Government Shouldn’t Be In The Accelerator Business

This article originally appeared online at Inc.com in an article titled Government Shouldn’t Be In The Accelerator Business. I talk more about this and lots of other topics in my recent book Startup Communities: Building an Entrepreneurial Ecosystem in Your City

As a co-founder of TechStars, I’m a huge believer in the mentor-driven accelerator model. But I don’t think government should be funding these accelerators, nor do I think they need to.

A good accelerator can be run in any city in the world for $500,000. Entrepreneurs with a compelling track record and approach should be able to easily raise, or even provide this capital. As evidence of this, there are already hundreds of accelerators in the U.S., without government funding, being run as entrepreneurial ventures for profit by entrepreneurs.

When we started TechStars in 2006, the idea of an accelerator was brand new. We funded the first TechStars program in Boulder in 2007 with $230,000. There were four investors – me, TechStars CEO David Cohen, David Brown, and Jared Polis. All four of us had been successful entrepreneurs and we decided to try TechStars as an experiment to help create more early stage start-ups in Boulder. We figured out the downside case was that we’d spend $230,000 and end up attracting 20 or so new, smart entrepreneurs to Boulder.

That first program went great and has already returned over two times our invested capital with several of the companies still having future value. We ran the second program in 2008, expanded to Boston in 2009, and adopted a funding strategy for each local program which we continue to use to this day. TechStars surpassed our wildest expectations and now runs over 10 programs a year for over 100 start-ups around the United States. We’ve begun expanding internationally with our first program running this summer in London. And there are many other accelerators around the world using the TechStars mentor-driven model that are members of the Global Accelerator Network.

All of this is privately funded. We’ve never taken a dollar of government funding, nor do we plan to.

While the amount of money required to run a program has increased from the original $230,000, it’s still well under $1,000,000 per program cycle. As a result, the amount of capital we need to raise to run a TechStars program is modest, and since we run it to make a financial return, it is actually an investment, rather than an expense. And, by being focused first on the financial return as well as playing a long-term game (we expect to be running TechStars accelerators for a long time), we are very thoughtful about how we allocate capital.

If entrepreneurs can’t figure out how to fund it, why should the government do it? That just seems like a situation where capital is going to be allocated poorly and the incentives won’t be tightly aligned.

  • http://twitter.com/ChrisLaPre Chris LaPre

    I think local governments are funding accelerators to create a local ecosystem of mentors and excitement in the startup community (and to a small extent, jobs). It might not be as effective in creating startups as when it is led by someone with a proven track record but those other goals can’t be ignored.

    • http://www.feld.com bfeld

      Yes – but my assertion is that government doesn’t have to do this – private citizens will do this. If government wants to help motivate private citizens to do this, they should use tax credits for people who invest / create these things, rather than allocate tax dollars to spend on them in the first place. It’s a much more powerful and effective capital allocation and incentive structure.

      • http://www.pointsandfigures.com pointsnfigures

        100% upvoted.

  • http://twitter.com/TechonomicMan Wayne Barz

    I understand this sentiment and vote for smaller government every chance I get. However, when TechStars got started Ben Franklin TechVentures was already 23 years old, had helped launch almost 100 businesses, our clients had created about 4,000 jobs and we had about 10 better than average exits including 2 IPO’s. Not from Silicon Valley, but from Bethlehem, PA of all places! The notion of mentoring a tech start up, surrounding them with a network of experienced people and providing seed capital did not begin with accelerators. It began with business incubators where “launch and hope” types of companies represent only about 20% of the company mix and the other 80% include life science, materials, semiconductors and others. We’re funded by the Pennsylvania taxpayers and aside from the jobs and great ecosystem that’s developed, the jobs at Ben Franklin funded companies have generated $3.50 for every $1.00 invested in the program…from PA WAGE TAXES ALONE! Just wanted to provide one anecdotal counterpoint to your argument.

    • http://www.feld.com bfeld

      There are definitely good examples – like this – of successful state programs. However, there are a relatively small percent that have positive economic impact. I appreciate you pointing out one of them!

  • Colin

    Couldn’t agree more. If your city’s best and brightest can’t pull it off, why on earth would you think a group of bureaucrats could? Sounds like a good way to have a bunch of “planning to plan” meetings.

  • Mário Valente

    Capital is allocated poorly, but political capital is monopolized.

  • http://twitter.com/joelgrus Joel Grus

    If entrepreneurs can’t figure out how to fund it, why should the government do it?

    I can think of at least two reasons:

    1. Private funders make investment decisions based mostly on what they think will be profitable and successful, whereas government funders will be able to take into account other things like “how will this help me get re-elected?” and “how will this help my politically-connected supporters?”

    2. There’s no easy way to attach strings to private funding, but it’s easy to make rules like “every company taking government funding must do X, Y, and Z.”

    In light of these benefits, why wouldn’t the government want to get involved?

    • http://www.feld.com bfeld

      I thought that was a perfect argument for why entrepreneurs wouldn’t want the government to get involved!

      • Dan R

        I think that is his point…

  • http://www.concretenetwork.com/ Jim Peterson

    Agreed Brad. A government can’t allocate capital like an individual(s) can with their own money. Thus the exhorbitant cost of everything our government does. The incentive to gain, or “not lose” is not high enough.

  • http://www.valideval.com/ Adam Rentschler

    What’s your take on tax-payer funded competitions and grants, Brad?

    I’m not referring to accelerator programs per se, but rather economic development spend at various levels of government. (SBIR, STTR, state business competitions, etc.)

    We’re seeing anecdotal evidence of positive outcomes for modest government awards, provided the judges are private-sector experts, and the competition uses an evidence-based and transparent decision-making process.

    • http://www.feld.com bfeld

      I’m a fan of some of this. Relatively small dollars that can have a lot of impact, especially if the private sector is involved in the decision process.

  • http://wmougayar.com/ William Mougayar

    Well said.

    And on top of that, there has been an abundance of new accelerators springing-up everywhere, but the quality isn’t keeping-up with the quantity, and that’s an unfortunate thing.

    Starting-up is easy (and becoming easier). Launching is easy. Keeping-up is harder. Growing-up is very tough. Scaling-up is extremely hard and few get a chance to even entertain that challenge.

    At the starting point, all accelerators may look the same for a startup, i.e. we’re a rocket and we’re going to launch, and they will help us. But what differentiates the top accelerators from the wannabes is the quality of mentorship and breadth of the network required to be successful.

    • http://www.feld.com bfeld

      You nailed it – scaling up is the really hard part. Fortunately, the starting up part is now rocking and rolling with the current generation of entrepreneurs and accelerators. It wasn’t that long ago (2006?) where this was not the case.

  • http://www.rodrigoalvesvieira.com/ Rodrigo Alves Vieira

    Well said,

    Brazil offers lots of evidence on how the attempts of “biz acceleration” by the government returns no good results and also, demonstrates the the government has less attention on how the money is spent.

    Here it causes many problems because the country taxes and bureaucracy prejudices a lot small entrepreneurs.

    As many of us say here in Brazil: hey gov, just get out of the way and we’ll be fine.

  • Austin

    This will seem like a sidebar to some, but bear with me…my point is fundamentally focused on measured success in the start-up space, and so it certainly ties to start-ups, accelerators and incubators.

    Let’s imagine that it was 13 years ago in April 2000 for a moment, and as we’re all sitting around the bar at a local pub here in Austin we get into a conversation about rockin’ software companies — the source of the most powerful $-returns over time of any start-up industry.

    We’re trying to see 13 years into the future in terms of which software companies will see the greatest success, and the argument goes round ‘n round as to how we should measure that success in a quantifiable way, not just ‘vision’ or some other intangible. After a sufficient number of local-brewed beers, we all finally agree on the measure: top-line $$ sales for publicly-traded (in the U.S.) software companies. It’s not a perfect measure, but for a variety of reasons we agree that this will suffice. We wrap up our thoughts at our thinking spot with one big question: where will these high-growth software companies be located?

    It’s now ‘now’…April 2013. And so…the questions: (1) where are these companies?, and (2) how many of these companies originated out of an accelerator or incubator?

    Answer for #1: Using Google Finance, I came up with a list of the answer to number one, though it took a good bit of homework to identify the corporate headquarters for each. Out of the top 150 software companies by top-line $$ sales, by state/country, here are the results:

    CA — 41
    MA — 9
    NY — 9
    TX — 9 (note to fellow Austin-o’-philes: only *3* in Austin)
    China — 7
    NJ — 7
    GA — 6
    Israel — 6
    VA — 6
    FL — 5
    MD — 5
    IL — 4
    PA — 4
    CT — 2
    IN — 2
    WA — 2

    …and just one (1) each for: AL, AZ, Canada, CO, Czech Republic, DE, Germany, India, KS, MI, NC, NH, OH, OR, Portugal, SC, Switzerland, TN, WI.

    Answer for #2: While I’d love to be able to say otherwise, I don’t know of a single software company in this list of 150 publicly-traded companies (again, by top-line $$) that began in an incubator or accelerator. If you know differently, no one will be happier than myself to be schooled otherwise.

    • http://www.feld.com bfeld

      Accelerators didn’t exist in 2000. Check back in 20 years on that one.

      Absolute numbers don’t matter here – it’s not a zero sum game. The world can support a lot more entrepreneurs, technology innovation, and entrepreneurship, so the absolute measure of “this many in this state, that many in that state” isn’t a particularly useful indicator.

      • Austin

        Point remaining: where is the money being made in software, really?

        Because location, location, location does matter due to to resources…very much including people.

        I’m not interested in puncturing anyone’s interests (self or otherwise) in creating new companies and success. Quite the opposite. Knowledge is power.

  • http://byJess.net/ Jess Bachman

    Hmm… the argument against government funded accelerators is that Tech Stars and others can do it without government money? I don’t see an argument here. The government generally isn’t involved when the circumstances are ideal, that’s kind of the point.

    • http://www.feld.com bfeld

      I view it as a really inefficient use of government money (that results from tax). If government wants to encourage / accelerate entrepreneurship, there are lots of other ways to do it, and it should do things that the private sector can’t do on it’s own.

  • StevenHB

    Can’t argue with your point but am curious about your motivation in making it. Is this a response to anything in particular? Are there people trying to create publicly-funded accelerators?

    • http://www.feld.com bfeld

      Yes – there are many local governments (and some state governments) talking about them and its currently the newest trendy economic development thingy.
      Hope you and all our Boston friends are safe after today’s horrifying events.

      • StevenHB

        Thanks, Brad. We and everyone we know are all well. Although I knew you weren’t here, as an avid marathoner, you were on my mind.

  • http://yoavlurie.com/ Yoav Lurie

    The fundamental flaw in the logic behind government-funded accelerators is that the funding is the part that matters: it isn’t. Mentors and community are what matter. And, as it happens, when high quality mentors and community are deeply engaged, they are able to figure out the funding on their own.

    Government can and should play a role in bringing people together; shining the light on successes; offering old, empty buildings if the community asks — but, not fronting the cash.

    (BTW, I don’t mean to sound ungrateful for the $18k.

    • http://www.feld.com bfeld

      Well said!

  • http://twitter.com/OguzSerdar Oguz Serdar

    How about initiatives like Start-Up Chile? I can only say good things based on my experience (my startup Limk is from Round 1), and the numbers look great. ($40M for 4-year-budget, 1000 teams all around the world, all working visas included)

    As far as I can remember, two teams from Start-Up Chile also participated to TechStars after graduating the program.

    • http://www.feld.com bfeld

      Check back in a decade. I’ve heard mixed things. Did you (a) stay in Chile after the program and (b) get deeply wired into the local ecosystem?

      • http://twitter.com/OguzSerdar Oguz Serdar

        I had to leave the country to participate another program in Netherlands, but we’re still in touch with most of the locals that we met. I’m also helping them to select new teams as a judge.

        For the rest, I could say that at least 40% of the all participants have been doing both (a) and (b).

        Actually, I totally agree with this article, but for some countries which literally have nothing like a tech scene, I would say that it’s a worthy risk. Other than this, I am more interested in the visa part & have been waiting for the Startup Visa for a long time.

        • http://www.feld.com bfeld

          Useful feedback. Thanks!

  • http://www.lifeexperiencedesign.com/ Brandon Burns

    The government helping to fund private accelerators is not the same thing as a government accelerator.

    I won’t comment on the former, but the latter is definitely a good thing.

    NYC Big Apps, while not an accelerator, shows what kind of awesomeness can come out of technology when its powered by government data to solve government needs.

    Think of public transit, national parks, the postal service, congressional transparency, etc. — how can areas that are controlled by the government be disrupted without the help of the government?

    In the same way Nike uses TechStars as a vehicle to put its data in the hands of entrepreneurs and mentors to innovate its business, the government should be able to do the same and reap the benefits of the output. Actually, all of us as a society can profit from such activity.

    Seems better to suggest and support good ways for the government to be in the accelerator business, rather than claim it shouldn’t be involved in any way at all.

    • http://www.pointsandfigures.com pointsnfigures

      I disagree. As soon as government money is committed, strings are attached. Government should open their data and give everyone equal access-let the private sector handle the creative and build the business part.

      • http://www.lifeexperiencedesign.com/ Brandon Burns

        You’re right that the government data should already be open and accessible.

        So what do we do about initiatives that aren’t necessarily profitable as businesses, but would still be of great use to the common good? Do you suggest private non-profits innovate in those areas?

        • http://www.pointsandfigures.com pointsnfigures

          if you can change the economics. ask why they aren’t profitable for an entrepreneur to take on-or figure out a way to make them profitable. Andy Kessler said some of the best companies are ones that take plenty of free data or commoditized resources and create value around it. Governments shouldn’t be in the accelerator business, or business in general.

  • http://twitter.com/seanhughessb Sean Hughes

    I agree with Brad, we should not be mixing our government with the free market forces. I would however like to say that as a startup myself I can tell you that it is very hard to get any traction if you are not located in one of the traditional startup hubs like Silicon Valley, New York, London, etc. It is frustrating to see wasted funding on some of the crappy ideas coming out of there when there are so many other cool ideas not getting any attention throughout the rest of the nation. I am working tirelessly to fix that problem, help regardless of where you are located, StarBlock.com

  • http://www.facebook.com/webbjo Webb Johnson

    I was part of a government funded accelerator effort in the early 2000s that was, like most, well-intentioned, but ultimately doomed. Needing substantial private sector economic development, the thought was that New Mexico could somehow leverage the intellectual property from it’s wealth of national laboratory assets and create private startups. We focused on a platform technology – MEMS devices, even secured a large economic development donation from Intel, of an entire line of semiconductor fabricating equipment, parts of which were installed in a clean room at the University of New Mexico to provide prototype and development resources for aspiring MEMS entreprenuers. While there were a couple of “successful” companies that came out of the effort – successful to the extent they received several rounds of VC funding, the effort ultimately failed because it was not driven by entrepreneurs. Entrepreneurs would have been much more focused on developing precise markets for a product, rather than the capability or promise of the technology itself.

  • http://www.charliecrystle.com Charlie Crystle

    What are the personnel costs?

  • http://www.pointsandfigures.com pointsnfigures

    Huge confusion among masses on this issue. As Brad has written, and I agree with, if you are going to build a sustainable entrepreneurial ecosystem, it needs to be entrepreneur lead. Governments are feeders-not leaders.

    The economics are also bad. Governments only source of revenue is constituents. Accelerators are not a social good-even though they may create awesomeness for citizens.

    Rahm Emanuel in Chicago has done a good job with the local startup community. He has talked about them, supported them-opened up government data for them, and tried to get rid of regs on the books that are hampering them. That’s governments role.

  • lunarmobiscuit

    Hear hear! Nice post Brad. My only question is.. what drove up the price of TechStars to $1 million per cohort? Are you counting in the convertible note, or are you including the bigger staffs at the Microsoft and Nike Accelerators?

    • http://www.feld.com bfeld

      Mostly bigger staffs, especially as we try to take TechStars beyond just the 90 day program.

  • Dan Corbett

    Brad,

    What is your opinion about non-tech accelerators? I am not advocating one way or another in terms of government funding but for say medical device or life science companies $1 million would likely far too small a sum. I know it is outside of your normal investment realm but do you have any thoughts for non-tech?

    • http://www.feld.com bfeld

      I’ve seen a number of non-tech accelerators pop up with several doing really interesting things.

      See http://www.gan.co

  • http://www.facebook.com/christopher.radkowski Christopher Radkowski

    Entrepreneurs always find find a way to fund a new venture or a project. 10 years ago I used credit card balance transfer option many times, borrowed against the home equity, borrowed from friends and family, and several other option to build Stretch Limousine, http://stretchlimochicago.com , an apple in my eye. I feel like the government is more interested in collecting more in taxes rather then helping small businesses.