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.

2016: The Year European Venture Capital Changed Gear

68 tech VC funds raised €8.4B in a record year for Europe.

Despite the unprecedented macro and political uncertainty that has characterised 2016, this has undoubtedly been a very prolific year for European tech VC funding.

I compiled a list of new tech-focused funds publicly announced this year and, with a couple of weeks to go, the headlines are hot: close to €8.4B of capital was raised by 68 European funds, at an average fund size of €127m (I’ve ignored clean/bio/med-tech funds for simplicity).


Note: numbers in this table exclude two funds that were announced, but whose size was not disclosed.



Amount raised and number of venture funds announced in European tech (by quarter)

A few take-outs from the data:

1. Growth! Since I’ve only been tracking new funds this year, I haven’t got a direct comparable for 2015. Luckily Atomico came to the rescue with their freshly released State of European Tech 2016 report, with data on new tech funds provided by Invest Europe (EVCA) up to 2015. After applying some adjustments to my data to make it as like-for-like as possible (e.g. they exclude Russia and Israel, they do not include all “growth” funds nor all corporate venture funds), in the most conservative scenario where I completely ignore corporate venture funds and growth funds, it looks like 2016 will be up at least 33% in terms of capital raised (well on pace with last year’s growth) and 10% in number of funds (reverting a trend that saw number of funds closed drop by 20% in ‘15), making ‘16 a record year as far as recent memory is concerned. And that is by excluding some funds that undoubtedly do ‘venture’ such as Idinvest Growth (backers of Onfido, Happn, Zenly), Nokia Growth (Clue, Drivy) and Santander InnoVentures (PayKey, Elliptic) which Invest Europe might actually have included. So the actual growth could be much higher.

Within the year, H2 appears markedly down compared to H1. One could infer that the Brexit referendum and US election had an impact on fundraising activity in the second part of the year. In reality Q1 & Q2 appear to be two exceptional quarters with the mega funds (>€250m) like Index Ventures, Nokia Growth Partners, Rocket, Accel London, EQT Ventures and Partech Ventures Growth together raising €2.6b in capital in the first half of the year. Excluding mega funds, H2 was only about 17% down in value compared to H1, and interestingly was up 46% in the sub-€100m category.

Fresh new funds raised by VCs is typically a strong leading indicator of the direction of the industry, as funds have to deploy capital within a specified period of time (3–4 years for first cheques). So, in a year in that will see capital invested at levels roughly on par with 2015, this is a great sign of things to come for European startups.

2. More late stage capital. Capital was raised at all levels and for all venture stages, not just at the small early end as it’s often conventional wisdom with European VC. The mega funds in particular raised €3.5b combined. These are the funds that can write €20m+ cheques at Series B-C-D and support companies until larger exit, a segment of the market in which Europe has historically lagged the US.

It’s great to see more capital becoming available at that level, to help European champions scale, with the welcome appearance of EQT Ventures as a 1st time fund in that category (and the largest raised in ’16 at €566m).

3. New breed of GPs. While the mega funds continue to raise larger funds, a new generation of 1st time funds is clearly emerging. 44% of the new funds announced were 1st time funds (30), representing 30% of the capital (€2.5b), with the average first time fund being €65m (excluding EQT Ventures mega fund, which would skew the numbers). This is a very important category as 1st time funds tend to come to market with innovative strategies and models (e.g. Entrepreneur First) , often tailored to their local market (e.g. Kibo, Daphni) or to the previous experiences of the GPs (e.g. BlueYard, EQT Ventures), new ideas and perspectives, filling gaps overlooked by established funds. Shai Goldman’s spreadsheet on sub-$200m US funds reports ‘only’ 25 1st time funds raised in the US this year. In that size category Europe has 27 already and, if one assumes that most if not all 1st time funds are in the sub-$200m category (maybe an incorrect assumption for the US), then Europe is likely to have produced more 1st time funds than the US this year, which would be remarkable.

I’ve written at length about 1st time funds and what they entail here, it’s great to finally see LPs embracing this category in Europe too. It’s also great to see successful entrepreneurs, executives and investors recycling their wealth and experience back into the ecosystem.

4. More specialisation. More funds are being raised to go after a specific opportunity or strategy: from Seraphim and OHB space-tech funds, to Entrepreneur First follow-on fund for deep-tech startups, to Anterra’s agri-tech fund, to Partech Growth fund, to Kibo and K Fund Spain-focused funds, to Barcamper in Italy, Daphni in France and Karma in Estonia. Stage, sector and country specialists are emerging, led by specialist managers with relevant experience.

This is fantastic news for European founders who can finally find the best-fit capital for their business or sector, while increasing their chances of success with the right support.

5. Democratisation. It’s clearly not just about the UK and Germany anymore. While this math is bit simplistic, as most funds can also invest outside of their home country, non-UK and non-German HQ’d funds accounted for c. 60% of all capital raised, with Sweden and France crossing the billion euro mark, Netherland, Finland and Israel each solidly in the €400–500m range and Southern-European countries like Italy, Spain and Portugal emerging with €200–250m in capital raised in each. Even Estonia and Bulgaria are coming up with their local VC funds.

This was the main theme that emerged from Atomico’s recent report published at Slush ‘16: capital is following companies from an increasingly diverse range of geographies and hubs across Europe. Great news for founders outside of the traditional tech hotbeds.

6. Government support. To the best of my knowledge, at least 26 out of 68 funds (38% by number and 45% by value) announced in 2016 had a national or European governmental institution as a LP, with the European Investment Fund (EIF) alone present in 20 funds (I believe in line with 2015). The recent announcements of a €1.6B pan-European EU-sponsored fund-of-fund programme and of a £400m top-up to the British Business Bank suggest there is more of that to come in the near future. This continues to be the reality of the fragmented European venture capital market. The bet remains that over time, as the industry continues to grow and mature, generating large and larger exits, attractive returns will eventually flow and attract private institutional capital from the likes of pension funds and insurance companies to the asset class.

This is already starting to happen at an accelerating pace, which is a great sign, with the recent news of Legal & General committing to Accelerated Digital Ventures, AP4 (Swedish national pension fund) investing in EQT Ventures, and Italian insurance group Generali in Earlybird Venture Capital most recent fund. It’s also worth noting that, out of my list, 40 funds raising a total of €4.6B do not have any government agency as LP, including 20 1st time funds, showing signs of European funds being able to stand on their own two feet.

Now onto more and bigger exits, please! If every fund manager is targeting to return 3x to their LPs, this vintage will need to return >€25b. That’s easily somewhere in the €100–200b worth of exits from the portfolio companies of these 68 funds over the next 5–10 years. While it certainly feels like a big endeavour, considering the pace of exits is now in the order of magnitude of €10b/year, the European tech industry has never been stronger and better positioned.

Onto an even greater 2017!

8 Areas of Internet & Digital Media I Will Pay Closer Attention to in 2014

(1) Vertical integration in retail. I refer to the process of brands cutting out the intermediaries and selling own products directly to their end consumers, primarily via the web. The intermediary share of the value normally created along the value chain gets split between the end customers and the brands, as higher customer satisfaction (higher quality at lower price) also results in higher gross margins. The enablers have been the web channel at the front end, which allows for effective and scalable direct to consumer distribution without the need to add more brick & mortar stores, and the emergence of rapid designing, prototyping and manufacturing technologies at the back end, which have shortened production cycles significantly. Despite what Oliver Samwer thinks, I believe the offline channel will still play an important role, not necessarily as a sales channel though but more as part of a multi-channel approach to retail. Services such as Appear Here will provide online brands the ability to access the high street “on demand”, at the right time and location. I will watch particularly closely for businesses embracing scalable manufacturing technologies, such as 3D printing, in their processes and leveraging flexible offline presence at the front end.
Examples: Makie Lab, Align Tech, Shoesofprey, Rapha, Walker & Company, Harry’sBonobos, Warby Parker, Shapeways, Intelligent Beauty.
(2) Mobile as the main delivery platform. As obvious as it sounds in 2014, any business not putting mobile at its core is soon going to be obsolete. I believe in 2-3 years the large majority of our digital interactions will occur via mobile or tablets, including commerce (mobile commerce is still only 25% of ecommerce). Some of this shift will be just desktop-replacement, but a large portion will be incremental as mobile makes us all ubiquitously connected, always a click away from another purchase or booking. Some services are also just better delivered via the mobile (think Hailo, Uber, Instagram, Snapchat, Citymapper, Yplan etc). Marketplaces are an example of a business model that mobile has enhanced, since it makes it “vastly quicker and cheaper than ever before to ‘wire up’ both sides” as Matt Cohler noted recently. Opportunities will be plenty for businesses delivering beautifully simple mobile experiences.
Examples: Hailo*, Uber, Depop, Bizzby, Hotel Tonight, Citymapper, yplan, Osom.
(3) Image-led ecommerce: the trend of commerce and content converging has been in the headlines for a long time already, with publishers getting closer and closer to the transaction (e.g. Mail Online, Conde Naste) and online retailers investing heavily in curation and content (e.g. Asos, Farfetch, Net-a-Porter etc). I expect more companies attempting to bridge the gap between rich media (photos/videos) and commerce as users attention span gets lower and lower (as Biz Stone, co-founder of Twitter and Jelly puts it: “In a world where 140 characters is considered a maximum length, a picture really is worth a thousand words”) and mobile and tablets, with their constrained screen real estate, made the economic model of traditional advertising inefficient.
Examples: Houzz, Osom, Asap54Pinterest, Fancy, WireWAX, Olapic.
(4) C2C economies: it is about the emergence of online (often mobile-only) vertical marketplaces that allow any individual with excess capacity of an asset (e.g. skills, know-how, money, time, car, taxi, couch, bed, room, house etc) to efficiently monetise it. An interesting trend that has emerged from the resulting over-fragmentation (and thus expansion) of supply is that hard ownership has become redundant for certain asset classes that can be now available on demand: it’s happening to transportation, apparel, music and even server space. Watch this happen to other verticals.
Examples: Airbnbuber, lyft, blablacarboatboundStylebee, Vestiare Collective, Lending Club, Zopa*.
(5) Offline to online shift in large and ripe industries: while most industries and product/service categories have already transitioned online, there are still a few large industries that are resilient to moving online, but inevitably doomed to (e.g. commercial real estate, healthcare, education, law, financial services, automotive).
Examples: Zesty, zocdocAppear Here*, nutmeg, covestor, Shake, LawPivot, LawpalWealthFront, Carwow.
(6) Twitter ecosystem. I am long Twitter as an interest-based advertising AND ecommerce platform in the making. To the extent that “interest” is more strongly correlated to purchase intent than just “friendship”, I believe Twitter has the potential to become an effective platform for commerce, where Facebook effectively failed. I believe the userbase gap with Facebook will slim significantly in the next few years.
Examples: socialbro, Driftrock*, Buffer, Hootsuite.
(7) Online education. I think in 2014 we will start to see the pace of investing and consolidation accelerating in the space as the new learning/teaching formats become increasingly accepted and incumbents realise they have missed the boat and decide to up their digital exposure. Opportunities remain as an enormous industry is changing fast and new value chains become clearer. I continue to believe the value captured by the online educational content producer will diminish as competition intensifies (there are countless sites already where I can learn the basics of coding for example) and therefore businesses building tools and services that sit on top the content providers to create better online learning environments (ultimately improving outcomes) will thrive.
Examples: Clever, Blikbook*, TopHat, Piazza.
(8) Pervasive computing. I include in this area the entire ecosystem created around the ability of any device, from wearables to connected home appliances and drones, to capture, analyse and act upon data. The technology is now available for this to happen. As this is a new area for me, I will aim to learn as much as possible about it in 2014.
Examples: Cyberhawk, SkycatchStrava, Alert Me, 3D Robotics.
* Forward’s investments