“Top Startups” Lists and Accelerators

TL;DR: “Top Startup lists” are being used as complements, and in some cases replacements, to accelerators for helping entrepreneurs signal their talent to investors. Generally speaking, the “network effects” of accelerators are diminishing over time from the simple fact that they don’t really “own” their networks; making it harder for traditional accelerators to justify their cost as the “network” detaches from the gatekeeper. Long-term, many startup accelerators run a real risk of adverse/negative selection killing their core value proposition.

Background reading:

The value proposition of elite universities is a fairly straightforward 3-part bundle:

A. Education

B. Talent Sorting / Signaling

C. Network

Data showing that top students who attend elite universities perform on average the same as those who are similarly accepted but attend lower-ranked schools proves that the actual education elite universities provide isn’t nearly as important as some people think; at least for most students. But their talent signaling and network functions are fairly important and durable, and it’s very hard for competitors to build viable business models to deliver them; though some are succeeding.

Respected employers willing to not require elite educations are, for example, talent signaling competitors to elite universities. Being  “Google Alumni” can be seen as more value determinative than being “MIT Alumni.”

Now, the value proposition of top accelerators is also a fairly straightforward 3-part bundle:

A. Education

B. Talent Sorting / Signaling

C. Network

Look familiar? Many post-accelerator founders will tell you that the actual educational content accelerators provide is hardly that big of a deal to them. I’ve definitely known some entrepreneurs who find it useful, but the more hustler autodidact types will say it’s just re-hashed versions of what you can find online and in books. But the other two propositions (talent signaling and network) are harder to build.

To the extent accelerators build respected brands – and by that I mean respected by investors and other ecosystem players entrepreneurs want to connect with – their ability to sort through the ecosystem’s “noise” and signal talent, and therefore reduce search costs, is extremely important for founders. I would say most of the founders we work with understand instinctively that the main reason to attend any accelerator is to simply make it a lot easier to connect with investors. And yes, for the right accelerators, it works. Big time. 

Sidenote: Attending a B-class accelerator can be worse than attending none at all. If the A-accelerators reject you, you can just pretend to be one of the many companies that never even try to attend them; and just find other “signals” to use. But by attending a B-class accelerator, people now know you tried and were vetted, then rejected. Can be a scarlet letter.

Education? The best information is online and in books. Network? Not proprietary. Founders who can hustle know how to access all the same top people, many of whom want to ensure their own personal brands aren’t captive to an accelerator; ensuring significant “leakage” of the network. The networks of accelerators are compilations of the personal networks of individual people, and by bringing all of those people together for a period of time, without the leverage to lock them in, they’ve made it far easier for the network to be unbundled and re-bundled without the gatekeeping fee.

But it’s the reduction in search costs for connecting with investors (the talent sorting / signaling) that is the real money maker for accelerators. And yet talk privately with many investors, and they’ll tell you they resent the “hunger games” demo day and investor herding dynamics some accelerators produce, even if it’s the price for having someone else do a lot of the company filtering for you.

A short list of accelerators have built real and durable talent signaling brands, and are worth their cost tenfold; at least for now. The challenge for some has been maintaining them, and not supplementing themselves with business models misaligned with the goal of being very selective. Accelerators heavily tied to real estate/co-working, for example, are tempted to dilute the accelerator brand by accepting a lot more people, because they can still monetize them with offices (even if their equity isn’t worth anything). Lower your standards to fill office space, and your talent signal weakens, which means fewer top people show up to your events, which dilutes your network proposition, which further weakens the quality of your startups, and now you’re in a death spiral.

One thing you’re seeing all over the place in startup ecosystems today is “top startups lists.” “Top startups to watch.” Top this, top that. Top 50. Top 25. Top 10.

Initially, my reaction was to judge these lists as just PR plays. Politics/brand driven founders who want a bit of an ego stroke pander to publications to get on them, and in turn the publications get eyeballs and visibility, and can make money off of ads.

But analyze what these lists are, or could be, from the perspective of the talent sorting/signaling function of accelerators, particularly at early stage. To the extent some publications can build highly credible “top startup lists” – the kinds that investors and other players pay close attention to, they could prove to be viable (and far cheaper) competitors to the talent signaling proposition of accelerators.

I actually think many entrepreneurs understand this, and it’s why they care so much about getting on these lists, and why the lists are proliferating. If your ultimate goal is just to connect with investors, “top startup lists” that get real brand credibility could, much more cheaply, get you the “signal” you need to get meetings with selective investors.  Of course, it boils down to whether the right publications are willing to put in the time to build the needed credibility, and not make them simply politics or “pay to play” schemes. I suspect many won’t, but some will.

By no means am I under the delusion that accelerators and top startups lists are direct competitors; especially not at the highest tier. Many smart founders use them, wisely, as complements. The most important thing is for founders to understand what their real purposes are, and to judge them accordingly.  If many founders view accelerators as simply fast-tracks to getting the attention of investors (and they do), then you can fully expect there to be demand for cheaper alternatives, and players willing to experiment in delivering them.

The challenge long-term for many startup accelerators is going to be maintaining/justifying their value proposition, and therefore their cost. As alternatives to their educational and talent-sorting functions proliferate, and as their non-proprietary networks detach from the gatekeeping fee, many run the risk of adverse/negative selection. By that I mean that the top, most resourceful entrepreneurs will realize they don’t really need to pay the gatekeeper. At that point, the accelerator becomes a signal not of a top entrepreneur, but actually a less resourceful and more “needy” one. The emergence of leaner, lower cost accelerators in specific markets (asking for 1-2%, not 6-7%) is clear evidence of this. The price may just have to adjust.


Also published on Medium.