Ross Baird, chief executive at Village Capital, takes a closer look at accelerators and entrepreneur support programs and asks: do they work?
Silicon Valley is the envy of the entrepreneurial world, and it deserves to be. It is a seamless ecosystem for entrepreneurs: if you are in the Silicon Valley system, and have a great idea, you can find the resources you need to succeed.
But in other cities, local leaders have had to create this ecosystem from the ground up.
In 2007, in Boulder, Colorado, Brad Feld and Dave Cohen built Techstars as an early accelerator, surrounding new businesses with the resources and mentors they needed to succeed. Since then, local leaders have launched accelerators in more than 1,000 communities across the world.
But do accelerators and other entrepreneur support programs actually work? In 2013, our team at Village Capital joined with Emory University and the Aspen Network of Development Entrepreneurs to release the first global research study on entrepreneur support programs: Bridging the Pioneer Gap. Three years later, the Global Accelerator Learning Initiative published a first-of-its-kind study to find out what works and what does not in acceleration: looking at 15 of Village Capital’s investment-readiness programs, they found that our model was helping entrepreneurs raise more capital – and that we might want to spend less time on certain things, like teaching financial modelling.
Last year, our team at Village Capital set out to take this question – “What works in entrepreneur support?” – one step further. We teamed up with DOEN Foundation, Kauffman Foundation, and Sorenson Impact Foundation to conduct a real-life experiment called VilCap Communities. In the pilot year, we selected 26 community leaders who committed to using Village Capital’s peer-selected investment model to invest $50,000 into local entrepreneurs. While not every program succeeded, all the programs provided instructive insights into how to build effective communities.
Here is what we learned.
She Leads Africa, a female founder-focused VilCap Community in Lagos, Nigeria
1. Know the problem you are solving: helping entrepreneurs raise money is not a natural outcome, it is distinct skill set.
Most companies are under-capitalised: 78% of startup investment in the US and 50% of startup investment in the world goes to just three states, while less than 5% goes to women and less than 1% goes to people of colour. Ecosystem builders can help.
Yet if the problem you are solving for is helping entrepreneurs raise money – getting companies ready to close a deal with an investor – make sure you are building the right solution.
Too many entrepreneur support programs promise everything to everyone. There is a distinct difference between “business model development” and “levelling up for investment,” but most entrepreneur support programs spend their time teaching the former, with the goal being to help companies validate their business model (think: “lean startup” or “business model canvas”) and then let entrepreneurs loose on a demo day, introducing them to investors – often with poor results.
I started Village Capital in 2009 to help entrepreneurs specifically level up for investment. Our core innovation: a peer-review process through which entrepreneurs in each program actually play the role of investor. Does this make for a better program? Although most of our 26 communities chose to customise the tools we provided (only 23% used the full curriculum), 100% of the communities used peer-selected investment.
The results were positive: 92% of businesses felt that the program made them more ready to raise investment for their next stage of growth. Beyond that, 92% of entrepreneurs connected with a meaningful mentor, 80% connected with a potential partner and 64% connected with a potential investor.
The lesson: know the problem you are solving. Not every accelerator or entrepreneur support program should focus on investment-readiness. Some specialise in offering product validation; others help founders develop strategic partnerships with big institutions. But if your promise and goal is helping entrepreneurs raise capital, make sure your pedagogy and learning outcomes are targeted to measurable increases in investment-readiness.
2. Be honest that building an ecosystem is not a profitable end in itself (and that is okay). Entrepreneur support organisations are infrastructure, not businesses. Get real about your goals beyond profitability and track them.
There is an old saying: “the cobbler’s son has no shoes.” The idea applies here: accelerators and incubators that are helping local businesses often have trouble with their own business models.
In our evaluation of the pilot, we found that 55% of every dollar taken in by the 26 programs was philanthropic. At the end of 12 months, 11 of the 26 communities were unable to reach their capital goals for launch – and none of them were “sustainable” without philanthropic subsidy.
As it turns out, entrepreneur support organisations may never be “revenue-sustainable” in a traditional sense. That is actually OK. These organisations, when effective, are critical infrastructure for a city or a community, and should be treated as such.
The Lean Lab, an education-focused VilCap Community in Kansas City
There are two important takeaways here. For policymakers, foundations and elected officials who commit publicly to supporting entrepreneurs: remember that you will more than likely need to put your money where your mouth is and support those who support entrepreneurs.
For entrepreneur support organisations: make sure you are accurately communicating what your goals are and sharing your progress with entrepreneurs, funders and any other stakeholders. Are you trying to make every company that goes through your program ten times more profitable? Are you trying to build a more resilient community? If you fail to set expectations, you risk alienating those who can support you financially.
3. Topophilia: communities should focus on sectors with deep and local resonance.
Last autumn over breakfast, I asked John Hickenlooper, governor of Colorado, why his state had four of the top 10 best-performing ecosystems in the country. “Topophilia,” he answered. The word, meaning “love of place,” highlighted a Colorado truth: Fort Collins is distinct from Boulder and Boulder is distinct from Colorado Springs, and they are all thriving because they are trying to be the best version of themselves.
Our VilCap Communities hypothesis from the beginning was that cities should not try and recreate Silicon Valley; they should be the best version of themselves. Many of our programs embraced a sector focus that resonated with the city. For example, Philadelphia launched a financial technology program, building on Philadelphia’s institutional history of financial services R&D since Benjamin Franklin designed the coins for the first US Mint. Cincinnati’s program focused on water innovation, building on its history as a bridge town and its private sector leadership in the water sector.
The results for these sector-specific programs were strongly positive. The cities that embraced a sector-meets-city thesis raised money more quickly, attracted better entrepreneurs, and were more likely to run and succeed.
VilCap Communities 2.0: what is next?
Rather than revolving around one distinct program, VilCap Communities 2.0 will be organised around three key skill sets that everyone who wants to support entrepreneurs needs to excel at, and work with partners worldwide to build solutions around each:
Find: a tool to recruit for entrepreneurs like we recruit for athletes
Jim Clifton, Gallup CEO, often comments that if you are a world-class athlete, then wherever you live, you have got a path to success. Our society spends billions of dollars recruiting athletes each year – why can we not do that for people who build businesses? The single most common resource that our communities requested was a tool to better recruit and evaluate companies better.
In the coming months, we will be launching a “Find” working group of investors and entrepreneur support organisation who want to think differently about how to source and evaluating communities. If you are interested in being a part of it, let us know.
Train: best practices in helping companies raise money
92% of the entrepreneurs in the pilot year reported that the peer review model helped them level up for their next stage of investment. Building on lessons learned from the past year, we are working to combine our successful curriculum with an investor and entrepreneur curation tool.
We are going to build on our work over the last year and launch a more focused “Train” working group of people who are creating, implementing, and sharing best practices in investment-readiness programs. If you are interested in joining, please let us know.
Invest: innovation in new financing vehicles
One of the organising questions of VilCap Communities is “how do we get more venture capital into more communities across the world?” Maybe that is the wrong question. Fewer than 1% of companies worldwide raise venture capital, and in most industries and places, “one size fits all” tools, like tech accelerators or venture capital funds, might be the right tool – or might not fit.
We have seen many other models work better in some contexts. For example, many agricultural businesses actually prefer a revenue-share structure to traditional equity investment, including Fin Gourmet, which is creating living wage jobs in one of Kentucky’s poorest counties and was recently profiled in Bloomberg. And my co-founder Victoria has highlighted other ways that new and alternative investment models are delivering better results.
Last week, Kauffman Foundation convened a design session of 45 investors and entrepreneurs to discuss a trillion-dollar moonshot – how could we get a trillion dollars of new capital into entrepreneurs in the next decade? We are not going to solve the problems we have by only using the investment structures we are most familiar with. A third bucket of VilCap Communities 2.0 will be to explore blended investment options that look past the one-size-fits-all equity model, and instead deliver capital based on company needs: let me know if you are interested in getting involved.
We are releasing a full report with more of these learnings in the coming weeks. To the partners who have made this ambitious pilot possible; thanks for going on the journey with us. In the meantime, if any of the ideas here seem like something you would be excited about, e-mail me at firstname.lastname@example.org.
– This article first appeared on Medium and has been republished with permission from the author. You can find Village Capital at VilCap.com.