If you have a business idea and the entrepreneurial mindset to pursue it, you’re likely to have come across Business Accelerators and Seed Funds – organisations geared at giving individuals and their new businesses the support and stress tests required to take their next steps. Research by Dr Juanita Gonzalez-Uribe of the LSE Department of Finance examines the importance of Business Accelerators and Seed Funds in screening and training in business, as well as their wider effects on the entrepreneurial environment.
Accelerators and Seed Funds usually succeed in increasing the average performance of participating businesses
As the costs of starting a new business have declined, so Business Accelerators and Seed Funds have become prominent features of the business landscape, addressing the capability and funding gaps that inexperienced entrepreneurs may face - but just how important are they to early-stage businesses? My research certainly shows that Accelerators and Seed Funds usually succeed in increasing the average performance of participating businesses. However, impact varies across types of programmes and participants. For example, in my work with ValleE - a Business Accelerator in Colombia - we have found that the ventures that benefit the most from participation are those at more advanced stages of development (rather than at the ideation stage) and with more educated founders.
Watch research video: Identifying and Boosting gazelles
Accelerators need not have a positive impact on every participating business
Accelerators can usher promising participants into the upper echelons of company growth. On the other hand, they can also steer less apt participants to fold faster. This role for Accelerators should not come as a surprise: Accelerators need not - nor should they be expected to - have a positive impact on every participating business. Instead, their priority is to zero in on the participants who demonstrate most promise and to make sure they have enough resources to grow. Participants that are thought to be less promising are often counselled to consider closing, thus helping bad ideas fail faster.
This is not a negative. One of the hardest things as an entrepreneur is understanding when to stop working on your existing business. It’s very hard when you’ve put effort, money and time into a project to say ‘enough is enough’. Business Accelerators and Seed Funds help in this regard: they can inject realism, help a founder pivot or even close a business idea, and take the lessons from that into their next project.
Bundling capability training with funding is more impactful for business growth
The capability-building that Accelerators and Seed Funds offer participants is crucial, even when funding is not part of the equation. For example, in my research with Business Accelerator Startup Chile, we find that bundling capability training with funding is more impactful for business growth than simply providing entrepreneurs with cash.
My research with a Seed Fund in the UK points to a similar conclusion regarding the importance of non-monetary factors for venture growth. We show evidence that going through the Seed Fund's due-diligence process increases business growth by improving venture productivity, even for those businesses that do not raise financing from the Fund conducting the due diligence. We are also finding similar evidence in new research with the Blue Lake Seed Fund in the UK.
Read article: For immigrant founders in the UK, office hours with VCs are rocket fuel (TechCrunch)
Capability gaps constitute a significant growth obstacle for businesses, especially in developing countries
Capability gaps constitute a significant growth obstacle for businesses, especially in developing countries. Some entrepreneurs cannot transform their ideas into sustainable companies because they lack sufficient capabilities, for example, business know-how or business connections.
Business Accelerators and Seed Funds play an essential role in entrepreneurial ecosystems by filtering and supporting the most promising candidates, and helping them build the capabilities they need before these entrepreneurs seek more specialised financing like traditional venture capital.
The impact of these intermediaries is also multi-dimensional and expands beyond participating businesses. For example, in my research quantifying the effects of Business Accelerators in the UK, we show that these programmes help attract venture capital to their regions, thus helping even non-participating businesses to grow.
Areas for improvement
There are certainly many positives offered by Business Accelerators and Seed Funds, but I do see areas for improvement. For example, the field of venture capital has poor figures in terms of diversity. Less than 2% of venture capital is raised by female-led businesses in the UK. Business Accelerators and Seed Funds are in a position to help break this pattern. We are seeing efforts being made, but we need more. Less than 20% of applicants to these programmes are female-led. Thinking about designing programmes that tackle diversity gaps head-on is crucial, as is thinking how to disrupt existing Venture Capital funds to break this pattern there too. I am working towards that end in my current research, and am part of the academic advisory board of Venture ESG and DiversityVC.
Future research: lasting effects?
Much work currently focuses on evaluating the effects of Business Accelerators and Seed Funds on participating businesses - but the vast majority of early-stage businesses fail by their very high-risk nature. In my new research, I am focusing on whether failed entrepreneurs can carry to their new businesses or work careers the capabilities these intermediaries have helped them build. If so, the effects of these intermediaries on the livelihood of participants are broader and more long-term than we have previously acknowledged.
Juanita Gonzalez-Uribe is Associate Professor of Finance at the London School of Economics and Political Science.
Her work with ValleE has been used by policy makers in Colombia to help improve the design of policies aiming to promote high-growth entrepreneurship. She has also recieved funding from the National Bureau of Economic Research (US), and collaborated with Startup Chile, Blue Lake VC, BEIS, Nesta, the World Bank, and Ikea Social Entrepreneurship in building bridges between academics and corporates [watch video, read blog post].
Read more about her work at https://juanitagonzalez-uribe.net