Corporate Accelerator Governance
Where Metrics Matter
Overview: Accelerators are a complex tool that exist in complex organizations. It's one thing to talk about how to select promising startups but it's a whole different beast to talk about how this tool can exist alongside daily operations. Who "owns" the corporate accelerator? What risks are associated with this tool? What is the timeline for a return on investment?
Independent accelerators typically answer to contributing investors, whereas corporate accelerators answer to the C-Suite, the board of directors, and shareholders. Budget considerations, annual reports, and risk management add a complex layer to accelerator design and management.
Conflicts abound in the governance realm. For example, a typical corporation makes decisions based on an annual schedule, which means, according a CB Insights interview of Dave McClure, that startups live and die within that timeframe. While corporations' quarterly and annual reports exemplify consistency, startups live in a boom or bust world.
The hope is, of course, that an accelerator is successful, but determining the impact of an accelerator is complex considering the variable ROI expectations of the corporation versus the accelerator.
Leadership and shareholders need to be aware that corporate accelerators rarely lead to instant results, and communication about innovation efforts with longer timelines must be clear. One of the worst possible outcomes for an accelerator is a premature termination.
There are several models, however, that address the time required for a measurable impact on a company's core business. In McKinsey's Three Horizons of Growth model, corporate accelerators exist around Horizon 3, shown in the illustration, with a timeframe for contribution to growth of approximately five to 12 years.
The Boston Consulting Group suggests a four to 10-year timeframe for incubator or accelerator results in their report “Incubators, Accelerators, Venturing, and More.”
The reality is that, according to McClure, most corporates don’t plan for a five-year horizon where accelerators are concerned. In fact, accelerator programs are typically renewed for no more than one or two years.
According to Deloitte, though, building an accelerator is an exercise in “business building.” It is the first step towards an internal corporate business-building unit and one that should be part of a long-term commitment and strategy. Major corporations are adopting this new way of thinking.
Deloitte’s view is that early stage ventures take five to seven years to show meaningful financial results. Even a startup that doubles that speed is looking at a two to four-year timeline, and many startups will fold or fail to achieve acceptable results.
However, accelerators that do succeed are those that have long-term financial commitment with consistent C-level and board support, because the true impact of accelerators manifests over time. If one startup fails in the short term, for example, there is value in the learning that occurred and the networks that were extended. While that value is not immediately evident, perhaps the next startup through will succeed because of the lessons learned from a prior failure.
Building an accelerator requires a long-term perspective, stable revenue, and careful planning to see positive results. Which brings us to the all-important cost factor.
The Cost Conundrum
Expenses for a corporate accelerator, according to Falguni Desai, managing director of Future Asia Ventures, may range anywhere from $2 million to $5 million per year considering third-party vendors, office space, marketing expenses, and internal teams.
But comparing R&D spending to accelerator expenses adds perspective.
The 2016 Global Innovation 1000 study by PwC Strategy& shows that the ten most innovative companies outperformed the top ten R&D spenders, which refutes traditional theory and past research studies.
No one will be surprised to hear that Apple and Alphabet continue to lead the most innovative list, followed by 3M and Tesla. However, they do so with far less spending on R&D than some big-name industry leaders. Volkswagen, Samson Electronics, and Amazon spent the most on R&D but with little to show for it. Apple spent $8.1 billion on R&D and outperformed Volkswagen in innovation, which spent a colossal $13.2 billion. 3M spent just $1.8 billion on R&D and outperformed Samsung, which spent close to $13 billion.
Depending on strategic motives and company structure, accelerators and corporate venturing could well be a way to save money and avoid R&D expenditures with disappointing results.
According to Yael Hochberg, a visiting professor at MIT Sloan School of Management, startups are about experimentation, and the cost of that experimentation is about one-tenth what it was a decade ago. Hochberg says, “[Businesses] can actually go out and get a sense of whether these things are going to be successful a lot more quickly and at a much lower cost."
Leadership and Structure
Leadership that can operate comfortably within both the startup environment and that of the sponsoring company is an effective conduit between the corporation, its investment targets, and the startup. What does that look like for a corporate accelerator, and what is the best approach?
An accelerator is straddling the line between an emerging concept and a contribution to a mature and established corporation. There is a need, therefore, for an entrepreneurial mindset that also has a deep understanding of the company's culture, structure, and mission.
Dominik K. Kanbach and Stephan Stubner suggest combining parent-company heads of corporations with over 15 years’ experience, leaders with startup experience, and a network of relevant external stakeholders such as investors.
Deloitte recommends some areas that accelerator leaders should consider at the outset. These include identifying areas for potential disruption in the industry, determining whether there is a long-term commitment to building exponential business and scaling, are ensuring that the corporate leaders on board with and supportive of digital transformation.
The hardest part of securing the long-term support of the C-Suite and board is persuading them that the risk of not following an innovative path and allocating the required resources is greater than the risk of doing so.
What’s scary about corporate accelerator is that the risks are admittedly high. There are significant initial costs, and there is no immediate payoff. The quality of both startups and mentors can be low if either are poorly selected. Based on this graphic from the World Bank, few corporate boards that are protective of shareholders would jump at the chance to initiate an accelerator based on the risks.
But that’s the state of technology advancement in the digital age. High speed and high risk.
Kanbach and Stubner describe corporate accelerators as either integrated within the parent company as part of a specific business unit, such as digital or online business, or a specific department, such as innovation management, corporate strategy, or product development. The way that the accelerator is integrated determines the reporting line of the accelerator management team.
A separate accelerator removes the direct risk from the corporate coffers. It can act as a bridge between innovation and the corporation. It’s funding should be separate and anticipate high initial startup costs with a suitable timeline for returns. David McClure of 500 Startups warns, however, that too much accelerator independence could be detrimental if a company has many innovative activities ongoing within its structure. While some projects might have a short horizon and some a longer horizon, innovation efforts should be coordinated to avoid crossovers, expense, and missed synergies.
According to McClure, "[the corporation] might have an accelerator program, they might have an innovation program, they might have a direct investment program, they might have a VC arm and they might have acquisition, right? And I think all those should probably be coordinated." That's because innovation doesn't start and end with the creation of a new product; a new product becomes part of the corporation’s core business.
Metrics and Lessons Learned
Pertinent to the independence and success of an accelerator, we look at how an accelerator’s progress can be measured over the short and long term. Data are key. Data can be the difference between the continued support of corporate leadership and the cessation of an accelerator. Data are also essential for cohort members to assess and document their progress in meaningful ways.
A study by the California Business Incubation Alliance from 2016 found that only 4 percent of corporate programs don’t track any performance metrics of their portfolio companies but almost 90 percent track financial and product milestones. Which data are tracked and reported depends on the focus of the accelerator governance.
Financial: A focus on the financials is most likely to be demanded by the board and shareholders; therefore, Deloitte lists follow-on funding, the total value of portfolio companies, and the number of startups that have survived, exited, or folded (over each year or every three) as key performance indicators.
Innovation Integration: For companies with a strategic focus on innovation integration, the number of joint efforts (co-development, partnering), the number of integrated technology or business models, business unit impact, additional business or revenue from the startup, or number of startups that survived, exited, or folded can be used as KPIs.
Public Relations: For marketing, the number of PR events, the amount of press coverage, the number of applications, and the number of participants can all show an uptick in ROI as a result of the accelerator.
It’s important for corporations to be transparent with their accelerator metrics, to maintain trust and credibility and to ensure future high-quality applicants. Techstars provides an excellent example of transparency by listing every company it has ever funded.
For ideas on additional metrics for assessing startups, McClure suggests the following data for early-stage startups.
Funding: Dollar amount or number of startups that raised capital after going through an accelerator program (or number that raised over a certain amount, for example, $250,000 to $500,000).
Product: The change in functional milestones for minimum viable product (or improvement in selected features as measured by observed usage/qualitative survey/net promoter score).
UX/Usage: The change in user reaction to a product measured by time on site, retention over time, a key conversion metric, or target goal behavior.
Markets: The change in the number of active or registered users, or percentage conversion for a set of acquisition channels or campaigns.
Revenue: The change in money generated, ideally based on the cost to acquire users.
Team/Hires: The change in team experience/skills acquired or hired during acceleration.
Founder Satisfaction: Simple qualitative survey of founder satisfaction with the program.
“If you don't take certain steps to drive innovation in your company and move towards being an exponential organization, chances are that you are on your way to becoming the next out-of-date organization, similar to Nokia or Polaroid" Deloitte, 2015.
We hope that this content on corporate accelerators should give organizations the impetus to bring their innovation efforts front and center of any business strategy. There are risks involved in creating a corporate accelerator, but none greater than the risk of failing to innovate.
This is a bare bones guide to building an accelerator. But building an accelerator is no guarantee that it will produce positive results. Companies must invest seriously and patiently, choose their accelerator's focus, leadership, cohort and mentors wisely, and measure that accelerator's success carefully. Only then can an accelerator fulfill its mission to provide intense learning and advancement.