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INVESTORS LOOK TO NEW TECH COMPANIES

Helping new technology companies to success, in the U.S. and beyond.

June 2015

Around the world young and not so young entrepreneurs are realising their dreams by joining incubators and accelerators that may be profit or non-profit, funded privately or by governments, or private-public partnerships.

Incubators and accelerators tend to focus on technology companies, perhaps because in recent years a handful of technology companies have made enormous strides and reached billion dollar valuations, and so investors support new technology companies for a chance at huge profits while local and state governments support them to increase employment and raise the tax base.

The goal everywhere it seems is to create an entrepreneurial ecosystem. Several successful new technology companies in a city or region attract more such companies and bring in venture capital, thereby contributing to economic development.

The terms incubator and accelerator are often used interchangeably, but they are not the same. Incubators rent space to start-up companies and make available to them related services like legal, financial, marketing, and sales counselling.

Accelerators are free to the start-up companies, but it is difficult to enter an accelerator because selection is restricted. Since the accelerator invests in each start-up and takes equity, the accelerator in effect gambles that the start-up will become a highly successful company.

A success story

500 Startups is based in Mountain View, California, in the heart of Silicon Valley. Despite the name it already has more than 1000 start-ups from 50 countries and accelerators in San Francisco and Mexico City as well as Mountain View.

Poonima Vijayashanker is an entrepreneur in residence at 500 Startups in Mountain View. She works with seven of the 30-40 companies at the accelerator per quarter. She calls 500 Startups “a new model” enabling start-ups “to maximise growth strategies,” adding, “there’s no substitute for constantly growing a network.”

The accelerator averages 1,000 applicants for each quarter; the surviving 30-40 companies are selected after application and interview: Criteria include “willingness to experiment; how far they have come on their own; goals for next quarter; and team dynamics.”

500 Startups has achieved international diversity with 50 percent of its companies coming from outside the U.S. The focus is on Mexico, Brazil, UK, Middle East, India, Malaysia, Thailand, Philippines, China, South Korea, and Taiwan as well as the U.S. although investments have been made in more than 30 other countries.

According to Vijayashanker, the accelerator invests USD 100,000 in each company in return for seven percent equity up to the first financing. During the three months they are in residence, company principals spend two months on basics: Product development, marketing, recruiting, and management. The third month is preparation for the presentation or pitch to potential investors.

Success is not guaranteed for these highly selected accelerator companies. 500 Startups has graduated 13 batches of entrepreneurs so far, says Vijayashanker, of which as many as two thirds may not do very well. One third will be good, and perhaps one or two billion dollar companies will emerge from those within 5-7 years.

Other accelerator examples

A different accelerator model on a much smaller scale is Tech Runway, based in Boca Raton, Florida, at Florida Atlantic University (FAU). The program is less than one year old and has just graduated its first cohort of five companies. Because Tech Runway is affiliated with an academic institution, its program runs one semester or four months. The second cohort of four companies will enter the program in September.

CEO Kimberly Gramm says Tech Runway is non-profit, state-supported, and looking for institutional investors. It selects each cohort from some 250 companies that apply for start-up funds, meaning 2 percent or fewer are accepted. Most applicants are current or graduated FAU students.

Client companies receive USD 25,000, housing, and mentoring. BedaBox in the first cohort makes shopping in the U.S. available to customers in other countries. Founder Jan Bednar from the Czech Republic calls BedaBox “a platform for products wanted by locals.” In its first two months, BedaBox grossed USD 150,000 and is already breaking even.

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