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Accelerators Groom Technology Ventures for Success

November 22, 2011 at 12:00 AM EST
The Kauffman Foundation, which studies entrepreneurship, recently found that startups create about 3 million new jobs a year. Hari Sreenivasan reports on efforts to nurture promising companies and bring them to market faster.
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JEFFREY BROWN: Now, from a big battle and gridlock in the public sector to programs that cultivate success on a small scale in the private sector.

The Kauffman Foundation, which studies entrepreneurship, recently found that startups create about 3 million new jobs a year.

Hari Sreenivasan looks at schools that nurture promising companies and bring them to market faster.

His report is a co-production with KQED San Francisco.

HARI SREENIVASAN: This is a demo day. Think of it as a debutante ball for startup companies where founders meet their funders. On the left side of your screen is San Francisco, on the right side, New York City.

On the same day, on both coasts, a handful of entrepreneurs were trying to impress deep-pocketed investors in the audience and sell them on the idea that they were the next big thing.

MAN: At OrderIn, we are bringing about the most fundamental change to the restaurant industry since franchising in the 1950s.

MAN: We want to enable anyone anywhere to sell online on any platform with ease and simplicity and elegance.

HARI SREENIVASAN: If this were a typical group of startups, the odds against their survival would be very long. Most startups fail, and most investors are left holding the bag.

However, these companies have already been marked for success because they have survived a kind of startup school known as a startup accelerator.

MAN: That’s it, right? Then that’s all you need?

MAN: Yes.

HARI SREENIVASAN: Accelerators are usually started by investors who want to mentor and profit from the next wave of Internet companies. They’re called accelerators in part because they try to shorten from one year to three months the time it takes a new business to learn its fundamentals.

This 10-week-long program in San Francisco is called AngelPad. It was started by a group of ex-Google employees. When I walked through, I met a range of startups, including LendFriend, a site that helps friend lend money to one another.

Co-founder Geno Moscetti:

GENO MOSCETTI, LendFriend: Research estimates that loans between people who know each other in the United States is about $75 billion. We want a very sizable chunk of that market.

HARI SREENIVASAN: And another startup that helps you cut in line at restaurants.

Evan Maddow co-founded Tapviva.

So, what am I looking at here?

EVAN MADOW, Tapviva: So, what we do is we facilitate mobile ordering and advanced point of sale for restaurants, cafes and food trucks. So you have your phone in your pocket, your smartphone, your iPhone, your Android device. You order ahead, you skip the line, you don’t to wait in line.

And the order shows up on an iPad that is in a restaurant in the kitchen in the back, and your food is prepared and you don’t have to wait.

HARI SREENIVASAN: These 15 companies were whittled down from 2,000 applications for AngelPad’s approval, which makes getting into an Ivy League school look easy. It also brings with it a certain cachet.

Thomas Korte is the founder and managing partner of AngelPad.

THOMAS KORTE, AngelPad: So we look really for three things. Number one is, we look for an amazing team, people that have a deep understanding of the problem that they’re trying to solve.

We’re looking for technical people that can actually build and solve that problem by using technology. And the third one is, we will look for founders and teams that show leadership, that can build interesting companies.

HARI SREENIVASAN: AngelPad staff members advise the startups on everything from products and design to customers and fund-raising.

THOMAS KORTE: If one of our lawyers comes in to explain how the funding process works or what these legal documents look like, he can do that once, instead of 15 times individually.

HARI SREENIVASAN: In exchange, the AngelPad accelerator gets stock in each of the 15 companies.

MAN: The hottest young entrepreneurs, the best new ideas.

HARI SREENIVASAN: Accelerators have become so commonplace that there was even a reality TV show on Bloomberg Television.

MAN: It’s a super red flag.

MAN: There’s just a limit to how big it can be.

HARI SREENIVASAN: It highlighted the trials and tribulations of a batch of startups going through three months of the TechStars accelerator program in New York.

MAN: This is TechStars.

HARI SREENIVASAN: TechStars has been around for six years. The program sifts through 3,000 applications to launch 50 companies a year in Boston, Seattle, New York and Boulder, Colo.

David Cohen is a founder and says the key to getting accepted is not just having great idea.

DAVID COHEN, TechStars: Someone might come in with the greatest idea in the world. That’s the last thing we look at. It doesn’t matter that much to us. We know that about half of the companies that go through TechStars are going to pivot, meaning they’re going change the business that they’re going over. That’s incredibly common, not just in this context, but in startups in general.

So, really, you’re looking for people that have the right skills and the right passion, the motivations to do a great job, that are going to be respectful of the data, and are going to make the changes they have to make to be successful.

HARI SREENIVASAN: Accelerators are springing up all over the world. Top-tier programs like Seedcamp in Europe and Y Combinator from the Bay Area launched dozens of companies.

This summer, Y Combinator launched 63 startups in one day. Even Hollywood is seeing stars. Actor Ashton Kutcher was in the audience at that demo day looking to invest. Recently, Leonardo DiCaprio and even his supermodel ex-girlfriend have made investments in tech startups.

To some, when investing in startups becomes fashionable, it might mean there’s a bubble.

WADE ROUSH, Xconomy: I do worry that there is sort of a — an overcrowding effect, I guess, going on.

HARI SREENIVASAN: Wade Roush is the San Francisco editor for Xconomy, a network of sites that cover innovation and entrepreneurship. He’s covered startups for 15 years and says that the Internet startup frenzy is back because the cost of technology keeps dropping.

WADE ROUSH: Back in the ’90s, a typical startup had to go out and raise millions of dollars, you know, $5 million, $10 million, $15 million or $20 million, just that they could go and buy the servers that they would need to host their applications, so that people could come and find their services on the Web.

It’s now possible to raise $100,000 or $200,000, and if you’re willing to eat ramen, as they say, for a couple years, that’s enough money to actually make real progress.

HARI SREENIVASAN: In a shared house in Atherton, Calif., filled with founders working on startups of their own is Black Box Ventures. Their project, called the Startup Genome, aims to turn the prediction of startup success from art to science.

Max Marmer and Bjoern Lasse Herrmann are co-founders.

MAX MARMER, Black Box Ventures: Startups are failing primarily because of self-destruction, rather than competition. And we think that’s a big insight.

HARI SREENIVASAN: They already know a few things that are bound to lead to failure, a part-time founder, a solo founder, not having the right team mix, not listening to customers, and the biggest reason for 70 percent of all failures is what they call premature scaling.

BJOERN LASSE HERRMANN, Black Box Ventures: A company increases their risk profile by effectively executing the unnecessary, which means that they do things which they have not validated before with their customers.

HARI SREENIVASAN: Black Box’s founders gained these insights by gathering data from more than 15 startups around the world. The company also realizes the world is catching up when it comes to startup culture.

Vivek Wadhwa has come to the same conclusion. He’s an entrepreneur-turned-academic who researches American competitiveness.

VIVEK WADHWA, Duke University: What’s happening now is that other countries like India and China are learning our secret sauce. They’re learning what made America what it is. You have got to realize that kids in Beijing and Bangalore right now have friends in Silicon Valley and North Carolina on Facebook and Twitter. They interact. They exchange ideas. They begin to think like each other.

HARI SREENIVASAN: Wadhwa says accelerator programs are important because they decrease the cost of starting and failing at a business.

VIVEK WADHWA: In America, failure is considered to be OK, especially in Silicon Valley. In Silicon Valley, the more you fail, the more experienced you’re considered to be. So failure is a badge of honor. People abroad think it’s really strange.

HARI SREENIVASAN: It’s still too early to tell which, if any, of these companies will be the next Facebook or Google, but as these investors put their money behind these entrepreneurs and their ideas, one thing is certain: They will be hiring.

JEFFREY BROWN: And if you’re curious about what it takes to get into one of the accelerator programs, or just want to know more about startups, we have posted six videos online to help.