Recent Research: The roles, impact that accelerators can have on a regional innovation system

Last week, SSTI looked at an academic research study on the impact that accelerator feedback has on firms. This week, we examine two recent academic studies that looked at the impact accelerators have on regional innovation systems. In the first study from researchers at USC and Rice University, Fehder and Yael Hochberg found that the introduction of an accelerator into a metro area helped to stimulate startup capital. In another recent study, two City University of New York researchers and one from Michigan State University contend that there are three distinct types of accelerators that serve different roles in an innovation system. They include deal-flow makers, welfare stimulators, and ecosystem builders.

Impact of the introduction of an accelerator on an MSA

In their study, Fehder and Hochber examined the impacts from new accelerators on 38 metropolitan statistical areas (MSAs) between 2005 and 2013. In total, 59 accelerators that graduated at least two cohorts were included in the study. Using a difference-in-differences model, the 38 MSAs were matched with similar MSAs in terms of pre-treatment levels, growth, and trends in VC financing. While they do not contend that there is a causal relationship, the authors maintain that the introduction of an accelerator is associated with an increase investment activity by both local and non-local investors.

The researchers found that the introduction of an accelerator was associated with a multi-year annual increase of 104 percent in the number of seed and early stage VC deals in the MSA; it is important to note that this figure includes only deals made outside of the accelerator. They also found that the introduction of an accelerator is associated with a 97 percent increase in the number of distinct investors investing in the region with a majority of this increase coming from local investors. The most significant impacts were observed when the introduction of a new accelerator was aligned with an existing industry cluster(s) in the MSA.

The authors highlight the example of the impact that TechStars Boulder had on the MSA’s innovation system. In the three-year period preceding the founding of TechStars Boulder in 2007, Boulder’s innovation system averaged 4.8 seed and early stage software and IT VC deals per year. From 2007 to 2013, the number average deals rose to 10.7 deals per year – an increase of 5.9 deals annually. During that same time, TechStars Boulder graduates averaged 2.3 deals per year. This indicates, the authors argue, that an additional 3.6 deals per year were the benefit of increased investor activity facilitated by the launch and ecosystem building work of TechStars Boulder.

Across the 38 MSAs, on average, startups that graduated from accelerators included in the study represented less than a third of the increase in the annual number of seed and early stage financing deals – 30.4 percent of all new deals went to graduate startups. The authors contend that this indicates that the effect of accelerators on startup capital activity in an MSA is not just an effect for accelerated companies alone, but rather represents a more general effect on the equilibrium of startup activity in the region.

Three types of accelerators

In a working paper, Shu Yang, Romi Kher, and Thomas Lyons attempt to plot where the accelerator model fits in the broader entrepreneurship ecosystem. They also look at how the three different types of accelerators that they identified – deal-flow makers, welfare stimulators, and ecosystem builders – help participating entrepreneurs and their ventures progress along the venture development pipeline. They contend that each of these have different focuses in terms of “whom” will be developed (entrepreneurs, ventures or both). These differences will greatly impact the development effects on entrepreneurs and their ventures.

First is the deal-flow makers approach funded by equity investors such as business angels, venture capital funds or corporate venture capital. In this model, the accelerator is primary focus is to “pick the winners.” They are driven by a mentality of identifying promising investment opportunities for investors and that those winners will attract follow-on capital.

The majority of companies targeted in this model are more late stage in their development cycle. They also are not likely as interested in spending their energies, resources, and time in developing entrepreneurs as the other two accelerator models described in the study. When placed in the regional innovation system, the authors cite several studies that had similar results to Fehder and Hochber – the introduction of this type of accelerator resulted in an increase in investment capital activity.

In comparison, the ecosystem builders approach is focused on developing an ecosystem. Accelerators in this model typically are targeting a specific industry or technology area. They also typically are created by large corporations for their own strategic reasons. This model does not take, or takes little, with regard to fees/equity from the company, but only startups that are perceived to have the ability to contribute to ecosystem development will have the opportunity to be selected.

In this model, there are typically two expectations from the funders. First, they want to develop entrepreneurs by providing experiential learning opportunities. Second, for corporations, they are frequently an engagement tool for symbolic actions such as broadcasting, newsletters, and showcase events to express a commitment to corporate social responsibility or their perceived legitimacy with the added bonus of potentially strengthening the parent company’s technology portfolio.

Finally, the welfare stimulators approach is typically launched by a government agency, nonprofit, university, or other anchor institution. In this model, the primary objective of the accelerator is to stimulate startup activity and foster economic growth. Due to the focus on very early stage startups, the primary component of this model is on entrepreneurial education and community building. Thus, they focus the most on the development of entrepreneurs and provide the most comprehensive entrepreneurial development services (e.g., curricula and training programs) among the three models. Unlike deal-flow makers, welfare stimulators are most likely entrepreneur-centered and focused on increasing the number of entrepreneurs in a regional innovation system.

The researchers conclude with several recommendations for policymakers, including:

• Facilitate high-growth ventures’ entrepreneurial activities, rather than providing “economically inefficient blanket support for all types of new firm creation;”
• Find, nurture and develop entrepreneurs, encourage them to pursue their dreams, counsel them, and connect them to other sources of assistance;
• Map the three types of accelerators in their communities to better assess and manage the regional innovation system; and,
• Help entrepreneurs determine where they are on the pipeline map to ensure that they approach the appropriate type of accelerator for help.

One potential flaw in this study was in the categorization of the accelerators. While the authors place only corporate-funded accelerators in the area of ecosystem builders, there are many publically funded and nonprofit accelerators that play a very similar role in helping cultivate startups in a particular industry with similar strategic goals. Similarly, many publicly funded and nonprofit accelerators also engage in the deal-flow makers approach as well.

SSTI contends that the authors should not exclude publically funded and nonprofit accelerators from the other two models. Instead, the diversity of publically funded and nonprofit accelerators should be further researched. Also, instead of calling the third approach “welfare stimulators”, they might be better described as something relating to their focus on entrepreneurial education/development.