Growing global ventures by effective seed acceleration – The opportunities and barriers of business acceleration

Growing global ventures by effective seed acceleration
The opportunities and barriers of business acceleration
Supervisors:
Gyorgy Drotos PhD (Corvinus University of Budapest, Research Centre of Information Resources
Management)
Peter Kadas MD (serial entrepreneur, founder of Brandvocat, blogger at startupdate.hu).
14. 05. 2013

2
About the author
Balazs Szabo is head of Business Development at InVendor and the Advisor of the Global Executive
Team at Kairos Society. Balazs Szabo was attended to the CEMS Masters’ in International Management
program which is one of the best management master according the Financial Times’ ranking and he
also attended Management and Leadership and Sociology at the Corvinus University of Budapest
beside studying in Université Catholique de Louvain in Belgium. He is an entrepreneur, strategic and
investment advisor for early stage startup companies. He is the main organizer of inveAst - Investors
Meet Startups from CEEMEA co-organized by InVendor and Bloomberg in London. He was the
organizer of the first Hungarian Innovation Day, that was held on the 16th October, 2012 in London in
order to connect the Hungarian startups with high growing potentials with London based Venture
Capitalists and Seed Investors. The patrons of the event were the British Ambassador to Hungary, the
Hungarian Ambassador to Great Britain and the Chairman of the Hungarian Private Equity and Venture
Capital Association. The event was supported by the British Private Equity and Venture Capital
Association and the EBRD.
Balazs is also a member of the education committee at Hungarian Venture Capital and Private Equity
Association. He has been elected four times as a Future Leader, by The Ambrosetti Forum (IT), by the
World Foresight Forum (NL) by the St. Petersburg International Economic Forum (RU), Youth
International Economic Forum (RU) and Open Innovations Forum (RU).
Balazs is a TEDx speaker and the author of startup/investment articles in business magazines, NEXT
Mentor, Startup Sauna Pioneers Festival and Startup Tour Ambassador. Balazs is the founder and
editor of www.cee-startups.com
You can find Balazs on LinkedIn.
www.balazsszabo.com

3
Table of Contents
About the author.................................................................................................................................. 2
1 Introduction..................................................................................................................................... 7
1.1 Problem statement.................................................................................................................. 9
1.2 The scope of the thesis.......................................................................................................... 10
1.3 Relevance .............................................................................................................................. 11
2 Methodology................................................................................................................................. 14
3 Theoretical framework.................................................................................................................. 15
3.1 Describing the concepts ........................................................................................................ 15
3.1.1 Entrepreneurship........................................................................................................... 15
3.1.2 Startup........................................................................................................................... 15
3.2 The actors of the entrepreneurial ecosystem....................................................................... 17
3.2.1 Entrepreneurs................................................................................................................ 18
3.2.2 Investors........................................................................................................................ 18
3.2.3 Mentors/advisors .......................................................................................................... 19
4 The new economics of startups .................................................................................................... 21
4.1 How companies grow?.......................................................................................................... 21
4.2 The early stage startup challenges........................................................................................ 23
4.3 Changes in the business environment .................................................................................. 24
4.4 The background of the shift between business incubators and business accelerators........ 29
4.5 Business accelerators ............................................................................................................ 32
5 Key elements of the business accelerator programs .................................................................... 34
5.1 Easily accessable open application process .......................................................................... 35
5.2 Intensive competition ........................................................................................................... 35
5.3 Offered pre-seed/seed investment....................................................................................... 35
5.4 Focus on teams...................................................................................................................... 35
5.5 Time-limited support, intensive mentoring .......................................................................... 36
5.6 Batch of startups and alumni network.................................................................................. 37
6 Introduction of international best practices of seed acceleration................................................ 39
6.1 Y Combinator......................................................................................................................... 39
6.2 Techstars ............................................................................................................................... 40
6.3 500 Startups .......................................................................................................................... 42

4
6.4 Seedcamp.............................................................................................................................. 43
6.5 Startup Sauna ........................................................................................................................ 44
6.6 Startup Wise Guys................................................................................................................. 45
6.7 StartupBootcamp .................................................................................................................. 46
6.8 Startup Highway.................................................................................................................... 46
7 Qualitative and quantitative research........................................................................................... 48
7.1 Interviews.............................................................................................................................. 48
7.1.1 The importance of accelerators .................................................................................... 48
7.1.2 The birth of accelerators ............................................................................................... 48
7.1.3 Creating entrepreneurial ecosystem by using best practices ....................................... 49
7.1.4 Criteria of selecting teams............................................................................................. 50
7.1.5 Value proposition for startups ...................................................................................... 50
7.1.6 Mentors/coaches........................................................................................................... 50
7.1.7 The core program.......................................................................................................... 51
7.1.8 The geographic areas covered....................................................................................... 52
7.1.9 Success and metrics....................................................................................................... 52
7.1.10 Skills............................................................................................................................... 53
7.2 Survey.................................................................................................................................... 54
7.2.1 Demographic limitations ............................................................................................... 54
7.2.2 The surveyed sectors..................................................................................................... 56
7.3 Analysis of the survey results................................................................................................ 56
7.4 Summary of the survey results.............................................................................................. 61
7.4.1 Accelerators and their location..................................................................................... 61
7.4.2 The most important decisive factors of selecting accelerator...................................... 61
7.4.3 The key added values of an accelerator program......................................................... 61
7.4.4 Other preferences of entrepreneurs regarding the length and program elements..... 61
8 Conclusion ..................................................................................................................................... 62
9 The findings of the research.......................................................................................................... 63
10 Recommendation for further research ..................................................................................... 65
References............................................................................................................................................. 66
Appendix................................................................................................................................................ 70
1. E-mail Interview Questions for StartupHighway – Agnė Adomaitytė 02. 04. 2013 .................. 70
2. E-mail Interview with Antti Ylimutka Startup Sauna CEO 17. 04. 2013 .................................... 72
3. Interview with Peter Kadas MD., serial entrepreneur, blogger 13. 04. 2013, Budapest .......... 77

5
4. E-mail Interview with Mike Reiner, Startup Wise Guys 23. 04. 2013........................................ 78
5. The questionnaire...................................................................................................................... 81

6
Graphs
1. Graph The process of the deaflow ................................................................................................... 12
2. Graph The entrepreneurial ecosystem ............................................................................................. 17
3. Graph How companies grow? ........................................................................................................... 21
4. Graph The transition from a startup to a company .......................................................................... 22
5. Graph The investment need and lifecycles ...................................................................................... 23
6. Graph Equity gap vs. competence gap ............................................................................................. 24
7. Graph Seed deals by vintage quarter ............................................................................................... 27
9. Graph The Role of Business Incubators ............................................................................................ 30
10. Graph Continuum of added value services provided by incubators and accelerators .................. 31
11. Graph Different types of accelerators............................................................................................. 33
12. Graph The intersection of accelerators and incubators ................................................................. 34
13. Graph The Accelerator Cycle........................................................................................................... 37
14. Graph Key elements of the accelerator program............................................................................ 38
15. Graph The vicious circle of the accelerators ................................................................................... 38
16. Graph The age distribution of the surveyed entrepreneurs ........................................................... 54
17. Graph Nationality of the surveyed entrepreneurs ......................................................................... 55
18. Graph Number of entrepreneurs by their sector............................................................................ 56
19. Graph The proportion of the surveyed entrepreneurs regarding their current stay...................... 57
20. Graph Have you ever participated in a startup accelerator program? .......................................... 57
21. Graph Types of funding .................................................................................................................. 58
22. Graph The most important decisive points of choosing an accelerator ......................................... 58
23. Graph Please evaluate the most important added valua of an accelerator ................................... 59
24. Graph Please evaluate the following educational elements of the accelerator program .............. 60
25. Graph How to measure accelerators .............................................................................................. 63

7
1 Introduction
„Entrepreneurs embody the promise of America: the idea that if you have a good idea and are willing
to work hard and see it through, you can succeed in this country. And in fulfilling this promise,
entrepreneurs also play a critical role in expanding our economy and creating jobs.”
President Barack Obama
After Barack Obama acknowledged the importance of entrepreneurship through the launch of Startup
America, the phenomenon was at the forefront of the discussions. Entrepreneurship and startups
became a global theme that impacted every geography, industry, market and demographic throughout
the world. (Feld, 2012) We are living in the age of entrepreneurship and fast growing ventures
according to Janos Vecsenyi (Vecsenyi, 2011)
Building a sustainable startup ecosystem is a key factor towards eliminating the market risks of seed
funding as this is the stage where most companies fail. There are different models of seed acceleration
throughout the world in order to minimize the risks of seed investors that is a common bottleneck of
growing global ventures.
In certain countries where the investment culture is more developed market actors do the acceleration
phase (USA), in other parts of the world governmental interventions and support is needed to get
private investors involved in one of the riskiest part of the investment lifecycle (Israel, Finland etc.)
Business accelerator is a new approach of helping and funding startup companies at the seed stage.
Instead of filtering out only one startup at a time these programs filter out cohorts and mentoring
them in batches to make it more efficient and less risky. The business accelerator model differs from
the traditional seed-stage investing and business incubators (Cristiansen, 2009)
Over the past eight years, a new methods of incubating technology startups have emerged, driven by
business angel investors, serial entrepreneurs and venture capitalists: the accelerator program.
In the global innovation hubs like the Silicon Valley, New York, Boston, Berlin or London all the needed
elements of the entrepreneurial ecosystem are present, including (serial) entrepreneurs, angel
investors, venture capitalists, incubators, accelerators etc. There other countries that were not
identified as flagship nations of the innovation a few decades ago, but there is significant improvement
as the results of the well organized and executed strategies and subsidies coming from the state or
wealthy private individuals. Countries as Israel, Chile or even Estonia are on their track to be among
the innovation hub of their geographical region or even broaden territories.
The thesis sheds light on the global best practices of seed funding and business acceleration. The goal
of the paper is to identify suitable and adaptable models of seed funding that could contribute to the

8
birth of new venture success stories and entrepreneurial growth in those regions that can not be
considered as traditional business hubs.
I have been involved personally in building an entrepreneurial ecosystem in Hungary and in Central
Eastern Europe since 2010. I was the president of Kairos Society, a student run global not for profit
organization in the past two years in Hungary and I was working on the Central Eastern European
expansion where I met really promising early stage companies building an innovative globally scalable
product of service. Currently I am an investment advisor for startup companies at InVendor Investment
and Innovation Ltd. and I am working with scalable businesses on their international expansion. I was
the local organizer of the first international seed accelerator program’s Warmup in Budapest (Startup
Sauna Warmup in 1st October 2012) and I have organized the Startup Sauna Zagreb Warmup event in
March 2013.
I was also the main organizer of the first Hungarian Innovation Day, that was held on the 16th October,
2012 in London in order to connect the Hungarian startups with high growing potentials with London
based Venture Capitalists and Seed Investors. The event was supported by the British Private Equity
and Venture Capital Association and the EBRD. I am also a TEDx speaker and the author of
startup/investment articles in business magazines.
By regularly working with startups I have realized that there is a lack of publication and primary
research on the topic not just in the local level but on the global scale as well. I have started to work
on my research at the autumn of 2012. In the meantime a few really valuable contribution had been
published including Frimodig, Barrehag et al, and Bollingtoft’s research on the topic (Frimodig, 2012,
Barrehag et al 2012, Bollingtoft, 2012). Therefore I have decided to focus on the empirical added value
expecially by measuring the preferences quantitatively.
The effective acceleration of businesses at the early stage is a new management challenge that is
solved by top tier accelerator programs and their mentorship based educational elements. This way of
education is considered as an alternative of an MBA course, mostly for entrepreneurs as the startup
stage needs different skills and approaches (searching for the working business model) as the
transition stage of becoming a successful company (executing a business model). I thought the
phenomenon of business accelerators is an interesting research topic of my Management and
Leadership thesis in order to know their best practices and added values better that helps their
positioning within the management science. Because of the lack of Hungarian sources and the low
number of global scientific literature in this topic I have asked for the opportunity to write a reference
work in English in order to have a small contribution to the business accelerators literature within the
science of management.
The cradle of business acccelerators is in the US, as a result of the growing popularity of Y combinator
(located in Mountain View) and Techstars (started in Boulder, Colorado). The number of accelerator
programmes has grown fastly in the US over the past few years and apparently the trend is being
replicated in Europe. From one accelerator programme, Y Combinator in 2005, there are now hundreds
just in the US that are funding hundreds of startups per year. There are also a number of high profle
startup that succeeded from accelerator programmes. (Miller, Bound, 2011)

9
Despite the short track record it is obvious that business accelerator programs have positive impact on
entrepreneurs, helping them to develop rapidly, create a powerful network that helps business
development and follow-on fundings within a short timeframe.
In order to get primary information on the actors during this research I have conducted interviews with
global investors as the founders and executives of Startup Sauna, Startup Wise Guys, Startup Highway
and a serial entrepreneur. I have also asked entrepreneurs on their experiences and expectations on
business accelerator programs by conducting a survey.
After the analysis of the results provided by the secondary research and the primary sources
(interviews, survey) we are getting to the conclusion and try to give recommendations for global and
national actors involved in this ecosystem both in the world and in my home country Hungary.
1.1 Problem statement
Business accelerators and their predecessors have proven to be an economic development tool for the
communities they serve. (van Huijgevoort, 2012 p. 4) Growing new ventures is considered as an
essential way of creating new workplaces and boosting economy. At the beginning of a company
lifecycle there are significant obstacles (lack of business experience, lack of capital, validation) and as
a result of that the initial phase of starting a venture could be considered the most critical period of
the venture lifecycle. Accelerator programs are pushing start-ups through their earliest life cycle at an
accelerated pace by helping to learn the basics of business, giving the participants mentoring,
networking, peer support, validation of the business idea and also access to follow-on funding.
Accelerators provide entrepreneurs with the support and funding they need to bridge the path
between ideas and developing working prototypes. (Miller and Bound, 2011)
Business accelerators usually offer seed money and guidance for a small stake, usually between 4 and
10 percent, of the start up company. These programs combine services offered by business incubators
with additional resources and benefits to help start-ups quickly secure funding and receive validation.
Unlike business incubators, accelerators are more selective, often accepting only maximum 10-15
startups per batch. The reduced number of companies offers a more tailored business development
process. (launchause.com, 2012)
The growing number of accelerator programs is the result of the changing economics of starting up.
Costs associated with early-stage tech startups have dropped signifcantly in the past years, making
possible to start a business with small initial money (USD 10 000-USD 50 000) compared to previous
eras of investment in digital businesses.
There is little scientific literature available about seed accelerator programs (eg. Cristiansen, 2009, van
Huijgevoort, 2012, Frimodig, 2012, Barrehag et al, 2012,) despite its significance presence in
technology blogs (eg. Techcrunch) and online business magazines (eg. Forbes). According to
Cristiansen „While signiﬁcant literature exists on startups and entrepreneurship, these accelerator
programmes are so new that they still consider their own success an open question.”(Cristiansen, 2009
p.5)
In this thesis we are using the following definiton for business accelerators:

10
„Accelerators are organizations that provide cohorts of selected nascent ventures seed-investment,
usually in exchange for equity, and limited-duration educational programming, including extensive
mentorship and structured educational components. These programs typically culminate in “demo
days” where the ventures make pitches to an audience of qualified investors.” (Cohen, 2012 in Forbes
2013)
Business accelerator programs and their effects are changing the pre-seed phase of venture
development lifecycle that needs more research focus from the seed financing and also from the
management perspective of the accelerator program.
1.2 The scope of the thesis
Starting from the fact that there is little academic research on accelerators, there is a wide range of
possible research angles available for this thesis. In order to create the context this chapter outlines a
purpose and aim of the thesis, as well as a research question. Furthermore, the scope of the study is
described as well as how sustainability fits into the investigation.
This goal of the research is to identify the criteria of success for business accelerator from different
point of view. The stakeholders are the startup founders, entrepreneurs programme founders and
external investors. We are not examining other stakeholders as governmental institutions and other
NGO-s because they are out of scope of the study. The track record of the accelerators is too early to
evaluate programs and their effect. On the long run we can evaluate by measuring success factors as
survival rate of the participating ventures and follow-on investment rounds. There are also soft factors
that can be considered as the perceived added value by the participating entrepreneurs.
The main question of the research: What are the key success factors of a business accelerator?
Sub-questions of the research are:
 How can we define success in case of the business accelerators?
 How do entrepreneurs select business accelerator programs?
 What are the expected outcomes of the accelerator programs by the founders, mentors,
investors and by the participating startups?
 Is that possible to create a successful business accelerator outside of the major investment
hubs?
The hypothesis of the research is that the success of a business accelerator program is not determined
by the geographical location and the local investment environment where it exists.
By using this hypothesis the goal is to find out whether Hungary could be an entrepreneurial hub by
offering internationally competitive accelerator program for companies at the seed level. We will have
the final conclusion after answering the main- and sub-research questions.

11
1.3 Relevance
At the time of the slow economic recovery there is growing interest in helping startups launch and
succeed that has a positive effect on the whole society by creating new jobs. There are an increasing
number of initiatives seeking to support entrepreneurs as they launch their businesses. (Forbes.com,
2012a)1
The currently available data on accelerators is lacking, and not sufficient therefore at this stage we are
unable to measure the real macroeconomic effects of these initiatives. What can be seen is the
immediate effects on the labour market. 151 registered accelerator programs accelerated 2416
companies that has created 6408 jobs so far according to seed-db.com that is an online repository of
seed accelerators based on Cristiansen’s research (Cristiansen, 2009, seed-db.com, 2013)
Number of registered programs
worldwide
151
Companies accelerated 2416
Number of successful exits 124
Sum of exit value $ 1 130 258 600
Total funding $ 1 793 109 821
Jobs created 6408
1. Table The macroeconomic effects of business accelerators
Source: Own edition based on http://www.seed-db.com Date: 03.03.2013.
The database has significant limitation as it has been updated by the accelerators manually and some
of them not consider their presence here a priority therefore in certain cases the data are missing or
out of date. Despite the macroeconomic effects that are visible by seed accelerators it is important to
higlight the fact that because of the lack of data and the short time span we can not evaluate the social
impact made by the accelerators in this early phase. Y Combinator, the flagship accelerator program
operating since 2005, that is why it has provided more funding alone than the other 152 accelerators
together.
1
http://www.forbes.com/sites/kauffman/2012/08/08/evaluating-the-effects-of-accelerators-not-so-fast/

12
All Accelerator without Y
Combinator (N=152)
Y Combinator
Companies accelerated 1937 479
Jobs created 4892 1548
Number of exits 68 57
Funding (USD) 801 695 421 USD 1 009 779 400 USD
2. Table The macroeconomic effects of accelerators without Y Combinator
Source: Own edition based on http://www.seed-db.com 2 Date: 10.03.2013.
Accelerators could be funded by entrepreneurs, wealthy individuals, VCs, business angels or
governmental institutions. Beside the positive macroeconomic effect by job creation business
accelerators are providing the pipeline and the dealflow for Venture Capital investors giving them the
opportunity of identifying the next success stories. Sourcing is a crucial element of the VC investment
process. According to Mahendra Ramsinghani 7% of the investment opportunities are screened, 5%
of them are getting to meetings with VCs, 3% will reach the due diligence and only 1% of the
opportunities end up with investment. (Ramsinghani, 2011)
1. Graph The process of the deaflow
Source: Mahendra Rasmsinghani, The Business of Venture Capital, 2011 Figure 6.2
2
You can find a detailed article on the methodological bias by evaluating seed accelerators:
http://www.forbes.com/sites/kauffman/2012/08/08/evaluating-the-effects-of-accelerators-not-so-fast/2/

13
As it can be seen above only 1% of the new investment opportunities ends up with successful
investment from the Venture Capital perspective (Ramsinghani, 2011). Accelerators could help the
newly established companies to get the needed knowledge, network, mentoring and attitude towards
creating successful businesses giving value to the VCs by offering pre-filtered and validated projects
and valuable dealflow.

14
2 Methodology
During the research it was a real challenge to find proven and curated academic literature on the topic.
The thesis built on the knowledge conveyed by the accelerator research of Cristiansen, Van
Huijgevoort, Miller and Bound, Frimodig, Barrehag et al. (Cristiansen, 2009, Van Huijgevoort, Miller
and Bound 2011, Frimodig, 2012, Barrehag et al, 2012) I have also used accredited online newspapers
as New York Times, Financial Times, Forbes, TechCrunch, Wall Street Journal, Inc etc. as secondary
sources.
The study combines quantitative (surveying entrepreneurs as prospective accelerator applicants and
alumni) and qualitative approach (exploratory interviews). The qualitative approach was needed
because of the lack of previous studies on the topic. According to Hirsjärvi et al. the aim of qualitative
research is to create the description of real situations, including the aspect of the manifold view of the
reality. The aim of qualitative research is to explore the topic as comprehensively as possible.
Moreover, the objective is rather to find or reveal the new facts than verify existing propositions.
(Hirsjärvi et al., 2009, Frimodig, 2012).
Because of the limited numbers of scientific literature and research on the topic it was essential to
have primary sources of information about the perception and preferences of entrepreneurs. I have
conducted a survey and asked 94 entrepreneurs including alumni and perspective seed accelerator
participants. A variety of international entrepreneurs were surveyed and in order to have first hand
experiences I have conducted interviews with the founders of the accelerators, key employees and
serial entrepreneurs. This paper is not providing detailed insight into the different sources of
investments because these are considered out of the research scope. The research only deals with
those actors (seed investors, business angels, venture capitalists) that are connected with the business
accelerators either as founders or partners providing follow on investments. I am not evaluating the
effectiveness of involving seed investors and angel investors instead of applying to an accelerator as it
has been considered out of scope.

15
3 Theoretical framework
In order to have a better understanding of the framework and the ecosystem the goal of this section
is to shed light on the concepts and the actors around business accelerators. Therefore this section
defines entrepreneurship and startup as the basic concepts of the study. Both phenomenon has many
definitions in use and there is no single definition and the terms are not consistent that are being used.
This section also describes how we define an entrepreneur, what are the types of the investors and
how the mentors are involved in the processes of growing successful ventures from scratch.
3.1 Describing the concepts
3.1.1 Entrepreneurship
Solving a real existing problem is one of the fundamentals of starting a successful company. Identifying
„pain points” and offer solutions for them by starting up new ventures is a creative process that is
called entrepreneurship.
Entrepreneurship can be defined as the pursuit of opportunity beyond resources controlled3
.
According to Steve Blank’s thoughts entrepreneurs could be everywhere. Inside the corporation,
within the government or the leader of a non profit initiative could be named as an entrepreneur. Real
entrepreneurs should do something in a radically new way and solve problems by doing that. Startups
are led sometimes by managers, engineers or scientists but not real entrepreneurs. (Blank, 2012) Brad
Feld define entrepreneur as someone who has co-founded a company. He makes a differentiation
between „high-growth entrepreneurial companies” and „small businesses” He consider both
important but entrepreneurial companies have the potential to be or are high growth businesses
whereas small businesses tend to be local, profitable, but slow-growth organization (Feld, 2012)
In this research we are using the narrower approach that is supported by Brad Feld. He makes a
difference between entrepreneurs and small business owners that are running traditional businesses
(Feld, 2012)
3.1.2 Startup
Defining startup is a big challenge. We often think about two programmers in a garage if we hear this
term. Starting a new company is getting more and more popular, becoming a trend. As a result of the
recent hype around entrepreneurship there are some books, studies, papers on the topic but there is
no widely accepted terminology at all. Definitions vary in terms of the maturity of the company,
commercial track record, etc. In this paper I am taking a look at the potential ways of defining a startup
company and finally create an own terminus technicus for that phenomenon.
3
http://blogs.hbr.org/hbsfaculty/2013/01/what-is-entrepreneurship.html

16
The pre-startup phase, the process from the idea to actual startup phase can be divided into five steps:
intention, product/market fit validation, organization creation, business concept alignment and
market entry. At the beginning of this process, entrepreneurs can be identified as nascent
entrepreneurs (potential entrepreneurs) and later at the final part starting entrepreneurs, firstly
novice entrepreneurs. (Geldren et al., 2005, Frimodig, 2012) If they are running their businesses
successfully and get to exit by an acquisition or an IPO they often start their next businesses becoming
’serial entrepreneurs’.
According to Eric Ries, the father of lean startup concept startup is a melting pot term. „Entrepreneurs
are everywhere. (…) concept of entrepreneurship includes anyone who works within my definition of
a startup: a human institution designed to create new products and services under conditions of
extreme uncertainty. Entrepreneurship is management. A startup is an institution, not just a product,
and so it requires a new kind of management specifically geared to its context of extreme uncertainty.
In fact, as I will argue later, I believe “entrepreneur” should be considered a job title in all modern
companies that depend on innovation for their future growth. (Ries, 2011 p.17)
Steve Blank, the professor of Entrepreneurship at Stanford and a serial entrepreneur using the
following definition "A startup is an organization formed to search for a repeatable and scalable
business model."
According to Steve Blank the keyword of the definition is the search as startups have to adapt to the
needs of the customers and challenge the initial assumptions by testing all their hypothesis. Therefore
the goal of the startup is to search and to find the scalable business model that serves the market
needs and solve the customers’s pain points while enables profitable operation and growth.
Dave McClure the Founder of 500 Startups, a leading accelerator has identified the following formula
STARTUP = Hacker + Hustler + Designer4
According to the European Venture Capital Association startup could be defined as „Companies that
are in the process of being set up or may have been in business for a short time, but have not sold their
product commercially.” (evca.eu, 2012)
Based on the definitions provided above this paper using the term startup as the following:
Start-up companies are businesses with high growing potential and global scalability by solving a real
customer need and continously looking for the most successful business model.
4
Based on TechCrunch interview with Dave McClure, the Founder of 500 Startups:
http://techcrunch.com/2011/04/10/dave-mcclure-on-500-startups-if-sequoia-is-the-yankees-were-the-
oakland-as/ Dowloaded: 29.04. 2013.

17
3.2 The actors of the entrepreneurial ecosystem
Entrepreneurs running startups, are existing within the entrepreneurial ecosystem that contains
investors, mentors, accelerators, governmental institutions, educational institutions and other actors
of the society. In this paper I put the accelerator in the middle of the ecosystem as you can see below.
The graph shows that all the actors are interconnected. The accelerators provides networking access
to entrepreneurs as they are supported by mentors during their program. The mentors get access to
promising startups and up-to-date knowledge in their industry. On the other hand they provide
branding support for the accelerators by let them use their name for promotions in order to attract
the best startups. Having the most promising companies provide a dealflow for investors that could
result in capital raise and follow on investment after the core accelerator program.
2. Graph The entrepreneurial ecosystem, Own edition based on Barrehag et al, 2012

18
3.2.1 Entrepreneurs
Accoding to Merriam-Webster dictionary entrepreneur is the “one who organizes, manages and
assumes the risks of a business or enterprise (Forbes, 2012)5
. In this research we are using the term
entrepreneur according to Brad Feld’s definition found in the book called Startup Communities:
Building an Entrepreneurial Ecosystem in Your City (Feld, 2012) According to the founder of TechStars
entrepreneurs are running globally scalable startups. We consider small business owners out of scope
in this paper, therefore we are focusing on entrepreneurs running their business that has real added
value and the business can be scalable. According to Hemingway and Balint, the idea of a startup is
based 47% on the previous experience of the entrepreneurs as they are tend to choose a problem to
be solved within they feel themselves comfortable (Hemingway-Bálint, 2004)
3.2.2 Investors
Running a startup is associated with high risk and often requires more funding than the founders can
provide themselves by boostrapping. Therefore they have to find investors that can provide them
capital in exchange for equity (Arundale, 2007). According to the glossary of the Princeton University
investor is someone who commits capital in order to gain financial returns6
. We can make a distinctions
among the investors based on the maturity of the company where they invest and they can be also
categorized whether they are establishing legal entities like venture funds or angel funds by becoming
formal investors or staying informal and investing their own money in companies. Angel investors,
seed funds and venture capitalists are the most associated types of investors with business
accelerators. In this reseach we are using the following categories:
Seed investor
Seed investor is providing the money that is used to move on with the idea and start a business – to
provide the first set of premises or to patent a piece of intellectual property or develop a prototype. It
is often the financial contribution of the entrepreneur or his family or friends to getting the enterprise
off the ground (3F financing). It can also be provided by specialized funds (frequently affiliated to a
university or a government ‘enterprise’ initiative) or from private individuals or philanthropic trusts. It
will usually require continuing equity participation in the business, but on vastly diluted terms; if it
doesn’t, because for instance it comes in the form of a government grant, then in consequence the
term ‘capital’ is sometimes misleading. (Bloomfield, 2005)
5
Source: http://www.forbes.com/sites/brettnelson/2012/06/05/the-real-definition-of-entrepreneur-and-why-
it-matters/ Dowloaded: 29.04. 2013.
6
Source: http://wordnetweb.princeton.edu/perl/webwn?s=investor Dowloaded: 29.04. 2013.

19
Business Angel
Angel investors, angel funds and affiliated forms of seed capital provide an early access to investment
opportunities for ventures. An angel investor or a business angel is an affluent individual or a group of
individuals that provides capital for a business start-up usually in exchange for convertible debt or
ownership equity. (Forbes.com, 2012b) Angel investor groups are composed of wealthy individuals or
hign-net-worth individuals (HNWIs) who pool resources and investment expertise. The number of
active angels in the United States is reported to be about 125 000, between 10 000 and 15 000 angels
are belong to angel groups (Ramshinghani, 2011). According to Ramshinghani, over 550 angel groups
exist worldwide and nearly 300 of which are based in the United States.
Boosting business angel investments is really important especially in Europe where seed accelerator
programs help to fill in the gap in start-up financing between friends and family and formal venture
capital.
Business angel investments can range from USD 5 000 to USD 500 000 or more. At the early stage of
the business, angels become very real and serious investors and owners with high expectations looking
for solid results and willing to actively involve themself in setting up the company.
Venture Capital
Most business people know something about venture capital or more likely some of the myths about
venture capital. This invaluable actors are often the currency of business conversation, but much of
the details what happens during an investment is unknown by most of the people. Since nature abhors
a vacuum, myth rushes in to fill the gap left by the absence of knowledge according to Bloomfield
(Bloomfield, 2005)
Venture capital is the originated from the United States in the 1960s and 1970s, when individuals put
money behind bright ideas – that later grew into disruptive businesses like Apple Computers, Cisco
Systems, Netscape, – without any certainty of return. It is closer to seed capital than other forms of
funding. Venture Capital is the sub-section of private equity. The portfolios of venture capital investors
typically involve risk taking with a potentially expected high return. They are often organized as limited
liability companies with the investors as partners of the corporation (Privco, 2012). VCs invest in
companies in exchange for equity and provides the startup with access to a wider network of
specialists. (Barrehag et al, 2012) According to Berglund (2011), VCs try to get to know the startups as
a part of their due diligence process. The reasoning is that they want to be able to say no to potentially
poor deals as soon as possible. In addition, the purely technical skill of the teams is evaluated and their
previous accomplishments are assessed (Privco 2012). Venture money is the supposed plug for the
equity gap. (Ramsinghani, 2011) Accelerators can provide validated and pre-screened dealflow for VCs
as Venture capital industry has high administrative and management costs and high risks.
As a result of these trends VCs are having crucial part of the success of the accelerators by providing
follow-on funding after the accelerator program.
3.2.3 Mentors/advisors

20
Mentors are experienced entrepreneurs or investors who contribute time, energy and knowledge to
startups and can be a key part of a startup community. (Feld, 2012) There is a difference between
mentor and advisor as the advisor has an economic relationship with the company he is advising. The
mentor is helping startups without a clear set of outcome goals or economic rewards. Mentors play a
crucial role in accelerators by providing guidance and ongoing support for the teams.
Well known mentors can bring value to an accelerator besides working with startups by marketing and
exposure that can result in attracting the most appropriate startups. As a consequence, by helping to
recruit the best startups the mentors will eventually promote the ambition of the accelerator to meet
the investor expectations, namely well prepared startups (Barrehag, 2012 p45)

21
4 The new economics of startups
4.1 How companies grow?
Before explaining what the phenomenons are behind the growing numbers and importance of startups
it is worth to define the phases that organizations go through as they grow. All kinds of organizations
experience these challenges for a certain extent. Each growth phase is made up of a period of relatively
stable growth, followed by a "crisis" when major organizational change is needed if the company is to
carry on growing. (Greiner, 1988)
This is not a negative phenomenon rather the needed structural change in order to further develop
the company. It is more like a ’turning point’ when the company needs transition. We consider Phase
1 and Phase 2 in the scope of the study as they are the typical startup lifecycles.
3. Graph How companies grow? Based on Greiner 1988 Source: www.exponentialtraining.com
Phase 1 is the stage when entrepreneurs who founded the firm are heavily involved in creating
products and opening up markets. There aren't many staff, so informal communication works fine,
and rewards for long hours are probably through profit share or stock options. However, as capital is
injected production expands and more staff join, there's a need for more formal communication. This
phase ends with a Leadership Crisis, where professional management is needed. The founders may
change their style and take on this role, but often someone new will be brought in. (Frimodig, 2012)

22
At the Phase 2 growth continues in an environment of more formal communications, budgets and
focus on separate activities like marketing and production. Incentive schemes replace stock as a
financial reward. However, there comes a point when the products and processes become so
numerous that there are not enough hours in the day for one person to manage them all, and he or
she can't possibly know as much about all these products or services as those lower down the
hierarchy. (Frimodig, 2012)
This phase ends with an Autonomy Crisis: New structures based on delegation are called for.
At the seed stage focus is on the business conception and idea development. The startup phase
emphasizes product or prototype development, whereas early growth consists of small-scale
commercialization and focus is on scalability. (Kubiš, 2009, Frimodig, 2012)
4. Graph The transition from a startup to a company, Source: Blank, 20137
There is also a transformation from the scalable startup that is looking for the right business model to
a company that executes the suitable business model at this stage as you can see on the 4. Graph.
Seed and startup stages are usually funded by informal investors. “Traditionally, informal seed money
has been gathered from 3Fs (founders, family and friends or fools) or 4Fs (founders, family, friends and
foolhardy investors) that have close relationships with founders and they believe that the company can
progress well based on the founders’ experience and capabilities.” (Frimodig, 2012 p42.) Moreover, at
the startup phase investors are still informal and are defined as informal venture capitalists. The main
difference compared to informal seed money is that formal venture capital investors invest in unknown
companies without close personal involvement. (Frimodig, 2012)
Generally, informal venture capitalists are angel investors; micro angels, business angels and super
angels. At later growth phases funding is raised from formal investors such as venture capital
companies. (Rasila, 2004). Development stages of growth, cash flow and sources of finance are
visualized below (Frimodig, 2012)
7
Source: http://blogs.wsj.com/accelerators/2013/04/01/steve-blank-should-i-get-an-m-b-a/ Dowloaded:
29.04. 2013.

23
5. Graph The investment need and lifecycles in Frimodig, 2012
4.2 The early stage startup challenges
Throughout the stages of the development the basic needs of the company are also differ. The startups
have a lack of knowledge and there are difficulties in finding the working business model, have access
to the market and raise funding after their launch. (Harding, 2002; Rasila, 2004.) Filling the gaps
demands that information and knowledge flow between startups and investors. Business angels can
fill the gap through a supportive approach, including mentoring, providing expertise, and also mental
and financial support. (Harding, 2002, Frimodig, 2012) Business accelerator also can contribute by
helping founders to bridging the gap between starting up and the market reach.
Startups have knowledge and an equity gap in the early stage of their existence. At the beginning the
founders usually need help on product and customer development when they are looking for the
suitable and sustainable business model. Obviously the more knowledge and experience they have,
the less support is needed. Parallelly with that, the need for capital is arising as the company is
developing and reaching the milestones step by step. In this development process the emerging need
of seperating different functions as IT, product management, marketing, sales, business development,
etc is appearing.

24
6. Graph Equity gap vs. competence gap (Rasila, 2004; Ala-Mutka 2005) in Frimodig, 2012
4.3 Changes in the business environment
As a result of the globalization and market- oriented business thinking, domestic markets have lost
significance and businesses going to global markets from day one. Operating in an extremely complex
environment makes the starting up process even more challenging as a result of different cultures,
politics and technological solutions. (Hisrich, 2010, Frimodig, 2012)
Globalization is a natural process that could be defined as “universal mechanism that grew out of the
naturally occurring order-exchange process”. Globalization has roots deep in history, but nowadays its
pace has been accelerated. (Beer, 2011 in Frimodig, 2012 p13). The global business environment has
changed according to Frimodig (Frimodig, 2012) during the last few decades and therefore has affected
the internationalization process of companies leading to the emergence of born globals in the 1990s.
(Laanti et al., 2007. in Frimodig, 2012)
The global aspiration of the startups is demanding management challenge because of the unbalance
between goals and resources. Usually the relatively young and inexperienced founders’ lack of relevant
knowledge, which is needed to gain high- growth in the global market. (Knight and Cavusgil, 2004;
Gabrielsson, 2007, in Frimodig, 2012). However, enthusiasm and vision can give limited compensation
in filling the knowledge gap (competence gap). The startup should seek appropriate resources and
knowledge outside the company to cover the knowledge gap. (Frimodig, 2012)
According to P. Miller and K. Bound (Miller, Bound, 2011) the changes in the environment had
significant effect both on the startup side and on the investor side as well. Those are decraising startup
costs, better access to customers and more efficient monetisation by using different online channels.
According to P. Miller and K. Bound „the falling costs of hardware and software (are) one of the main

25
drivers in the proliferation of startups over the last five years and an important factor in the growth of
accelerator programs” (Miller, Bound, 2011 P. 21.)
The cost of launching a start-up is decreasing
As a result of the technological developments, the new ICT business models and the decreasing service
costs startups can start their operation with rented resources instead of having significant initial costs
by hardwares for example cloud services could be a cost effective solution instead of buying a server
and paying for the maintenance in-house. These alternatives are affordable compared with the solid
hardware infrastructure needed before the dot com bubble to start a new company.
Dot-com Era Lean startup era
Buy own servers and drive them to the
datacenter
Using services from the cloud
Buying software licenses for all the employee Activate Google Apps for your domain
Agree and sign an office lease Working from/meeting at a coworking space
Launch a billboard campaign Google Adwords or Facebook advertisments
Take years to build software and then release Iterative agile software development with
daily updates
3. Table Starting up in the dot-com era versus the lean startup era (Based on Miller, Bound, 2011)
The trend turning towards open source softwares also helped a lot by making the startup more „lean”.
Licenses for software used to cost a lot, now there are alternative tools in most cases for free or very
reasonable prices.
Another favourable trend is the pay as you go business model or monthly subscriptions for online
services like online CRM, project management, workflow, cloud ERP and other related softwares and
services.8
Small companies should not have to pay significant money on upfront. Certain sofwares are
available in the cloud for them that would not be affordable otherwise. Startups can start using
services for free and if they decide to use the premium functions they can pay a monthly fee.
Leased offices could be replaced by working in coffee houses or paying daily or hourly fees at co-
working spaces that gives extra flexibility for startups especially at the very beginning of their customer
validation and development process. Meeting room rental services are also available at the co-working
offices.
The initial costs of setting up a business has changed dramatically in the last couple of years. The major
cost of early-stage companies are not related to technology nowadays but more like human resource
expenses. One of the initial problems for founders how to cover their daily expenses while they are
8
You can find cost effective tools for startups in the following article: http://www.inc.com/tom-searcy/start-
up-on-a-budget-14-cheap-tools.html Dowloaded: 29.04. 2013.

26
developing the first product, trying to acquire new customers or working on finding investors. (Miller,
Bound, 2011)
Easier to find and address new customers
Not just the decreasing cost of the starting up process that has changed in the last decade but the
customer acquisition methods and costs too. There are new online channels of reaching the target
audience and these channels also give better results based on the better measurability and more
effective targeting. By using Google Adwords, Facebook or LinkedIn advertisements it is possible to pre
validate products, services on low budget and continuing spending just on the effective channels,
campaigns. There is another reason starting up is cheaper as competitive analysis is getting easier and
cheaper now by using online channels like LinkedIn, AngelList or Crunchbase on the competititors
funding, employee count, and sales.9
Getting the revenue inflow is easier
Beside the growing number of potential customers by the result of the easier starting up, reach and
targeting there are effective ways on getting paid for products and services via direct payment
transactions through e-commerce channels, app stores or subscription based models. Based on these
facts online channels that makes a much more cost effective alternative than traditional commercial
channels.
Changes in the investment market
The economics of startup companies changed dramatically and the entry barriers to the technology
intensive markets have decreased significantly during the past decade that can be considered as one
of the main factor behind the growth of the business accelerator programmes.
Beside the lower costs of starting up a venture, the venture capital industry is having hard time to
adapt and find their place in the ecosystem. VC has retreated from early-stage investments,
particularly in Europe, and the way of early-stage investment is changing. In the US a number of multi-
stage investment funds have emerged, but in Europe, bar a few newly developed ‘feeder funds,’ like
Index Seed and Atomico, an investment gap is growing both the US and Europe, business angels have
stepped in to fll this gap since 2000. (Miller, Bound, 2011)
Yet despite positive signs that the gap in venture performance between the US and Europe is
narrowing, it is likely that the gap will widen again as US investors are set to reap the social media
boom. “The problem with the European investment market is not that European investors aren’t as
good at growing companies, but that the environmental conditions, and particularly the pipeline of
companies is inadequate. This is proved by venture performance data – UK VCs perform better than
average when they invest in the US and US VCs perform worse than average when they invest in the
UK.” (Miller, Bound, 2011 p23.)
9
Source: http://davidquail.com/2012/05/11/another-reason-starting-up-is-cheaper-now/ Downloaded: 29. 04.
2013

27
The fundraising is critical for the growth of a born global company. Generally the companies that have
gained external funding grow faster. On the other hand, investors and venture capitalists search
founders that are able to create global visions, have international business experience and global
networks, and therefore competence, knowledge and experience are all important. (Laanti, et al.,
2007) (Frimodig, 2012)
Technically, in the early phases of a born global company, the product development has a significant
role. It is crucial to have a clearly focused product portfolio and keep the customer focus. (Barringer et
al., 2005, Gabrielsson, 2007, Frimodig, 2012) The right combination of engineers, designers, marketing
and sales makes a team an interesting investment targets.
As a result of the costs of starting a new venture coming down, venture capitalists increasingly making
smaller seed investments and seed investments in internet companies are becoming more prevalent
when it comes to early stage investing.10
7. Graph Seed deals by vintage quarter Source: www.cbinsights.com
On the other hand, regarding the follow-on investments for seed funded companies there is also an
interesting trend. The next investment level after the seed funding called Series A that remains
relatively steady in the past few years despite the boom of the seed investments. The gap between
the two funding round called the Series A Crunch that is an excessive demand for a limited supply of
10
Source: http://www.cbinsights.com/blog/trends/seed-investing-report Dowloaded: 29.04. 2013.

28
Series A financings. This trend would mean that “many startups will be orphaned and that some
investors will lose their money”. (cbinsights.com, 201311
)
8. Graph Series A Deals by Vintage Quarter Source: www.cbinsights.com
The Series A crunch is one of the biggest challenge that the early stage VCs and business accelerators
and their portfolio companies are facing with in the next few years.
11
Source: http://www.cbinsights.com/blog/trends/seed-investing-report Dowloaded: 29.04. 2013.

29
4.4 The background of the shift between business incubators and business
accelerators
The seed accelerator (or business accelerator) derives many of its characteristics from the business
incubator. Therefore it is recommended to start the description by introducing the concept of
incubation.
Incubators, the predecessors of the business accelerators have proven to be an economic development
tool for the communities they serve since 1959. The general idea behind the incubation concept to
create an institutionalized environment that assists and enables startup companies and business ideas
to grow. (Barrehag et al, 2012) Incubated companies have created numerous jobs, thereby increasing
the tax base, occupying additional commercial real estate space, contributing to local business
infrastructures and creating even more jobs in other industry sectors (van Huijgevoort, 2012 p4.
Wiggins & Gibson, 2003)
Business incubators are institutions that support entrepreneurs and the process of starting a venture,
helping to increase survival rates for innovative companies and also for small and medium enterprises.
The process of developing a startup company within an incubator can be extensive and could take
several years. (Barrehag et al, 2012)
There is no widely accepted standard definition of business incubation. There are several definitions
available in the academic literature and just as many have been adopted by industry associations and
policymakers in different countries, reflecting local cultures and national policies. According to
Hamdani, Germany targets innovative start-ups, while France and the Netherlands promote the
university-incubator model. (Hamdani, 2006)
The American National Business Incubation Association defines a business incubator as “an economic
development tool designed to accelerate the growth and success of entrepreneurial companies through
an array of business support resources and services. (Bollingtoft, 2012) According to Sherman &
Chappell (Sherman & Chappell, 1998), these support services include assistance in developing business
and marketing plans, building management teams, and obtaining capital and access to a range of other,
more specialized, professional services. They also provide flexible space, shared equipment and
administrative services
The main purpose of a business incubator, is to create a favorable business environment for start-up
firms to compensate for the lack of financial, knowledge and networking resources they generally have
(Commission, 2002). The start-up firms in an incubator are provided offices for moderate price, shared
equipment, administrative services (legal advisory, accounting etc.) and other business related
services. (Bollingtoft, 2012).

30
9. Graph The Role of Business Incubators Based on: Sahay, 2004,
According to Sahay the author of the Role of Technology Business Incubator, Angel Investor and
Venture Capital Fund in Industrial Development ’Business incubators accelerate the successful
development of entrepreneurial companies through an array of business support resources and
services, developed or orchestrated by incubator management, and offered both in the incubator and
through its network of contacts. A business incubator’s main goal is to produce successful firms that
will leave the program financially viable and freestanding. These incubator graduates have the
potential to create jobs, revitalize neighborhoods, commercialize critical technologies and strengthen
local and national economies.’ (Sahay, 2004 p5.)
The US Small Business Administration defines incubators as: physical facilities that provide new firms
with the supportive network necessary to increase their probability of survival during the early years
when they are most vulnerable. (Cornelius, 2003)
Business incubators are institutions founded to be the catalysts of the entrepreneurial process, by
helping to increase survival rates for innovative startup companies. Entrepreneurs with feasible
projects are selected and admitted into the incubators, where they are offered specialized resources
and servicesthat might include such elements as (Sahay, 2004):
 Providing available spaces (office, production space, laboratories for discounted renting fee)
 Consulting and Management services (consulting for business planning, financial
management, taxes, marketing, advertising, advice on intellectual property, access to funding)
 Administrative services (juridical assistance, accounting, shared bookkeeping)

31
 Logistic support (office services, utilities, usage of equipments, IT services)
 Technical assistance (laboratory services, instruments, research services, assistance with early
engineering & prototype, quality management services, technological services)
 Business networking (access to different actors, institutions, universities, corporates, chamber
of commerces, investors)
 Training and education (professional business training courses, fine tuning business
management skills (planning, organizing, directing & controlling), coaching, mentorship and
personnel training services, entrepreneurial training programs)
(Based on Sahay, 2004, Van Huijgeevort, 2012, Vasilescu, 2008)
Efforts to determine how incubators assisted firm development quickly became an examination of
incubator categories. Based on the extent of value added services there is a continuum from real estate
incubators to purely business development focused programs. (Cornelius, 2003, van Huijgevoort, 2012,
Bøllingtoft & Ulhøi, 2005; Christiansen, 2009; Commission, 2002; Grimaldi & Grandi, 2005; Hansen,
Chesbrough, Nohria, & Sull, 2000.)
10. Graph Continuum of added value services provided by incubators and accelerators (Price, 2004 in Frimodig, 2012)
In short, there has been a shift from real estate provision and appreciation to for-profit enterprise
development, as the main starting point of business incubators (Aerts et al., 2007 in van Huijgevoort,
2012).
At the time before the dot-com bubble in 2000, a lot of networked incubators12
started with a focus
on IT-based startups. These very specialized and received significant funding from investors at a rapid
12
Networked incubator: A networked incubator is a type of business incubator model which is a suited model
of the Internet economy. The ‘Networked Incubator’ model emphasizes the dynamic working environment,
with start-up firms constantly working together,and informal interactions of co-founders and participants (van
Huijgevoort, 2012)

32
pace. The model was based on large investments in single projects, which suited venture capital and
had previously been successful (Miller, Bound 2011).
As the dot-com bubble inflated, many promising IT-based were unable to generate revenue and
collapsed (Blank 2005). Within two years starting from 2000 to 2002 NASDAQ lost 80% of its former
value because of the dot-com bubble. This collapse in valuation meant that many investors lost their
capital in companies that had only succeeded in burning through their money without creating anything
of value. (Barrehag et al, 2012) Critics of the networked incubator investment model coined the term
“incinerator” to emphasize the problems of investing large amounts of capital at once without
demanding measurable results (Miller, Bound 2011), (Barrehag et al, 2012).
As the investment climate began to recover a few years later, the new frameworks and approaches
initiated by entrepreneurs such as Paul Graham started to gain the attention of the investors. Key
changes in the model were shorter incubation cycles, as most IT based products can be developed
faster than physical products. (Miller, Bound 2011)
5 years after the peak of the dot-com bubble Paul Graham launched Y Combinator in Silicon Valley.
This represented a business idea that had a lot of common characteristics with traditional incubator
but there were also significant process innovations. Most importantly, the acceleration period is
usually no longer than three months that is suitable for ICT related applications. In addition, the cost
and structure of investments differ in that they are much smaller in each individual startup. (Barrehag
et al, 2012). Y Combinator for instance offers twice a year 40 companies 11-20 000 USD investments
for 6-7 percentage of its stake.
4.5 Business accelerators
The traction of business accelerators is much shorter, originating from 2005 (Christiansen, 2009; Miller
& Bound, 2011). A very small amount of scientific literature exists on business accelerators, however
the growth in the number these programs is significant. According to Bloomberg Businessweek, in
2011 around 110 business accelerator programs were operating around the world (Van Huijgevoort,
2012) and for 2013 it has grown to 153 (seed-db.com, 2013).
According to Susan Cohen who is a researcher at the University of North Carolina at Chapel Hill:
Accelerators are organizations that provide cohorts of selected nascent ventures seed-investment,
usually in exchange for equity, and limited-duration educational programming, including extensive
mentorship and structured educational components. These programs typically culminate in “demo
days” where the ventures make pitches to an audience of qualified investors. (Forbes.com, 2012)

33
11. Graph Different types of accelerators, Source: Frimodig, 2012

34
5 Key elements of the business accelerator programs
Business Accelerators have several distinctive features that set them apart from existing incubators
and other programmes to support startups.13
12. Graph The intersection of accelerators and incubators Source: www.launchause.com
Since the establishment of the first business accelerator program (2005) they were driven almost
exclusively by private investors, and concentrated in the web and mobile sector.
In the past few years not-for-profit accelerator programs also started to operate (eg. Startup Sauna,
Startup Chile, etc.) There is some variation between programmes, but they comprise five main
features. The research uses the approach of Miller and Bound by describing business accelerators.
(Miller and Bound, 2011)
 An application process that is open and highly competitive.
 Provision of pre-seed investment, usually in exchange for equity. (There are a few not-for
profit programs as well usually supported by the governments)
 A focus on small teams not individuals.
 Time-limited support comprising programmed events and intensive mentoring.
 Startups supported in cohort batches or ‘classes’. (Miller, Bound, 2011 p3.)
13
Read more about the differences at van Huijgevoort’s thesis: The ‘Business Accelerator’: Just a Different
Name for a Business Incubator? http://www.dutchincubator.nl/uploads/Documents/49.pdf Dowloaded: 29.04.
2013.

35
5.1 Easily accessable open application process
Accelerator programmes have web-based application processes and they are expecting applications
from teams coming from anywhere in the world. The application process is simple, by keeping minimal
paperwork needed. The form often focuses more attention to the founders and the team rather than
the business idea and concept. If the team managed to get through the pre-selection, they are invited
to an interview that are pretty short (10-20 minutes in most cases). The process of selection from the
application deadline through to a decision is often very short compared to many routes to funding or
business education programmes. (Miller, Bound, 2011)
5.2 Intensive competition
Programmes are highly selective and exclusive, involving serial entrepreneurs, investors, experts to
choose the most talented teams that worth to participate in the accelerator program. Most of the
accelerators are having applicant success ratio of less than one in ten. Accelerator programmes often
invest considerable time in speaking and running events internationally to reach out to potential
applicants to maintain the quality of the applicant pool (eg. Startup Sauna, Seedcamp). For high profile
accelerators, less than 1 per cent of applicants will be successful.
Accelerators usually decide on a limit on the number of startups they can support in each cohort based
on the amount of office space they have available or the number of mentors and operational staff
needed to handle larger numbers. One of the most successful one, Techstars has decided to work with
ten companies per batch whereas Y Combinator has been less constrained. They now fund over 60
companies per cohort.
5.3 Offered pre-seed/seed investment
The investment provided by accelerator programmes is different, in most cases it depends on how
much it costs per co-founder to live during the period of the programme and for a short period
afterwards. Programmes usually provide a minimum of USD 20 000 and a maximum of USD 50 000
investment during the first three months. This can be in the form of a non refundable grant, convertible
note or an equity investment. (Miller, Bound, 2011)
5.4 Focus on teams
Accelerator programs are focusing on teams not individuals. They usually prefer teams not larger than
three or four person. Larger teams needs more initial investment to cover the living expenses and
make the co-founders ready to work on solely on the startup.

36
5.5 Time-limited support, intensive mentoring
Accelerator programmes provide support for a set period of time – usually between three and six
months. According to Miller and Bound this is linked to the decreasing length of time it takes to launch
a web startup, but it’s also about creating a high pressure environment that will drive rapid progress.
(Miller and Bound, 2011)
While a number of programmes do offer ongoing support for graduated companies there is always a
more intense interaction with the programme for the giving time frame of acceleration. Regular
meetings and discussions with mentors, experienced founders, investors and other relevant
professionals is a significant added value of the business accelerator programs.
Business accelerators should have enough incentives or opportunities that make them attractive for
startups as the competition is growing. In other words, any new accelerator programme must be
distinctive and compelling to entrepreneurs (Cristiansen, 2009).
There are introductions where mentors present their ideas and experience and then spend time with
teams on a one-to-one basis. According to Miller and Bound the aim of this kind of mentoring is two-
fold
1. to challenge the teams and give them honest feedback on where they’re going right and
wrong
2. to give them a chance to create longer-term relationships with mentors who could take on
the role of an advisory board over time. It’s not uncommon for angel investors who act as
mentors to become investors in the companies they work with. (Miller, Bound, 2011)
It is essential for an accelerator programme to develop an extensive network of prestigious mentors,
serial entrepreneurs and investors with wide range of expertise around the batches.
In the accelerator programs startups have the opportunity to be educated on business topics and on
product-speciﬁc topics that are applicable in their industry. Accelerators that operate in regions
without a strong history of entrepreneurship will need to create a more comprehensive educational
programme, while accelerators that focus on more experienced entrepreneurs can likely be successful
with a more tailored educational programme. (Cristiansen, 2009)
According to personal interviews with entrepreneurs access to respected high professional mentors is
one of the most important element of the competitiveness among the programs. Attracting high
quality mentors requires filtering and admitting only high quality startups. (Miller and Bound, 2011)
Accelerator programmes usually offer regular professional and get together events between the
participating companies/mentors and external partners. The accelerator programs finish with the
demo day where the teams having the opportunity to present their progress in front of business angel
and Venture Capital investors.
The demo days are at the end of the programs and they are designed for angel and venture capital
investors to come and see what has been developed during the accelerator program. It can also give
companies a chance to launch their product or service to the outside world – media coverage is

37
common. These events give participant teams access to a large and high quality group of investors in
a way that would be very difficult to achieve without the accelerator programme. (Miller and Bound,
2011)
13. Graph The Accelerator Cycle, Source: Barrehag, 2012
5.6 Batch of startups and alumni network
Accelerator programmes differ from business angel or seed fund investment since batches of
companies are getting investment at the same time. Startup founders are the ’raw materials’ in the
accelerator process putting them through the same process and mass producing them by resource
efficient way that can be achieved by helping companies all at the same time.
One core advantage of cohort working is the peer support that startup teams provide each other. This
can take the form of technical co-founders helping each other out with problem solving through to
early feedback on pitches that avoids embarrassing mistakes ahead of more vital presentations to
investors or clients. By encouraging the startups to support one another, some of the burden is also
taken off the accelerator management team, allowing them to focus on bringing in outside expertise.
Co-working is a key part of the accelerator programme although not all the accelerators provide desk
space. Y Combinator organize meetings once or twice a week. In spite of not having office face-to-face
meetings and events between peers and mentors are essential. (Miller, Bound, 2011)
For accelerators the intangible value of the alumni network will becomes a distinctive in the future.
The more startup they fund, the faster the alumni network grows and they can be mentors, investors
and advisors for future cohort companies. Being a mentor/investor after becoming a successful
entrepreneur by the help of a business accelerator could be the pillar of the sustainable development
of these programs.

38
14. Graph Key elements of the accelerator program, Source: Van huijgevoort 2012
It is also interesting to have a look at on the business accelerator cycle. If they can attract high profile
entrepreneurs and mentors that results in successful startups. Successful startups are the most
important outputs of the accelerator process and the base of the valuable dealflow. If the follow on
investments are relatively frequent that helps to build a brand around the accelerator that results in
better batches in the future.
15. Graph The vicious circle of the accelerators, Source: Frimodig, 2012

39
6 Introduction of international best practices of seed acceleration
6.1 Y Combinator
Y Combinator14
is the first seed accelerator program in the world by established in 2005. Y Combinator
is a hybrid venture capital fund and business school that invests in, advises around 40 early stage
businesses twice a year. (Wired, 2011) The HQ is situated in the center of Silicon Valley, in Mountain
View. Twice a year the company hosts a three-month boot camp. Each team that is accepted receives
seed funding 11 000 USD for the group plus 3 000 USD more for each member of the founding team.
In exchange Y Combinator gets a small stake in the startup, usually 6 or 7 percent. Only 1% of the
startups are admitted that were applied to the program. There are approximately 2000 applicants for
each Interview Days. (Wired, 2011)
Y Combinator supplements the money with advisory and coaching services, introductions to later stage
investors, technical help, and have an extended community. Over the 13 weeks the members of the Y
Combinator getting valuable feedbacks from industry experts, innovators and investors. Their model
has produced many promising startups, couple of significant acquisitions and many seed accelerators
with similar business models all around the world. The founders of Dropbox, Reddit, Loopt and Scribd
were all discovered by Y Combinator. As a result of the ongoing successes of the Y Combinator
companies, tech blogs always covers the launches of the new ventures coming from Y Combinator
(Wired, 2011)
According to Paul Graham - the founder of Y Combinator - founding a company is the most efficient
way to create wealth for investors, for founders, for society at large despite the difficulties. As Paul
Graham15
told Inc. Magazine ‘There’s a classic pattern that has happened over and over again
throughout the history in which something is made one at a time, very expensively and unreliably by
hand, and then someone comes along and figures out how to make large numbers of them cheaply and
reliably. (…) We are pulling this kind of transformation with venture funding. We’re mass-producing
the start-up’ (Chafkin, 2009)
Y Combinator offers free incorporation services from its in-house lawyer. Investors from Sequoia
Capital, one of the most respected VC company according to Techcrunch (Schonfield, 2011) giving one-
on-one coaching. Free office space at AOL’s Palo Alto headquarter is also given to one of the YC
startups. A partner of YC Rackspace also supplies each company with web hosting worth 20 000 USD.
Y Combinator companies are officially launched after the first press release at one of the significant
medium of the technology scene (eg. TechCrunch, Inc, etc.). Over the past six years, about a quarter
of Y Combinator companies have folded and many more are barely existing. That is a relatively small
14
Y combinator is a mathematical function that makes other functions, just as Y combinator is a company that
makes other companies (Chafkin, 2009)
15
Paul Graham is the Founder of Y Combinator. He holds a Ph.D. in computer science and has several years of
formal training as a visual artist. Before starting Y Combinator he founded Viaweb, a dot-com software
company that helped retailers sell online. Viaweb was acquired by Yahoo in 1998 for 49 million USD.

40
failure rate in the startups scene. As a result of the high quality companies the investors are really open
minded to be the part of the Demo Day. In 2005 15 investors showed up to the first Demo Day; in 2011
more than 365 attended to the 2 days long Demo Day.
Speakers and coaches of YC are include Salesforce.com CEO Marc Benioff, Facebook founder Mark
Zuckerberg and eBay CEO John Donahoe.
Founded 2005
Location Mountain View, California
Founders Trevor Blackwell, Paul Graham, Jessica
Livingstone and Robert Morris
Companies per class 46
Total startup alumni to date 513 companies
Notable Alumni AirBnb, Reddit, Dropbox, Scribd, Heroku
4. Table The basic facts of Y Combinator Source: NESTA and seed-db.com, Ycombinator.com
6.2 Techstars
TechStars is a mentorship-driven seed stage investment program. TechStars runs a three month long
program in Boston (MA), Boulder (CO), Cloud (San Antonio, TX), New York City (NY) and Seattle (WA)
once a year since 2007 and in London from 2013. (Techstars.com, 2012). The programme lasts 12
weeks, for which the companies have to move to the Techstars office space and completely focus on
their projects. (Miller, Bounds, 200x)
TechStars uses a franchise model. TechStars is also spredading their global network by creating Global
Accelerator Network in partnership with Startup America. As a result of that they outsource their
model and help launch other accelerators. The seed stage investment program is pretty selective. They
choose the 10 best companies from hundreds of applicants. Those companies get 18 000 USD in seed
funding. Moreover, companies accepted into the program are offered a 100 000 USD convertible debt
note by well known investors. Total of 114 companies has gone through the program and in 2012 Q1
98 were still active. (Forbes, 2012c) About 80% of TechStars companies go on to raise venture capital
or a significant angel funding round. Companies managed to raise an avarage 1.1 million USD. Around
40% of startups come from the neighbouring cities of each program. (Forbes, 2012c) Mentoring is one
of the most important added value of the Techstars approach and the first month of the programme
consists almost entirely of meeting experienced tech entrepreneurs and investors and receiving often

41
honest feedback on their businesses. Unless a team can attract five mentors to help them, Techstars
feel they’re unlikely to succeed. (Miller, Bound, 2011)
As David Cohen, the founder of TechStars said „The venture community has started to see high quality
accelerators as a filtering mechanish, It’s become a new college for entrepreneurs because we’re so
elective on front end” (Forbes, 2012c). TechStars uses the mentorship driven model (10 to 1 mentor
to startup ration) in order to assure that each company could get enough feedbacks and attention from
various professionals. The management of TechStars is emphasizing the transparency of their
activities. They have published a list of every companies that have gone through TechStars with funding
information, number of employees, failure rates, etc. The differentiative strategy could be found by
keeping the incubator batches small and giving more attention to the participants. They hold one
program each year. As the founder declared: „For us we focus on quality over quantity. We want all
companies we fund to be successful. We have kept our class sizes small” (Forbes, 2012c) One more
differentiator is that the founer David Cohen also invests his own money in startups.
Founded 2007
Location Boston, Boulder, New York, Seattle, London
Founders Brad Feld, David Cohen
Companies per class 10 per location
Total startup alumni to date 189 companies
Notable Alumni CrowdTwist, Occipital, Orbotix, SendGrid
5. Table The basic facts of TechStars Source: NESTA and seed-db.com, techstars.com

42
6.3 500 Startups
500 Startups is a seed fund and incubator program focusing on early stage startups founded by Dave
Mclure. 500 Startups is located in Mountain View, CA. They invest primarily in consumer & SMB
internet startups, and related web infrastructure services. (crunchbase.com, 2013)
Selected areas of interest include financial services & e-commerce, search/social/mobile platforms,
personal & business productivity, education & language, family & healthcare and web infrastructure.
The program offers between USD25 000 and USD100 000 funding in exchange for 5% equity (with
some exceptions), and lasts for three to six months. (Businessinsider.com, 2012) In addition to funding,
the 500 Startups Accelerator program also offers access to 120 mentors, sponsorships from
infrastructure providers like Microsoft, Rackspace, and Amazon Web Services, and office space at 500
Startups headquarters in Mountain View. 500 Startups also organizing events like SmashSummit,
UnSexy, and GeeksOnaPlane. 500 Startups investment team and mentor network has operational
experience at companies including PayPal, Google, YouTube, Yahoo, AOL, Zynga, LinkedIn, Twitter,
Apple & Facebook.
As of April 2012, 500 Startups had invested in 257 companies, including myGengo, Artsicle, Visual.ly, E
la Carte, and Udemy.
Founded 2010
Location Mountain View
Founders Dave McClure
Total startup alumni to date 126
Notable Alumni myGengo, Artsicle, Visual.ly, E la Carte, and
Udemy
6. Table The basic facts of 500 Startups Source: seed-db.com, 500.co

43
6.4 Seedcamp
Startup companies that need business acceleration shouldn’t go directly to the Valley in order to grow
and develop into a meaningful venture. Seedcamp is Europe’s most well-known accelerator fund
focuses on European startups with high growing potentials. (Forbes, 2011 seedcamp) Founded by Saul
Klein (former Skype VP) and Reshma Sohoni (previously worked for a private equity firm 3i) Seedcamp
is a combination of investment firm and entrepreneur boot camp. (Techcrunch, 2012) (Forbes, 2011)
The participants receive 50 000 EUR (70 000 USD) and the opportunity of joining Seedcamp’s weeklong
training camp in London. There they will be able to get access to volunteer mentors –product
development specialists, lawyers, accountants, financial experts, investors and other entrepreneurs-.
Seedcamp also offers one-day meet-ups throughout the year and also organizes one week long trip to
the US for boot camp graduates. Seedcamp is organizing one day workshops in different cities in order
to find the best entrepreneurs at different parts of Europe (Italy, Israel, Latvia, France, Estonia, Hungary
etc.).
The best companies are choosen to participate at the Bootcamp. Seedcamp offers 50 000 EUR in
exchange for about 9% equity. (Forbes, 2011 seedcamp). Seedcamp has around 40 investors roughly
half of them angel investor, and half of the VCs. As a result of this structure seemingly the ecosystem
owns (the investment parties at least) Seedcamp not just a few business angel, one VC and the owner
like in case of YC. Its goal is creating a better startup „ecosystem” for Europe, in the region of diverse
languages, cultures, economies that make difficult growing fast and getting global within a short run.
Seedcamp is also working on creating bridges to the Valley by partnering with American seed fund,
500 Startups, founded by Dave McClure. Seedcamp also have negotiations on building other
partnerships in New York, Boston and Berlin.
Founded 2007
Location London
Founders Saul Klein, Reshma Sohoni
Companies per class 15-20
Notable Alumni Mobclix, Zemanta
7. Table The basic facts of 500 Startups Source: seed-db.com, 500.co

44
6.5 Startup Sauna
Startup Sauna is a Finnish not for profit accelerator founded in 2010. Startup Sauna is funded by the
Startup Sauna Foundation that is backed by SITRA, Teknologiateollisuus, Aalto University and private
companies. Startup Sauna connects the pre validated startups from Northern Europe, Russia with
experienced serial entrepreneurs, investors and media from around the world. In practice, Startup
Sauna consists of three different operations:
 An internship program for university graduates to intern at high-growth companies in Helsinki and
Silicon Valley. More than 60 interns have been employed through the program to date
 An accelerator program for early-stage startups from Northern Europe and Russia, where the
startups get coached by experienced serial entrepreneurs and investors in an intense one-month
program in Helsinki. More than 90 companies have graduated from the program since 2010
 The Slush conference, which brings together the early-stage startup ecosystem in the region to
meet top-tier venture capitalists and media from around the world. In 2012, Slush gathered more
than 3.500 attendees, 550 companies and 250 investors and journalists for two days in Helsinki
Startup Sauna seeks the most promising early-stage startups learn, grow and help them become
successful ventures with the help of their extensive network of coaches since 2010. Startup Sauna is
physically located in its own co-working space found on Aalto University's campus in Espoo, Finland.16
Startup Sauna is funded by Aalto University, Tekes (The Finnish Funding agency for technology and
innovation), Teknologiateollisuus and Sitra.17
Startup Sauna is using a mixed ownership structure as
the Finnish accelerators and incubators usually tend to do. (Turi, Koranyi, 2010)
Founded 2010
Location Helsinki
Founders Kristo Ovaska, Captain, Juha Ruohonen
Companies per class 15-20
Notable Alumni Ovelin (USD 1,4mil from TrueVentures, Futureful
(USD 2 million including founder of Skype Janus
Friis), Advacam, Blaast, Videolla (Virool), Asema
Electronics, Dentatube, Audiodraft, Infogram,
Froont, Mcule.com, SooMeta, MailMill
16
Source: www.startupsauna.org Dowloaded: 29. 04. 2013
17
Source: angel.co/startupsauna Dowloaded: 29. 04. 2013

45
8. Table The basic facts of Startup Sauna Source: seed-db.com, startupsauna.org
6.6 Startup Wise Guys
Startup Wise Guys is an international 3 months intensive and mentorship driven accelerator program
for early stage technology startups. The program is hosted twice a year and up to 10 new teams are
accepted to each cycle of the acceleration that means investment in 20 startups a year. The program
is tailored for startups who want to take their prototypes to new level and work hard for business plan,
product development and get mentorship, guidance. Startup Wise Guys network consists 70+
international mentors and patch of international teams. Startup Wise Guys is based in Tallinn, Estonia.
The program ends with Demo Days in Estonia and in London. Startup Wise Guys gives chosen startups
up to €15 000 investment based on the number of founders. In return Startup Wise Guys take 8% of
equity. (startupwiseguys.com, 2013)18
SWG has an agreement with SmartCap for 1M EUR investment for alumni and the team is currently
working on a follow up US program for selected teams.(angel.co, 2013)19
Mentors are divided into 3 categories - local, corporate and international mentors. Each team is having
their personal mentors, and given access to others as well. The startup companies are supported by
13 angel investors who actively participate in the selection process to get experience in co-work and
confirmation to continue their individual investments.
Founded 2012
Location Estonia, Tallinn
Founders Jon Bradfor, Herty Tammo, Mike Reiner
Notable Alumni Brandiegames, Monolith VitalFields, Brickflow
9. Table The basic facts of Startup Wise Guys Source: seed-db.com, Startupwiseguys.com
18
Source: www.startupwiseguys.com Dowloaded: 29. 04. 2013
19
Source: https://angel.co/startupwiseguys Dowloaded: 29. 04. 2013

46
6.7 StartupBootcamp
Startupbootcamp is a three-month European startup acceleration program providing seed funding, co-
working space with other startups and a significant mentorship program - which focuses on getting
your startup the right exposure, the ability to scale across European to global markets and funding
from potential investors. Startupbootcamp accelerates ten early stage tech startups per program with
€15k in micro funding, free office space, 100+ serial entrepreneurs, mentors and exposure to hundreds
of investors on Demo Day. In return Startup Bootcam receives 8% equity from the startuppers.
Founded 2010
Location Copenhagen, Madrid, Dublin, London, Berlin,
Haifa
Founders Alex Farcet, Luis Riviera, Eoghan Jennings
Companies per class 10 teams/city
Notable Alumni Archify, balconytv.com, Viewsy, TheEyeTribe,
Poikos, Skynet Labs
10. Table The basic facts of StartupBootcamp Source: seed-db.com, startupbootcamp.org20
6.8 Startup Highway
StartupHighway is a European start-up accelerator, aspiring to be the best of its kind in the wider CEE
region. It is designed for those with the best business startup ideas to provide them with the tools,
network and knowledge necessary to get in shape for angel or venture capital funding. The support
comes as pre-seed funding, office space and a network of experienced mentors to help the admitted
20
Source: seed-db.com and startupbootcamp.org Dowloaded: 29. 04. 2013

47
teams’ business idea become a successful business, or to prepare your young business for the next
round of funding.21
Three months of intense work, combined with the regular mentoring sessions together with the weekly
guest visits seems to be a great recipe for all the companies participating in this program. In addition,
each startup receives up to €14,000 in seed funding, free office space and other essential services
(accounting, legal, hosting, etc.) in return StartupHighway asks for 7,5% of the startups equity.
According to the terms of this new partnership with Practica Capital, each of the teams composing
StartupHighway’s spring class in 2013 will be eligible for a EUR 30 000 convertible note.22
Startup Highway was founded by the local startup community builder – Rokas Tamosiunas. By
exploiting his wide network of connections, Rokas was able to attract only the most promising startups
in the region. Hundreds of applications were received; nine startups have started the first program.
The accelerator program is finishing with the Demo Day. The accelerator is having a number of high-
profile mentors, including Jon Bradford (co-founder of Springboard), Lauri Antalainen (co-founder of
GameFounders), Lopo Champalimaud (CEO and co-founder of Wahana), and Toivo Annus (co-founder
of Skype). StartupHighway is having 19 months of existence, it has accelerated 10 startups over two
classes. Within 12 months after graduation three out of four startups from the first batch raised follow
on funding.23
Founded 2011
Location Vilnius, Lithuania
Founders Rokas Tamosiunas, Indré Milukaité
Notable Alumni Sellfy, Relead, Lamas Valley, Utilimon
11. Table The basic facts of Startup Highway Source: seed-db.com, startuphighway.com
21
Source: http://www.startuphighway.com/en/team Dowloaded: 29. 04. 2013
22
Source: http://goaleurope.com/2013/04/15/lithuanian-startup-accelerator-startup-highway-announced-
partnership-with-practica-capital/ Dowloaded: 29. 04. 2013
23
Source: http://techcrunch.com/2013/01/29/accelerators/ Dowloaded: 29. 04. 2013

Growing global ventures by effective seed acceleration – The opportunities and barriers of business acceleration

Growing global ventures by effective seed acceleration – The opportunities and barriers of business acceleration

Recomendados

Recomendados

Más contenido relacionado

Último

Último (20)

Destacado

Destacado (20)

Growing global ventures by effective seed acceleration – The opportunities and barriers of business acceleration