Our Deputy CEO at Capital Enterprise, Darren Balcombe, recently wrote a detailed and thought-provoking blog post about the work we have been doing in South Yorkshire through the TEAM SY programme. For anyone interested in the nuts and bolts of how a tech startup ecosystem works, I recommend giving it a read as it addresses many of the key challenges we see repeated across South Yorkshire as well as in many other places – everything from how to deal with the entrepreneur pipeline problem, to addressing the shortage of seed-stage investors who fund early-stage companies.
Today I’d like to focus on one aspect of our approach with TEAM SY and explain in more detail why we believe this area of work merits public investment: that is, the critical importance of startup accelerators and incubators to the development of a tech ecosystem, and why we need more of them. We at Capital Enterprise have significant experience in this area, and simply by running the numbers (as I will below) it is possible to show they make a very strong return on investment.
First, a quick explanation for those new to this terminology. Incubators are usually shared workspaces where entrepreneurs in the earliest stages of creating a business base themselves for the first 6-12 months. Sometimes offering ad-hoc support in the form of mentors and speakers, most incubator programmes are not-for-profit, run by universities, local government, or another entity that supports startup creation.
Accelerators, by way of contrast, target companies in a later stage of their development. Accelerators typically work on a cohort system, rigorously selecting from a large pool of global applicants and shepherding them through a 3-6 month development process where ideas are tested and often discarded, high-quality mentoring and feedback are provided by startup veterans, and important decisions about each company’s future direction are taken. The goal is for years worth of learning and experimentation to be compressed into just a few months. By the time they graduate, these companies should be ready to raise funding and start to scale.
Recent years have seen it suggested that accelerators are falling out of fashion. In part, this is because many of them work by taking equity in the companies they support, which can sour the deal for other early-stage investors (for more on this, please see my LinkedIn post on this topic as well as this excellent blog post by Gil Dibner). That is a shame, because accelerators deliver tremendous value, both for investors and in terms of ecosystem development and job creation, and I know this because many such high-quality accelerators have been delivered in partnership with Capital Enterprise.
From 2016 until 2019, Capital Enterprise ran a programme called CASTS that over the 2.5 years of its duration matched the operating costs (primarily salaries) of 12 London-based accelerators, including Seedcamp, Techstars, EF, Startup Bootcamp Insurance and IOT, Emerge Education, Collider, TAN, The Bakery, Deep Science Ventures, the Seraphim Capital-run Spacecamp and the SOSV-backed Rebel Bio. These accelerators supported 475 startups, slightly less than half (220 or 46%) of which went on to raise funding from other investors.
The last time I ran the figures, the total funds raised by those 220 startups to date stand at more than £1.3 billion, including one company that has become a unicorn valued at more than £1 billion, eight other successful exits, and more than 5,000 high-quality jobs created. In fairness, another dozen or so companies have ceased trading.
The cost of this highly successful programme was a mere £7.4 million, half of which came from the public sector and the other half from private sector sponsorship. Sadly, CASTS is no more, having been canned by the powers that be in the belief that supporting early stage startups is a poor use of public money.
The disadvantage to running an accelerator is that they are tremendously resource-intensive. Cohorts must be kept small or quality is diluted, which implies high staffing costs for those providing the programme. This is why financial support is so crucial if they are to continue. It should come as no surprise, then, that since CASTS was discontinued, more than half the accelerators we partnered with have ceased working in the UK, putting a real dent in the availability of these programmes.
There are three further reasons why supporting accelerators is an excellent investment, whether for government, corporate sponsors, and VCs:
- Accelerators are a great way of attracting new talent to a region, especially from overseas to the UK. Almost two-thirds of the founding teams that went through CASTS-backed accelerators were foreign born. These programmes are also very important for founders from overlooked backgrounds, who would not ordinarily have access to this type of advice and mentorship. If we want a more diverse tech sector and for the UK to continue attracting top-quality talent from overseas, then backing accelerators is a tried and trusted method.
- Accelerators are a good way to give a boost to pre-seed funding. Whilst overall the investment going into tech startups has never been higher, investment in pre-seed rounds (companies raising funds for the first time at $500,000 or less) in the UK has been flat. In these circumstances, an accelerator is even more useful – not only as a means for pre-seed investors to discover talent but for the opportunity to get to know the startups and follow their progress prior to committing money. If we had more accelerators, especially those that not only support but invest, then I think we would get more pre-seed cheques written, with enormous consequences for the future health of tech startup ecosystems.
- Investors, whether they are VCs or corporates, should consider financing accelerators or similar programmes to get exclusive access to deal flow and the opportunity to invest at a “fair” price set by themselves. The data from our CASTS programme shows that the share of startups going onto raise following participation in an accelerator is higher than forecast, and the subsequent valuation increases for companies raising 6-12 months after completing the programme are substantial. For investors, the benefits of having first access to these companies should outweigh the cost of running an accelerator programme – especially when there is public money involved as well.
As regional tech startup ecosystems take root across the UK, the presence of accelerators, as well as incubators and other types of business support, is a crucial ingredient that can make or break the success of the ecosystem as a whole. Our experience with CASTS shows that genuine private-public partnership can deliver tangible benefits by attracting investment and creating new sources of high-quality employment. I hope that both the private sector and the public sector will return to the view that such an important component of a thriving startup ecosystem deserves their support.