Student loans: why only for colleges and not for startup accelerators?

Startup mentoring is education. Why can’t existing government-backed student loan schemes be extended to include startup founders attending accredited startup accelerator programmes?

The benefits are clear:

  • not just funding startups, but instead developing startup founding capabilities
  • creates more startup founders from reputable founder mentoring stables, rather than dubious ‘business plan mills’ and ‘pitching crammers’
  • some school leavers are more suited to working on a job, rather than sitting in class, startup accelerators offer them the best of both worlds
  • it’s vocational education and investment in innovation combined
  • much quicker than a degree or apprenticeship (it’s actually an apprenticeship in ‘how to discover and validate new business models’)
  • established startup accelerators have exceptionally high startup success rates
  • accelerated startup founders are future:
    • startup investors
    • startup mentors
    • innovation sources
    • employers
  • more jobs are created by startups than by any other kinds of organisation
  • teaches prospective entrepreneurs how to fail quickly, painlessly and productively enough to turn (or ‘pivot’) naïve hypotheses about speculative customer requirements into concrete and verifiable insights into valuable untapped market opportunities
  • provides a conducive context for prospective Business Angel and Venture Capital investors to be introduced to future investment opportunities

Small scale innovation investment has developed a reputation over the decades since it began for being tied to questionable clusters of projects, many of which often seem to be on indefinite ‘life support’ within their ‘business incubation’ environment, with history showing that only one per batch of 10 to 20 of such startups having any chance of giving a big enough return to encouraging the investors to start another big batch.

 

Unlike the Business Incubators of yesteryear, accelerators equip their alumni to be more than ‘one-trick ponies’: there are countless examples of accelerators producing successful serial entrepreneurs, serial investors and respected multi-project mentors in great demand.

Another benefit of using the Student Loan Scheme to fund those entering accelerator programs would be the potential to reduce or eliminate the necessity of applying the standard investment policy of leading accelerators like silicon valley’s Y Combinator, where the accelerator takes an equity stake in the entrant’s startup business, in return for entry into the accelerator program.

Avoiding the disadvantages of equity dilution will constitute a significant attraction to potential applicants.

The founders applying to an accelerator are selected upon the basis of the extent to which their pitch, startup idea and pre-selection interview performance indicates that they are suitable ‘founder material’.

This may be self-evident, even if the startup idea that they initially pitch ultimately proves to need to be replaced with another in the course of their attendance on the accelerator program: self-evident ‘founder material’ inevitably trumps ‘great startup ideas’.

Highly suitable potential founders can, by definition, always come up with another great new idea to replace one that turned out to be not worth pursuing due to some unforeseen shortcoming.

Y Combinator has funded a total of 316 startups to date with 64 in the current class. In a recent post on the value of a Y Combinator startups, Paul Graham pinned the total value of the top 21 Y Combinator startups at $4.7 billion, which puts the averages out to around $22.4 million a startup.

TechCrunch, June 2011

The typical accelerator program comprises (using Y Combinator as a general template):

  • selecting and accepting suitable applicants (who apply as founders of startups, i.e. they need to pitch their startup, or startup idea, to the accelerator admissions team)
  • resolving ‘outstanding co-founder requirements’: applicants who are ‘solitary founders’ (if deemed to be potentially suitable) are attempted to be ‘matched up with suitable co-founders’ wherever possible: ‘single founder startups’ are not generally seen as an attractive accelerator option
  • successful applicants are given a sum essentially representing living expenses for the duration of the program (about $500 per week per founder for 12 weeks) and in return the startup gives the accelerator an equity stake (say 6%)
  • the accelerator provides 12 weeks of mentoring in ‘accelerator office hours’ (by recognised experts in such things as business model discovery, server infrastructure, software development, mergers and acquisitions, marketing, sales and pr, design, etc..)
  • a ‘demo day’ at the end of the program, where the founders, in contention for an award for best startup of the batch, get the opportunity to present the fruits of their labours on stage, with prospective investors in the audience

The performance of such accelerators as Y Combinator and TechStars, in terms of survival rates, profitability, valuation and successful exits of their startups is typically an order of magnitude higher than conventional startup investment schemes.