Do Startup Seed Funding Programs Really Work?
By Anna Johnson on March 23rd, 2010How effective are seed funding and mentoring programs in producing successful companies? And do these business acceleration programs beat good, old fashioned ‘two guys/gals in a garage’ (or bedroom, or dining room, or kitchen) in terms of their success rate?
Ever since Y-Combinator began enrolling startup technology and Internet companies into its seed funding and mentorship program 10 years ago, more and more programs have sprouted across the United States to give entrepreneurs the opportunity to convert their ideas into businesses.
Given that these seed funding and mentorship programs are private and not required to disclose their results, it’s not obvious how superior these are to the conventional way of starting a business. Fortunately, Imran Ghory has done a little poking around Y-Combinator and another high profile program, David Cohen’s TechStars, has revealed its track record.
According to Imran Ghory, out of the 144 companies started via Y-Combinator’s nine programs:
- 82 are still active, independent companies, with 24 having received funding subsequent to the seed investments they received from Y-Combinator.
- 14 were acquired.
- 9 are in ‘stealth’ mode (i.e. still in development).
- 1 has merged with another company.
- 1 has had a private investor buy Y-Combinator’s stake.
- 25 closed after launching.
- 7 failed to launch.
- 5 have an ‘unknown’ status (i.e. it’s unclear whether the company is still active or not).
Compared with often quoted figures that most startups fail within the first year or so, Y-Combinator’s results are impressive:
- 29 percent got further funding post-Y-Combinator.
- 57 percent are still independently operating.
- 10 percent were acquired.
- only 22 percent were definite failures or non-starters.
TechStars’ results are even more impressive (with the caveats that (a) TechStars has operated just four programs in the last three years – so not as much time for attrition to set in – and (b) they derived and analyzed their own data whilst a third party derived and analyzed Y-Combinator’s data). Out of TechStars’ 39 companies:
- 29 are still independently active, with a massive 22 having received funding post-TechStars.
- 5 were acquired.
- 4 failed.
- 1 is unknown.
Upshot:
- 56 percent got funding post-TechStars.
- 69 percent are still operating as independent companies.
- 14 percent were acquired.
- only 10 percent failed.
Of course, the number of companies that are still active versus failed is just one indicator of success. Both Imran Ghory and TechStars provide some other relevant statistics, such as the amount of funding received, the amount a given company was sold/acquired for, the number of employees it has, and its profitability.
From the perspective of Y-Combinator and TechStars themselves, the most important result is presumably their return on investment (ROI), and whether or not this exceeds the likely ROI from a standard angel investment (i.e. no focused mentoring program).
From the entpreneur’s point of view, the question is whether their own results are worth the price of equity they give up to those operating the relevant program – usually 2-10 percent in return for up to $20,000.
For my part, I was interested to know just how many of these companies got off the ground, got further funding and were either still operating or had been acquired, as basic indicators of ‘success’ as compared with the ‘going it alone’ garage/kitchen table startup approach to starting a business.
The results attributed to Y-Combinator and TechStars indicate to me that the programs DO give startups a better than average chance to get funded, grow and be acquired.
That’s not to say a hot company couldn’t do well without being part of such a program. Or that the price of equity will be worth it in all circumstances. Not at all. But, both conceptually and quantitatively, it seems these seed funding and mentorship programs do provide entrepreneurs with a great start.
Sources: TechStars Results, March 7, 2010, Imran Ghory, “Analyzing Y Combinator,” Awesome Zombie, 2 December 2009
March 24th, 2010 at 6:15 pm
I’m a huge fan of incubator programmes, but you should probably reflect that the wise heads at TechStars and YC have a better than average chance of “picking a winner”, meaning their success stats will be skewed.
Definitely not a problem for those lucky enough to be part of those programmes, but the statistics possibly say more about the ability to select genetically strong propositions.
March 24th, 2010 at 6:22 pm
Really spectacular figures.
It would be great to have a comparison with the data referring to the the success rates of the classical, long term, less seed-investment driven business incubation programs.
Is there any such analysis available?
Thanks!
March 25th, 2010 at 4:13 am
That’s a really good point, Jason. Y-Combinator, TechStars, etc are run by experienced entrepreneurs/angel investors/VCs who undoubtedly have a nose for winning businesses.
March 25th, 2010 at 4:16 am
I agree Radu – it would be great to have some solid data comparing the various types of programs. There might be bits and pieces of data here and there, but not necessarily comprehensive, definitive data, since most of these programs are private.
March 25th, 2010 at 4:49 am
Anna, I am managing an almost 6 years old incubation program, in Western Romania. Unfortunately our approach is the old European one, publicly founded and funded, rather comparable with a “social service” for start-ups: offering subsidized office space, training, advisory support, networking events, access to software development tools, over a 3 years period. No direct financial support available neither from the incubator nor business angels, seed funds, state programmes, etc.
In this context the incubated companies are splitting their existence in two components: 1. providing customized services to clients mostly abroad, assuring the revenue inflow and (eventually) 2. working on their own products and services.
Our statistics are extremely positive but only at two levels: most of the incubated companies are independently active (like +80%), the rest failed or are in “stealth mode”. There is one difference: non of them received investments, so they are linearly growing reaching 10-12-15 employees over 3-5 years but none has “exploded” based on successfully launching and exploiting a remarkable product/service.
So, the main metric to use for evaluating the success of different types of incubation approaches is the number of clients receiving investment or being acquired.
On other hand, the extreme advantage of ycombinator, techstars or newer European thedifferenceengine approach is the intensity and the rapidness of the business development support: 12-16 weeks of full time intervention, made possible by the initial capital investment that will keep beneficiaries minds protected from the stress of the next day’s bills, or next month’s customer acquisition.
As a conclusion, there is a great need in Europe of correct replication of the successful business accelerators programmes invented by Mr. Graham and friends…
March 25th, 2010 at 5:11 am
Radu – firstly, let me applaud you for doing what you can for startups in Romania. Here in Australia, the situation is pretty much the same: what incubation programs there are, are the government run incubation programs. These are great initiatives and better than nothing, but the reality is that they are out of reach for the vast majority of startups and, as in your country, we sorely need the kind of investor/entrepreneur supported acceleration programs pioneered by Y-Combinator.
March 25th, 2010 at 6:09 am
Thanks, Anna. I am sure the Y-Combinator model will be soon addopted/addapted world-wide. The business development cycles should be much shorter than in our current model…