TechStar Co-Founder Brad Feld: Are We Experiencing A Startup Accelerator Bubble?

IncubatorsIn 1961, after 70-years, professional baseball created its first expansion teams – the Angels and Twins. Naysayers harshly criticized the growth of the league, fearing that new teams would dilute the talent pool and ultimately lower the quality of game play.

Since 1961, professional baseball has grown from 18-teams to 30. Over the same period, professional football and basketball leagues also expanded dramatically.

Although sports purists would no doubt quibble about the impact expansion has had on professional sports, most fans agree that the overall talent level has remained relatively constant, despite the significant increase in the number of professional athletes.

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Expansion League Teams In The Startup World

In the past year, the number of startup accelerators and incubators across the US has grown faster than expansion league baseball. This growth led Jed Christiansen to base his master thesis on the impact and efficacy of the phenomenon. In 2009 Jed created a Google doc to track the seed accelerators. By mid-2011 he noted, "As seed accelerators have exploded in number world-wide, it's become nearly impossible to keep this (Google Doc) working."

I recently discussed the explosion of seed accelerators and incubators with Brad Feld, who, as the Co-Founder of acclaimed startup accelerator TechStars, is uniquely qualified to opine upon the subject.

Brad Feld's Incubator's Quote

You can watch my seven minute discussion with Brad below or on YouTube here:

I started our conversation by asking Brad if he felt the recent surge in accelerators and incubators reflected a replay of the phenomenon we witnessed a decade ago, when incubators largely failed to generate reasonable financial returns.

Brad prefaced his comments by highlighting several meaningful distinctions between accelerators and incubators."I think there is a fundamental difference between an incubator and an accelerator… (this) distinction helps people understand why, (even though) … there is a saturation point, but we are nowhere close to it. The distinction between the two is that an incubator has an economic model that is based around having people be tenants. Having people being captive within some investor's…sphere.

The money that went into them was usually very inefficiently deployed because it was deployed against infrastructure, it was deployed against a longer arc of build-up and you were into a company a while before you knew whether something was going to work or not.

With accelerators, it's a very focused process, it's 90-days long. We are actually giving the companies money, rather than taking money from them. So it's a very early form of investment. If you use the mentor-driven model that we pioneered at TechStars, you get entrepreneurs who are deeply connected with the broader entrepreneurial landscape.

If their first companies don't work, it's totally fine, because they built… muscle around creating a startup that would take many years and lots more money to create."

Brad went on to address the issue of a diluted entrepreneur talent pool and its potential impact on the efficacy of new accelerators.

"I am not going to say A and B and C players as in expansion baseball, because there is a wide variety of skill sets. It's taking people that are relatively inexperience, (but) not entirely inexperienced.

Many experienced entrepreneurs choose to go through an accelerator because of the network effect and the dynamics of the mentor help that they get. But it's people that tend to be entrepreneurs who are early on their company and entrepreneurial arc. It allows them to really accelerate their own development. We like to think that in 90-days, you get two years or three years worth of real, focused effort. Not just in terms of your concentrated effort as an entrepreneur, but because of what you are surrounded with."

TechStars has expanded beyond its home base of Boulder, establishing regional chapters in Boston, Seattle and New York. In addition, it is accelerating accelerators in a number of regions by affiliating with third-party accelerators worldwide.  

Given TechStars' "expansion league" strategy, I was curious as to Brad's thoughts regarding the various saturation points of regional markets. For instance, in Los Angeles, there are currently 23 accelerators, incubators and colocation facilities, as documented in Ben Kuo's recent SoCalTech series. As Ben points out, many of these organizations were formed within the last 12-months. "The goal of an accelerator is to get companies funded with seed financing. It makes a higher-quality company…the investors that are around the accelerator have a better choice of companies. Could you have a thousand companies a year going through accelerators? Sure. Could you have ten thousand? There some limit, but I don't feel like we're there.

In a big city like LA, could you have four or five (accelerators)? Sure. In a small town like Boulder could you have four or five? Probably not. You get saturation that is different, by geography."

Given the rash of accelerators and incubators in LA, differentiation and market segmentation has emerged. According to Sam Teller, LaunchPad LA's Managing Director, "At Launchpad LA, we have two parallel goals that are often intertwined. First, to marshal our deep network and experience to help an exceptional group of LA startups grow their businesses and gain third-party validation from customers, partners, and investors. Second, to establish a physical hub for the LA startup ecosystem by opening our offices not just to entrepreneurs, but to mentors, investors, advisors, and other startups who we hope will benefit from our events and educational programming."

Echoing Sam's sentiments, Brad passionately believes that the impact of accelerators on a regional startup ecosystem grows over time. This effect is accentuated with the launch of each new accelerator. "There is a cumulative, positive effect because it continues to get the alumni group bigger, the network of mentors bigger, the network of investors bigger and the integration into the community deeper.

That said, is a two or three or year program that goes away…a net negative? No. I think it's a huge positive. It's another resource for entrepreneurs. I think you'll see a lot of accelerators go away and frankly, that should be (considered) normal."

Brad concludes his comments by underscoring his belief that the US is not facing a pending startup accelerator bubble. He believes that such concerns are a legacy of the dot com meltdown of the last decade. "Whenever there is a big amplification of stuff in the tech community…anybody who has been involved in it for more than a decade remembers 1999, 2000, 2001. On the one hand, you don't want to repeat it. On the other hand, you want to be optimistic. So whenever there is something that feels like there is too much of it, the reaction is AGHHHHH." <watch the video to see Brad's untranscribable reaction – very funny>

Expansion League Success Factors
There are a number of elements which contributed to maintaining a high-level of game-play in professional sports, despite the leagues' growth, including: improved conditioning, player specialization and the maturation of youth leagues.

With the proper infrastructure in place, the average level of human abilities can be enhanced, even as the number of participants increases. To this end, seed accelerators serve a similar function as minor league and college sports teams. By providing entrepreneurs with a safe, supportive environment to experiment, fail and ultimately succeed, accelerators have enhanced the talent of their participating companies, despite the dramatic growth in the overall number of accelerators. Brad sums up this reality by saying, "The more resources for entrepreneurs that are feeding entrepreneurs, rather than taking from entrepreneurs, the better."

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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