would surmise the level of support is relatively higher per dollar invested than a normal venture round. This makes them act like the Monster or CRV program, with the only exception being a particular focus to the investment. So in summary, I would view them more in the camp of seed capital accelerator programs rather than “venture capital” in the traditional definition.

  6. Michael Jash Says:

    This is very good information for investors. Very very thanks. I will also want to inform one more thing. I hope investing and making profit is very difficult task without good knowledge. So I will suggest before investing take some kind of supervision and guide from some good resources. My suggestion is go to http://www.askamarkettechnician.com and follow all instructions listed there. It will be very very helpful. One more thing is that you may ask your own queries there.

    Have a nice time.

  7. Alan Veeck Says:

    James - agree with all the comments; this is great info you provide here! As a VC, but even more importantly as a part of the growing Pittsburgh startup community, I have been very interested in the development of local ecosystems, and what “elements” are needed to optimize growth. It would be nice to continue the discussion with you - and I plan to write more myself on my own blog.

    I also wanted to point out that here in Pittsburgh we have AlphaLab (www.alphalab.org) that has been running since mid-2008. They follow the model of 6 companies every 6 months, and are almost finished with their second class. Please add these guys to your list, and let me know if you would like a warm intro to them.

    Thanks for your work!

  8. Aditi Gupta Says:

    Hi James, a very well written article. I represent the iAccelerator Program which runs in India, in a city called Ahmedabad, which is about 500 kms from Mumbai - the Financial hub of the country. Its impressive to see our names in between the other versions of the start up camp running around the globe. Thanks for mentioning..

  9. sameer guglani Says:

    Excellent series on business accelerators. I am the founder of Morpheus Venture Partners (MVP), based out of India, would love to connect with you and share more information about us. Do let me know the best way to get in touch.

  10. Jose G. Gonzalez Says:

    Dear Sir,

    Finally !! This is it !!
    I have been looking for that Startups listings like that for long time.
    Please see my profile/groups in my network:
    -www.linkedin.com/in/jg2009

    Why now ??
    It is STRANGE concidence.

    Thank you very much !!

    Jg

  11. mark Says:

    I rarely comment on blogs but yours I had to stop and say Great Blog!!

  12. Farhan Thawar Says:

    Just saw this post as it was linked to here (I know Mark): http://startupcfo.ca/2009/06/startup-accelerators.html

    We are also running a startup accelerator program this summer: http://www.extremevp.com/university.php

  13. Rockon Says:

    I also wanted to point out that here in Pittsburgh we have AlphaLab that has been running since mid-2008. They follow the model of 6 companies every 6 months, and are almost finished with their second class. Please add these guys to your list, and let me know if you would like a warm intro to them.

  14. The microseed accelerator model | VCPlan - The Path to Success Says:

    […] read more about check out the article at http://www.firstascentventures.com titled: New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 1) – 01/13/20…. Check in later this week to learn more about one starting in Dallas: Tech Wildcatters. Share and […]

  15. Eli Says:

    You could add another Accelerator in Israel: BDB Technologies & Hi-tech investments (www.bdb-tech.com) which is focused on early stage Cleantech and Medical Devices technologies.

  16. Move Over Business Incubators and Make Room for Business Accelerators | D. Steven White Says:

    […] multiples and comes to the conclusion that the business accelerator model works. You may access part 1, part 2 and part 3 via these […]

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