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Published 09 May 2012 16:39, Updated 10 May 2012 08:29
Group-buying website Spreets flowered when it was hot-housed by technology business incubator Pollenizer and went on to be snapped up by Yahoo!7 for $40 million last year. Not to be outdone, Startmate, the first Australian technology business accelerator, watched as its star pupil, smartphone application developer Grabble, was gobbled up by Walmart, for an undisclosed sum in December 2011.
Incubators – where small businesses or ideas are pushed forward on their growth trajectory – are a relatively new phenomenon on the local scene and have a longer history in the United States. However, as the above examples demonstrate, participation in these programs can provide a sturdy stepping stone to what’s known in the lingo as a “minimum viable product”, some early customers and a pocket full of potential investors’ business cards.
Pollenizer was the first local incubator, established in 2008. Fast forward four years and a number of organisations offer different things to different start-up founders. To the naked eye they seem similar. Quirky name, often including the word “start” and a few with misplaced capital letters. Check. Mentor lists of local entrepreneurs made good. Check. Technology wunderkinder eating three meals of ramen a day. Check.
But the reality is far different. “There’s a misconception at the moment that all the organisations that have popped up are the same and they’re not at all,” PushStart accelerator and entrepreneur network founder Kim Heras says.
At the top of the taxonomic scale are three basic definitions that investors and entrepreneurs need to get their head around: accelerators, incubators and co-working spaces.
Five local accelerators (see profiles) are based loosely on the success of US models such as Y Combinator or Techstars. Accelerators give company founders – who usually have solid technical expertise – a small amount of seed funding in exchange for equity (usually less than 10 per cent) and participate in an intense three-month program to speed up their time to market. The program links them to experienced mentors and gives them an opportunity to pitch to investors.
Where accelerators want technical founders, the incubators are after founders with business experience. The incubators strike a co-founder deal. Both put up capital and in exchange for equity, the incubators provide development services and similarly link founders to mentors and help the businesses to pitch opportunities.
Finally co-working spaces do not provide funding nor take equity. They provide a space and services on the cheap. The idea is to boost a business’ potential by working collaboratively with other enterprises.
So what’s a young aspiring entrepreneur to do? Why would you choose Pollenizer over Ignition Labs or PushStart, or should you forget the whole idea and join a co-working space such as Fishburners? It can be confusing for young business people seeking the right sort of support for their venture and for angel investors looking to pick up the next big thing to know just who is who in the technology start-up zoo.
The good news is that there are plenty of options. “If you’re a purely tech-team or a business team or a well-rounded team, no matter who you are, you now have more options than you ever had before,” Heras says.
But even with this explanation, aspirants must realise that the scene is embryonic and is rapidly changing. Organisations are adapting their programs and already niche offerings have popped up. Some concerns have arisen about diminishing quality of both the organisations and the businesses they graduate as the number of copycat programs increases.
So far this year, three new accelerators – PushStart, Ignition Labs and Innovyz START – have welcomed start-ups. Those close to the scene reckon there is capacity for more – Startmate founder Niki Scevak says Australia should be creating hundreds of web start-ups a year – but also recognise that market forces will be at play.
“The more choice, the more variety, then prices go down and there’s more power to consumers, but eventually there will be a saturation point,” incubator Blue Chilli founder Sebastien Eckersley-Maslin says.
Ian Gardiner: “You’ll see the emergence of star performers.”
“That’s the way the world works,” Scevak says. “It creates too much and then pulls back and finds an equilibrium.”
The co-founder of angel investment network Innovation Bay , Ian Gardiner, says the “boom” is a natural economic phenomena that will be followed by a natural correction. “You’ll see the emergence of star performers [but] because it’s still quite early, you’re not seeing anyone coming out the other side yet.”
The cream rising to the top is an obvious marker of maturation for the start-up scene. The other marker is the arrival of more niche offerings. Already the emergence of a clean-technology focused accelerator (see “Ignition Labs”) shows that the scene is moving down this path. The players reckon more is yet to come.
“Accelerators are more useful when the mentor groups are clustered together around specific skills,” Scevak says. “I doubt there will be many more successful general accelerators, but there’ll be many more successful niche accelerators, where they’ll cluster mentors around a specific type of company or problem.”
In the US, technology business accelerators already focus on industries such as healthcare, biotechnology and consumer electronics. “Potentially the mining technology industry could well benefit from this sort of thing,” the founder of Melbourne co-working space the York Butter Factory , Stuart Richardson, says.
Regionalisation will also be a feature in future. Innovyz START is an Adelaide accelerator that will open its doors in late May. Founding director Stuart Douglas says there are plans to open outlets in other cities and in the Asia-Pacific region. Western Australian venture capitalists are keen for the scene to spread more strongly out of Sydney and Melbourne.Perth would be an obvious choice for that mining technology accelerator.
Stuart Richardson: “The mining technology industry could benefit.”
However while the incubator-accelerator model is sizzling hot, it is not without its critics. The harshest comments are about young companies giving up sizeable chunks of equity without really knowing their company’s worth.
“I love the accelerator model,” the director of Sydney co-working space Fishburners, David Vandenberg, says. “I think it’s a great way for young companies to get good mentorship but at the same time you’re giving away equity and it’s only three months.”
As for incubators, Vandenberg says there are entrepreneurs who have “been burnt”. “They felt like the incubator [didn’t give] value commensurate with the equity they gave up.”
Rebekah Campbell is the founder of online marketing start-up Posse . She was an early Pollenizer portfolio company, using its web development expertise. The incubator still holds a minority stake. “I think the incubator stage was very good for us to get something very basic up and running but as soon as you go past that it’s really important to have your own team that is focused on the product,” she says.
Since working with Pollenizer, Campbell has had two subsequent fundraising rounds and has had the website rebuilt four times as the business’ needs have changed. She thinks that some business founders enveloped by accelerators and incubators take the “fail fast” model too literally. “It would be easy to go into an incubator situation, try your product, fail fast and then say ‘well I’ll go back to my 9 to 5 job’. Fail fast doesn’t mean that the business fails fast. It means ... something doesn’t work and so you work out what happened. It’s only because we stuck at it and kept going ... that now we’ve got a really exciting product.”
Rebekah Campbell: “Fail fast doesn’t mean that the business fails fast.”
Although the accelerators provide good quality early stage deal flow, they could end up being the venture capitalists’ worst nightmare. The founder of Melbourne accelerator AngelCube , Andrew Birt, already predicts that local accelerators will begin to provide follow-on funding to their businesses, as already happens in the US. Y Combinator businesses, for example, are offered a $150,000 convertible note investment from local angel funds after they finish the program.
“The accelerators and the super angel funds have really made life difficult for the venture capital firms in the US. They’re missing out on a lot of deals,” Birt says. “Because these web start-ups are capital efficient, they don’t need that much funding in the early days ... If I was an Australian VC firm I’d be either partnering with one of us or looking to get in at an earlier stage. I think they’re going to miss some good quality deals and they already have ... such as 99designs and BigCommerce. I think they need to take a few more risks.”
A problem is finite resources, specifically mentors. Only so many local technology entrepreneurs have successfully cracked the market recently.
So founders who like the idea of a stint in an incubator or accelerator need to consider many factors. The differing terms and the whats, wheres and whens are spelled out in the information boxes. But the most important consideration is the who. When choosing the organisation that is right for you, who is running the show and who the mentors are, is vital both for the interaction you will have and the networks they can access. “These people are your business partners,” Birt says. “If you like them and get along with them, that’s probably more important than anything else.”