Where Einstein Meets Edison

Do Startup Accelerators Deliver Value? The Economics of Creating Companies (Part 1 of 2)

Do Startup Accelerators Deliver Value? The Economics of Creating Companies (Part 1 of 2)

Aug 14, 2011

In the last few years, we have seen an explosion of startup accelerators, such as Techstars (est. 2006), Y Combinator (est. 2005), MassChallenge Inc. (est. 2009), and several smaller corporate and venture capital supported groups. Some are for profit, others not-for-profit, some government backed, others private sector backed, and a lot somewhere in the middle.

So what is a startup accelerator, and how is it different from an incubator?  On the surface, they appear very similar: both offer services such as mentoring, networking with entrepreneurs, office space, and seed funding. Incubators bring in companies and keep them in a protected environment, and the incubated companies often have trouble breaking away and succeeding on their own. As a result, the incubator concept developed a poor reputation and has declined in popularity since the nineties.

Enter the startup accelerator, which while builds off the longstanding incubator model, differs in its emphasis on preparing startups for the real world. Accelerators provide their companies with substantial leeway in their operations, and are focused on preparing their companies for explosive growth upon exit from the incubator. In addition, participating startups often face a tight time limit on occupancy.

At first glance, it would appear that these accelerators create successful companies—like Drew Houston’s Dropbox which was part of Y Combinator—and strong communities of passionate entrepreneurs. Anecdotal evidence notwithstanding, it remains to be seen whether these programs deliver statistically significant value to participants and economic value to communities.

 

Accelerators and Going to College
The academic literature on startup accelerators is comparatively slim, but there is an analogous situation with much more complete research: attending an elite college. The benefits of attending an elite college boil down to human capital (education), reducing search costs (networking), and signaling (having the line on your résumé). Startup accelerators work the same way, but with the additional benefit of reducing the rental rate of capital (by offering funding). We will discuss these points in depth later (Part 2).

So what do we know about the value of college? As you may have expected when dealing with economists, the results are ambiguous.  In an early study, Brewer, Eide, and Ehrenberg (1999) found that “strong evidence emerges of a significant economic return to attending an elite private institution, and some evidence suggests this premium has increased over time”. On the other hand, Dale and Kruger (2002) found that “students who attended more selective colleges earned about the same as students of seemingly comparable ability who attended less selective schools”.

Why is the “return to education” question hard? Because there is a major variable we cannot measure: ability. Ability correlates with the level of education that an individual attains; higher intellectual ability makes the cost of education lower—i.e. school is easier for smarter people—and thus increases the probability of graduating from college and attending an elite college.  Individuals with more ability have more human capital and also tend to have higher wages. Economists call this missing variable problem omitted variables bias.

The “return to accelerator” question is hard for the same reason. Just like for people, we cannot easily measure the innate ability of a firm. While we often use test scores as an imperfect proxy measure of people’s abilities, we don’t have a similar proxy for companies. Moreover, many factors contribute to a company’s ability: ability of the founders, ability of the employees, meshing personalities, preexisting personal networks, etc.  Even if we could measure ability, it would be challenging to weigh all of these factors together and come up with a single firm measurement.    

 

See Part 2 of “Do Startup Accelerators Deliver Value? The Economics of Creating Companies”

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