Some of functionality may not work while you disabled JavaScript. Enable JavaScript for better User Exprience.
Access here alternative investment news about Disrupting Venture Capital: Accelerators, Incubators and Network Effect Platforms - Part I
Venture Capital

Disrupting Venture Capital: Accelerators, Incubators and Network Effect Platforms - Part I

by trusted insight posted 1year ago 1060 views

In the past, the best venture investors were found at the later stage, where traditional growth equity brands were considered the go-to partners to successfully scale one’s company. Since then, the top investors have focused on earlier and earlier stages, to where even emerging micro-VCs have generated considerable returns.

In the past decade, the most valuable technology investors have evolved to become platform-enabled incubators and accelerators. The opportunity to generate outsized returns at seed and pre-seed stages has become increasingly evident. In fact, Pitchbook data shows the number of incubators and accelerators has grown from 334 in 2006 to 1525 in 2016 (CAGR of 16.4 percent).

Accelerator and incubator models have become the supreme investors in the venture space for several reasons:  

Incubators or studios assemble specialized teams to work together on several ideas. As an idea proves successful, the incubator scales the team and capital accordingly. Typically, incubators can take a meaningful piece of the company, at times up to 90 percent.

Accelerators are ecosystems that accept startups into their program. Once accepted, startups receive support from in house experts and the accelerator’s network while participating in the program for a fixed period of time, usually 3-9 months or longer. Accelerators provide $50,000 to $150,000 in funding for 7-15 percent in equity.

New VC models are outperforming at a different order of magnitude.
 


As outsized returns are concentrated on a few startups, these new models now capture much of potential early-stage returns.

Lower costs for starting companies have increased the number of startups and their ability to scale. The increased number of companies requires platforms to source at scale.    


As the cost of starting a company has decreased to almost zero, series A is no longer the first round of financing for a lot of startups. Marc Andreessen has made the point that traditional VCs are no longer the first round of financing in startups. In fact, companies nowadays have up to five rounds of financing before they even reach their Series A. As a result, traditional series A and B venture investors with large-size checks no longer fit with the “to-go-market” round for startups. Founders now primarily seek seed investors who have previous operating experience and can help with various aspects of building business.

Traditional venture capital has become a later stage of financing that is similar to private equity and has a difficult time generating outsized returns.

Large fund sizes in the range of $500 million to $1 billion have prevented traditional VC firms from investing in seed rounds. As mentioned above, with decreasing capital requirements of launching a technology startup, seed and pre-seed rounds are usually where the highest growth occurs; these are the rounds that are most primed for outsized early stage returns. Yet, only 4 percent of institutional capital is allocated to non-traditional VC firms, including accelerators, incubators and seed funds, according to Pitchbook data.

An increasing amount of top breakout companies are now funded by non-traditional VCs like seed funds, incubators and accelerators. 70 percent of the top 10 companies in the past 10 years are backed by such investors.


These models can be as simple as an accomplished serial entrepreneur creating companies methodically to large-scale operations like Y Combinator. A study by the Academy of Management shows that companies from top programs accomplish more key milestones than non-accelerator-backed companies. Milestones includes time to raise follow-on financing, exit by acquisition, or increased customer traction. Given these advantages, top accelerators are attracting quality founders and therefore enable them to grow breakout companies faster. On the other hand, TI Platform Fund finds that top entrepreneurs are now applying their learnings and networks to incubate numerous breakout companies.

Models with a network effect platform are able to capture breakout companies early.

Incubators and accelerators are continuously scaling their rippling network effect. For example, while Y Combinator only has one office location, unlike many other accelerators,  it is no secret that its biggest advantage is an impressive network of alumni founders.

New models of incubators and accelerators will continue evolving while disrupting the venture capital asset class.

Incubators and accelerators have a few structural advantages: they are able to source companies at scale; create platform-enabled, multi-disciplinary networks of experts, founders, customers and investors; and launch companies at extremely low costs, creating a favorable environment for company creation.

Venture Capital has been disrupted by these models since Y Combinator’s early days. The effect of this disruption will be increasingly prevalent in upcoming years.


 

Part two of this article will discuss how incubators and accelerators in line with seed funds can create tremendous long term value for institutional investors by providing early access to breakout companies. Please contact tiplatform@thetrustedinsight.com if you have any questions or would like to discuss this piece further.
 

Important Disclosures

This blog is for informational and educational purposes only. Nothing in this blog constitutes investment, legal or tax advice. This blog is not intended to constitute any offer or solicitation to buy or sell securities. Offers of securities or investment advisory services may be made only pursuant to appropriate offering or other disclosure documents, and only after prospective investors have had the opportunity to discuss all matters concerning the prospective investment or engagement with their adviser and the issuers of the securities. In addition, neither TI Platform Fund I GP, LLC nor any of its affiliated entities (collectively, “Trusted Insight”) may offer interests in any of its unregistered funds or accept subscriptions from any potential investors with whom it has no prior or existing relationship until the expiration of a 30-day “cooling off” period with each potential investor, respectively.

This blog is not an offer to sell, or solicitation of offers to buy, securities. Investments in a private fund can be made only pursuant to such fund’s subscription documents and private placement memorandum and only after careful consideration of the risk factors set forth therein. Non private fund investment advice shall be provided in accordance with the investment management agreement. Investments entail significant risks and are suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment. Investment advice offered by Trusted Insight is typically available only to investors who meet statutory qualifications as promulgated under the Investment Advisers Act of 1940 and the Securities Act. In addition, there can be no assurance that current investments will be realized as projected. Actual realized returns will depend on, among other factors, future operating results, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing and manner of sale, all of which may differ from the assumptions on which the information contained herein is based. It should not be assumed that any issuers described herein were or will be profitable. Forward-looking statements involve known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples and should bear in mind that past performance is not necessarily indicative of future results. Neither Trusted Insight nor any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were originally made. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Information included herein does not constitute investment advice and should not be viewed as a current or past recommendation to buy or sell any securities or to adopt any investment strategy.

This blog is not to be distributed or disseminated without the prior written consent of Trusted Insight. This blog and any of the content therein is the sole and exclusive property of Trusted Insight. Nothing in this communication nor the contents of this blog are intended to imply that such investments may be considered “conservative”, “safe”, “risk-free” or “risk averse.” It should be noted that past performance is not indicative of future results.