The Kauffman Foundation, a leading foundation that is dedicated to advancing entrepreneurship in the U.S., just released a report on an emerging trend in start-up venture formation - the growth of the "accelerator" model in seed stage/early stage company development. Like American Idol which is based on grooming leading contestants for a career launching and promoting records in the music industry, the "Business Idol" formula features a similar contest-based method of selection, funding and management nurturing.
Kauffman's findings indicate that not only is the "Business Idol" trend a rapidly growing phenomenon in the U.S., it is also gaining in popularity in Europe and throughout the world. A core reason behind this new development is the shift in how venture capital is being deployed post the dot com bust. From 2000 until 2005, seed-round investments by the venture capital community dropped from 281 deals to 63 per VentureOne. Although the stock market has been heating up, Kauffman believes that VCs will not return to heavily supporting seed-stage investments.
In the absence of this financial channel, the importance of angel investors has dramatically risen - those individuals or investor groups that function independent of a formal management organization. Kauffman notes that angels invest their own money in early stage ventures that meet their assumptions of future high-growth for a variety of reasons that extend beyond just wanting to earn the highest returns. Their research posits that angels fund deals (normally in their areas of expertise) so as to contribute to local economic growth, apply their expertise in a real-world company environment and find personal enjoyment-enrichment.
In addition to the angel community and the growing formation of angel resource groups (see the Angel Capital Association), Kauffman reports that the "Accelerator" or "Business Idol" model is catching on as an alternative to early stage financing and company development. They have redefined this model as a full partnership that provides much more than space and common management services to start-ups. Accelerators actually help form companies in terms of becoming a legal entity, interviewing - hiring - developing the management team and lending its own management know-how and time. In truth, the accelerator actually becomes part of the emerging start-up throughout its entire early stage development.
This makes a lot of sense from the start-ups perspective. In the early company development stages there really isn't a need for a full-time CEO, VP Marketing or CFO - although their input and guidance is critical to determining a successful long-term business strategy and overseeing operational progress over different functional areas. Working with an accelerator gives the start-up access to the resources they need, without the huge expense and commitment normally required.
To access one of these "accelerator organizations" Kauffman reports that companies "audition their skills" and compete for slots on an accelerator's team, with the business idea normally being less important than the individuals and their history and experience. Accelerators operate this way because they see that many new ideas, not just one new company idea, will emerge from bringing together groups of potential entrepreneurs.
Today accelerators appear to be focusing on specific industries or sectors and selecting a critical mass of people with common backgrounds to come up with the next generation of new technologies and products. Accelerators that are operational today include The Foundry, Inc. in Menlo Park, CA (medical device development); The Accelerator Corporation in Seattle, WA (biotechnology); and YCombinator in Mountain View, CA (software and web development). Similar models are forming at venture firms and universities, which are also featuring competitions and intensive training.
Shivonne Byrne, Innuity CMO