Wednesday, July 11, 2012

Accelerators Try to Get Startups to Stick Around

A few years ago, when Bryan Jowers and Justin Stanislaw were dreaming up an app to help friends pool money to give gifts, they felt they needed to leave Houston to improve their chances of finding investors and forging connections. Instead of relocating to a Silicon Valley hotspot, they moved to Cincinnati, lured by a startup accelerator called The Brandery. As one of six startups participating in the summer of 2010, they got 12 weeks of intensive help building their product, called Giftiki.

Startup accelerators, which give fledgling ventures seed money, office space, and mentoring through boot camps that typically last a few months, were born in tech hubs such as Silicon Valley and Boulder, Colo. The federal government and economic development groups around the country are banking on accelerators to create jobs and revive local economies in cities like Nashville, Tenn., and Greenville, S.C. The challenge in those places is whether the new crop of accelerators can get more companies like Giftiki—which left for San Francisco after raising more than $1 million in venture capital—to stick around.

Officials in Fayetteville, Ark., think they can. In August, 15 startups will arrive at ARK Challenge, a new accelerator with mentors from prominent Arkansas companies including Wal-Mart (WMT) and Tyson Foods (TSN). It’s partially funded by a $2.1 million federal grant. The ARK Challenge received 83 applications, including some from startups in Australia and Croatia, for its 15 spots. Director Jeannette Balleza hopes the graduates will move permanently to the region. “There’s a model in the Valley that we’re emphasizing to figure out: How do we spur innovation and create jobs but keep it specific to Northwest Arkansas?” she says.

ARK is one of 20 projects to receive a chunk of $37 million in federal money as part of the Obama administration’s strategy of using accelerator and incubator programs to create jobs in different regions. “If you really look at how America is going to be competitive, we need all of our entrepreneurs to be successful,” says Karen Mills, head of the U.S. Small Business Administration.

“We need to make sure they have access and opportunity, not just in Silicon Valley, but in Iowa, in West Virginia, in Arkansas.”

Keeping accelerator participants rooted in an area after a program ends requires the right combination of seasoned mentors, investors, and nearby research institutions, says Aziz Gilani, a Houston-based venture capitalist at DFJ Mercury. While many programs are too new to judge, Gilani found that in nearly half of the 29 accelerators he researched for a ranking, none of the graduating companies went on to raise more money. TechStars in Boulder and Y Combinator, located in Mountain View, Calif., were at the top of the chart. The Brandery ranked 10th. Gilani says the most successful ones are “directly tied to what the region is best in the world at.” Houston won’t become a consumer Internet hub, Gilani says, “but an energy-company accelerator would be a slam dunk.”

Two-year-old Brandery, which focuses on consumer marketing startups, highlights connections to big consumer companies, such as Proctor & Gamble (PG) and Macy’s (M), that call Cincinnati home. Co-founder Dave Knox says the burden is on accelerators to give startups reasons to stay. “We’re big believers of playing to the natural resources of a city,” he says.

The accelerator draws entrepreneurs from across the U.S. Many of the startups from the program’s first two classes, like Giftiki, departed in the months after graduating. Knox says an accelerator’s first concern needs to be the success of its companies. If staying close to home limits a startup’s prospects, it limits the potential of the accelerator’s investment as well.

Cities and investors alike are betting on accelerators to uncover new pockets of entrepreneurial talent around the country. Kristian Andersen, co-founder of Indianapolis angel investment fund Gravity Ventures, is a mentor for several accelerators in Indiana and will serve as one for the ARK beginning in August. He estimates that there 150 accelerators in the U.S. alone, and believes that “there are parts of the country that are genetically predisposed to entrepreneurship,” but that not all those places have gotten attention yet.

“It’s really good for a startup as an entity to have a bit of a chip on its shoulder,” Andersen says. “There’s no better fuel in the world than to tell a smart guy that he can’t do something.” The same holds true for regions trying to breed homegrown startups, he says: “Being the underdog can be a really powerful motivator.”

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