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As they like to say in The Hunger Games, “may the odds be ever in your favor.” Meaning, that even though many people die along the way, and that your odds of hitting it big are likely smaller than you think, you never know, it’s the most exciting game in town, and what else were you planning to do with the next few years of your life anyway? Starting and running a business is sort of like that. What the actuator can do is substantially improve your odds of getting to a decent exit.
Here’s how it works. First, the failure rate for new businesses is very high. Per the attached chart, almost 78% of all startups fail within the first 5 years…only 22% survive. The comparable number for accelerator graduates is that, after 5 years, 33% are still in business, an increased survival rate of 50% compared to the population of all new businesses.
Accelerator graduates also do much better at fund raising. There are about 800 accelerator graduates on average per year nationally, out of a total of nearly 600,000 new businesses created per year, or roughly 1/10th of 1% of all new businesses. Yet according to Pitchbook, this small population of companies accounted for almost 33% of the Series A capital raises in 2015.
As part of my research into accelerator models I created a reference model, based on industry averages for funding at various stages of maturity, along with the likelihood that a company will move from one stage to the next.
For a new startup company entering a typical accelerator program (and receiving an average $100K investment to start), about 2/3 of those companies will go on to receive Angel round funding on the order of $250K. Half of those will raise a seed round of $1M, and so forth down the fund-raising line.
When you start stacking up those probabilities, here is what you get. For a single company coming out the end of the pipe with Series B funding, it takes three candidate companies who have raised a Series A round. Nine with a seed round, eighteen Angel round companies, and twenty-seven accelerator entrants needed to account for the successive attrition through the fund-raising rounds (very much in line with The Hunger Games odds, by the way!).
Now some companies don’t go through this entire process, and many of the outcomes prior to a Series B can be very nice outcomes for the entrepreneurs. But, the reality is that accelerator graduates do MUCH better than non-accelerator startup companies in terms of both survival and fund-raising, and yet even with these advantages the numbers show only about 4% of these companies go all the way to complete a Series B funding round.
One last consideration: the accelerator you’re in matters. Check out our next post for some more insight on metrics to help understand accelerator performance, and see the difference that a robust accelerator program can make.
In a perfect world, the odds will be ever in your favor, and perhaps the coveted Initial Public Offering (IPO) will occur. Home free at last! Gazillionaire, here we come!! But, life is never quite that easy. Check out this great story from the L.A. Times for some additional insights into the tricky internal company business of going through an IPO.
Next (Monday 3/13): How do we know the Actuator is Working?