2030 Finance | July 11, 2019

Accelerating entrepreneurship: Why business accelerators are good investments for global development

Matthew Guttentag and Saurabh Lall
Guest Author

Matthew Guttentag

Guest Author

Saurabh Lall

ImpactAlpha, July 11 – Since the launch of Y Combinator in Boston over a decade ago business accelerators have spread like wildfire as a model for helping tech ventures grow. The programs are increasingly seen as a useful way to help spur entrepreneurship not just in Silicon Valley, but in Ecuador, Indonesia, Nairobi and other nascent markets.

Accelerator programs, in fact, are considered to be a critical component of economic development efforts — with the rationale that investments in accelerators will pay back dividends to the local economy and community through the growth of participating small and growing businesses. 

“Entrepreneur support organizations may never be ‘revenue-sustainable’ in a traditional sense,” says Ross Baird, founder (and former CEO) of the impact accelerator Village Capital. “That’s actually OK! These organizations, when effective, are critical infrastructure for a city or a community, and should be treated as such.”

But are accelerators actually effective at stimulating entrepreneurial growth? And how do these effects vary across different regions and entrepreneurial types?

We now have better answers to these questions, thanks to the Global Accelerator Learning Initiative, a research partnership between the Aspen Network of Development Entrepreneurs and Emory University. The initiative has collected longitudinal performance data on over 19,000 ventures applying to over 280 accelerator programs, allowing us to examine the effectiveness of these programs. 

The Global Accelerator Learning Initiative has aggregated data on ventures from over 150 countries, focusing on the types of accelerators that are often receiving government or donor support to generate social impact—rather than the well-established Silicon Valley superstar programs typically previewed. Most importantly, the initiative has collected longitudinal data for a large proportion of these ventures which allows us to compare the performance of accelerated ventures with those that applied to accelerator programs, but were not accepted. 

Based on the findings from a recently published book, Observing Acceleration, co-written by one of the authors of this article (Saurabh Lall), we offer some insights for funders thinking of supporting accelerators for social and economic impact.

Catalytic investments

So what has the initiative found about the effectiveness of accelerators in supporting entrepreneurship for economic development? The good news is that, in the aggregate, we are finding that accelerators are good investments. On average, $1 in program costs leads to $1.70 in increased short-term funding for participating entrepreneurs in the form of revenue, equity investment, debt, and philanthropic funding.

The caveat: these benefits vary wildly across programs. While most programs generate more than $1 in benefits for each $1 spent, a large minority do not. Although accelerators clearly have the potential to be efficient drivers of funding into ventures, this is not a sure thing. When we looked across programs, we found that there is unfortunately no magic ‘recipe’ for success in terms of accelerator design. Instead, our analysis and experience provide some broader lessons to consider when thinking about accelerator effectiveness.

Network effect

While the specific curriculum of an accelerator may be important, there does not seem to be evidence of one curriculum design element differentiating high- and low-performing programs. 

Programs with large and small cohorts, shorter and longer durations, and greater or lesser structured emphasis on areas such as finance, communications or marketing, can all be both effective or ineffective. 

Networks and peer support, however, have proven beneficial to entrepreneurs as evidenced by both the Global Accelerator Learning Initiative and other academic studies on entrepreneurship support programming. Effectiveness may be more a function of the accelerator team’s deep understanding of local entrepreneur and investor networks, and its ability to weave strong networks, rather than the more visible aspects of curriculum or program design structures. 

Instellar, based in Indonesia, for example, has shortened its program from one year down to six months, and recently reduced the number of in-person workshop sessions (from six to five) to make more time for one-on-one work with mentors and network development. This aligns with a recent study by Endeavor suggesting that a key differentiator in strong versus weak entrepreneurial ecosystems is the integration of successful local entrepreneurs into support programs, more than just the sheer number of these programs.

Accelerating success… and failure

While accelerators have an average net benefit, only a small number of entrepreneurs are accepted into accelerators, and even among these entrepreneurs, the benefits of acceleration are heavily driven by a small minority of ventures. In fact, approximately 10% of the accelerated ventures in our sample were responsible for all of the net benefits we found, with the other 90% of ventures showing, on average, no statistically significant investment or business growth. 

This is not necessarily a bad thing. There is other research showing that one of the benefits of acceleration is that it helps some entrepreneurs grow quickly but helps others fail faster—essentially accelerating both success and failure. 

These findings should set some expectations about what accelerators are and are not designed to achieve and how this aligns with local economic development goals. Accelerators provide a means for the most talented entrepreneurs to have access to the resources and networks they need to spur rapid growth or fail fast. It is also worth noting that accelerators can serve as important connection points in an ecosystem, helping to bridge ties among the entrepreneurial community, and can be important anchor points to develop a regional investment environment.

New Ventures, a Mexico-based accelerator, for example, intentionally targets high performing social and environmental entrepreneurs with business models that are profitable, and importantly, scalable. Such companies can most benefit from New Ventures’ network of funding sources, partners, and allies. 

An accelerator may not be the best tool to ensure that a large number of ‘typical’ businesses do a little bit better. Accelerators, after all, are about acceleration rather than incremental growth.

Ecosystem fit

We have also found important differences in accelerator effectiveness depending on the ecosystem in which these programs are run. Most importantly, we find that accelerators in emerging markets drive revenue but have a much harder time driving equity investment—and this has been consistent across our analysis over time. This makes sense, as early-stage equity tends to be scarce in emerging markets.

So it is important to think about the goals of an accelerator relative to the current ecosystem: if an accelerator is heavily focused on driving equity investment, what is the program doing to overcome the structural difficulties? Just having a demo day doesn’t work if there aren’t investors willing to sign term sheets afterwards. 

Some programs have adjusted their models to reflect ecosystem realities as well as filling ecosystem gaps. Village Capital, for example, has scrapped demo day altogether in favor of more intense one-on-one connections between entrepreneurs and accelerators, as well as creating its own investment fund that uses revenue sharing agreements as seed funding in emerging markets where traditional exit possibilities are scarce. IMPAQTO, in Ecuador, recognized that supporting idea-stage ventures through an accelerator program was not generating the level of impact commensurate with the resources invested. It then decided to partner with Google Launchpad to create a new accelerator for early-stage ventures from Latin America and placed more emphasis on connecting them to the Ecuadorian market.

Like all efforts to spur business success and economic development, accelerators are not a magic bullet, and there is no one clear recipe for success. Nevertheless, a growing body of evidence suggests that accelerators can be effective drivers of business growth. 

For those working with or thinking of investing in accelerators, we believe it’s important to not only develop thoughtful accelerator programs but also to prioritize investments, measurement, and research alongside of these programs.

Matthew Guttentag is the director of research and impact at the Aspen Network of Development Entrepreneurs at the Aspen Institute. Saurabh Lall is an assistant professor at the University of Oregon’s School of Planning, Public Policy and Management.