Graduation Rates for Accelerated Startups

Relative odds of making it through funding rounds for European accelerator alumni.

I recently wrote about Accelerators as Series A Engines, and got a number of follow-up questions from that post. In particular, a number of people showed interest in whether going through an accelerator increases the odds of ‘making it’.

One possible attempt to address that question is to look at round by round graduation rates for cohorts of accelerated and non-accelerated startups separately. Yoram Wijngaarde and the team at Dealroom came to the rescue providing the data, as this is a topic they have covered in the past, comparing Europe with the US over time.

Europe only as of March 2017. Source: 

What the bar chart above shows is the percentage of European seed-funded companies that progress through to subsequent rounds of funding (capped at Series D), for both cohorts of accelerated and non-accelerated startups.

A few observations worth making:

  • As a caveat, these percentages are likely to be slightly inflated compared to reality since a non-insignificant number of seed rounds do not get publicly disclosed relative to larger more late stage rounds that are more likely to be announced. However, it is still relevant to look at them on a relative basis;
  • At first glance, it’s apparent that a larger number of accelerated startups make it through to Series A and Series B compared to non-accelerated. Cumulatively, c. 40% more startups manage to raise a Series A round (37% vs 27%) and almost 2x as many go on to raise a Series B round (27% vs 14%);
  • In particular, 71% of accelerated startups that have raised a Series A, go on to raise a Series B (vs. ‘only’ 53% for non-accelerated), which is comparable to, if not higher than, the A-to-B graduation rate of the very top tier US VC portfolio companies:
  • However, post Series B the two cohorts seem to re-calibrate. It’s hard though to attribute statistical significance to the deltas in percentages given the much smaller sample sizes at those stages; the drop-off from B to C for accelerated startups looks particularly pronounced, with 67% of Series B funded companies not proceeding to raise a Series C round;
  • Overall across the two cohorts, 4–7% end up going all the way to Series D and (if you believed in the statistical significance of numbers at this stages) 58% more accelerated startups end up raising a Series D round (7.0% vs 4.4%);
  • What these numbers do not tell us though is what happens to startups that do not progress to the next funding round. In fact there are four possible outcomes for a company after each funding round and the numbers in the chart only represent one of them (the 1st):
  1. Raises a further round of funding;
  2. Does not raise / has not yet raised a further round of funding (i.e. becomes self-sufficient or has yet to go to market)
  3. Fails;
  4. Gets acquired.
  • Without actual data on each of these four possible outcomes at each funding round, one can only speculate on the causes of leakage. So one could, for example, speculate that accelerated startups get to cash-flow profitability faster than non-accelerated ones and therefore do not need to continue raising dilutive capital post Series B; or that accelerated startups become attractive M&A targets much earlier in their life than their counterparts; or quite simply that there isn’t enough data on accelerated startups post Series B because the cohort is just too young and most have not gone to market yet (thanks Jon Bradford for pointing that out!);
  • A more skeptical one could speculate that accelerated startup live off ‘demo-day hype’ and momentum up until Series B and then gravity brings them back down to earth after that, either failing or transforming into “cockroaches” (Matt H. Lerner’s favourite nomenclature for startups that keep chugging along between life and death); or that accelerated startups tend to turn into great acqu-hires, failing to generate the type of exits VCs strive for.

I am hoping to get more data on these potential outcomes, so hold tight for a follow-up post!

European Accelerators as Series A Engines

A relative analysis on the shape & size of Series A rounds for ‘accelerated’ startups

I was intrigued by the numbers recently released by Mattermark on accelerators share of the US Series A market (tl;dr c. 10% of all Series A are raised by graduates of the top 3 accelerators, Y Combinator, Techstars and 500 Startups), so I did some digging to see what the situation is like over here in Europe.

The headline is that in 2016 18% of all European Series A rounds were raised by startups that at one point went through an accelerator or incubator programme.

This table has many more interesting numbers in it, which I will dissect below.

Source: Crunchbase

A few takeouts from the data:
  • 10x more rounds. The number of Series A rounds raised by accelerator graduates has increased more than 10-fold since 2012, from 6 to 61, while the rest of the A market ‘only’ grew by 2.8x over the same period;
  • Bigger share of the volume pie. Series A rounds raised by accelerator graduates have taken a larger and larger share, trebling from 6% of all A rounds in 2012 to 18% in 2016. This year we can be pretty confident that at least 1 out of 5 Series A are of this type. Series A investors better show up at those demo days!;
  • Bigger share of the dollar pie. Accelerator graduates have raised $456m worth of Series A rounds over the past 5 years, representing c. 8% of the total Series A capital raised over the same period, although that was 14% in 2016 and only 3% in 2012. So the pace of capital deployment is accelerating, literally;
  • Smaller A rounds. The average Series A round size raised by accelerator graduates is consistently lower than that of non-graduates, with the average discount being c. 28% over the last 5 years ($3.6m vs $5.0m). It would be fascinating to have the data on how pre-money valuations (and thus dilution) compare between graduates and non-graduates. I would speculate that this discount can be attributed to either: a) adverse selection (i.e. the more confident, experienced and networked founders do not need an accelerator and/or are able to raise more capital); or b) once ‘accelerated’ a startups has less funding needs, having invested previous capital more wisely and achieved more with it;
  • Less pre-A capital. The average amount of pre-Series A capital raised by accelerator graduates is 22% lower than that of their counterparts ($1.1m vs $1.4m). In other words, graduates get to a Series A more capital efficiently, ‘wasting’ less capital, or perhaps it is adverse selection at work again;
  • More pre-A rounds. The average number of pre-Series A rounds for ‘accelerated’ startups is more than double the number of rounds than their counterparts require to get to a Series A event (1.5 vs 0.7). i.e. graduates needs an extra round to get to a Series A (which I guess is glaringly obvious if the acceleration is considered as a round per se);
  • The A-crunch is real. Across the board it is very clear that the Series A bar has consistently risen, with the average amount of capital needed before getting to the A having increased 7x from $0.4m over 0.34 rounds in 2012, to $2.6m over 1.03 round in 2016.

While one can easily get stuck in it, it is always interesting to draw some comparisons to what is happening in the US, where in 2016 21% of all Series A rounds were accelerator graduates (so not too far from the 18% in Europe).

Source: Crunchbase

Other then the most obvious observation, such as that Series A rounds are generally larger in the US (just shy of 50% larger, whether or not the startup has been through an accelerator), it is interesting to note that:

  • It appears hard to unlock a US Series A with less than $3m in pre-Series A funding, regardless of accelerators involvement;
  • In Europe a Series A can happen with a lot less pre-Series A funding, particularly going though an accelerator which gets you there on about half the capital ($1.5m vs $3.1m) and fewer rounds (1.8 vs 2.3);
  • The accelerator Series A ‘discount’ applies in similar fashion across the pond, with average size of Series A rounds 37% higher for non-accelerated startups in both US and Europe.

So overall, with various caveats, it seems clear that accelerators and incubators in Europe can be a very strong engine of Series A creation, just like they have been in the US.