Over the past fifteen years, a series of stark contrasts has characterized the financial landscape — from the shattering fallout of a major housing crash to the triumphant rise of the longest bull market, followed by the disruptive onslaught of a global pandemic. Amidst this turmoil, the Venture Capital (VC) accelerator industry has emerged as a steadfast contender, weathering the storms and charting a unique course.
Fueled by the zero-interest terrain of 2020, the VC accelerator realm surged ahead, spawning an ever-expanding assortment of funds. Yet, the horizon seems to be hinting at a broader venture landscape shift, one that could redefine the contours of this ecosystem.
Initiating a tech company today demands a staggering 99% less investment than it did eighteen years ago, coinciding with the inception of Y Combinator in 2005. This dramatic reduction is largely attributed to the ascendance of cloud technologies, no-code tools, and artificial intelligence. An extraordinary wealth of knowledge is now at the disposal of founders, with resources like free YC Startup School courses steering the way.
Intriguingly, network effects have taken on a digital dimension, migrating from traditional physical spaces to virtual domains. Platforms such as Twitter, Signal NFX, YC’s co-founder matching, and Slack communities have orchestrated a profound shift in fostering connections and community within the entrepreneurial sphere.
As of the outset of 2022, the assets under management (AUM) totaled a staggering $1 trillion, while VC dry powder stood at $230 billion. These numbers loom in stark contrast to the AUM figures pre-financial crisis, exceeding them by a factor of five. Coinciding with this, the number of funds raised in the eight-year period leading to 2022 soared to 2,700, marking a significant upswing from the 883 in 2010. Crowdfunding enjoyed a robust 2.4x growth from 2020 to 2021.
Angel investments in 2022 equaled the cumulative sum from 2006 to 2011. The involvement of family offices saw a fivefold surge, and corporate venture investments catapulted sixfold, thus opening up fresh capital avenues for entrepreneurs who had previously faced challenges in securing funding.
The competitive landscape underwent profound shifts as well. The dawn of 2022 unveiled 2,900 active VC firms, a whopping 225% increase from 2008. This infusion of funds has propelled platform VCs to elevate their strategies, nurturing their portfolios and intensifying their pursuit of lucrative deals.
Moreover, the talent pool for tech startups has undergone a significant expansion. Factors such as remote work, offshore development, and the growing availability of skilled software engineers have enabled startups to access additional engineering talent, serving as an additional catalyst within this dynamic ecosystem.
Significantly, the traditional accelerator model has reaped the benefits of these potential paradigm shifts. The number of accelerators has more than doubled since 2014, with the number of accelerator-backed startups in the U.S. nearly quadrupling during the same period. Yet, as we peer into the future, founders must grapple with a pivotal question: Do we now have an oversaturation of accelerators, and is joining an accelerator even essential anymore?
The notion that accelerator funds offer diminishing value gained traction during the pandemic, as capital flooded the market, prompting first-time founders to bypass accelerators altogether. Moreover, reports of unethical conduct at accelerators have surfaced with increasing frequency. A notable instance was the allegations of fraud involving Newchip, a prominent virtual startup accelerator.
The Newchip debacle reverberated across the startup ecosystem, fueling growing concerns about dubious practices within accelerators. Another instance involving the On Deck accelerator saw a 25% staff reduction in 2022 due to a soured deal with Tiger Global, compelling On Deck to tap into its Series B funds to sustain operations. The challenges faced by players like Newchip and On Deck signal a broader trend — accelerators are now competing for both capital and opportunities with established institutional VC firms.
As we delve deeper, it becomes apparent that accelerators increasingly vie with other well-entrenched VC firms. Notably, the influx of pre-seed venture capital has intensified the competition, influencing more funds to adopt a “platform VC” approach, encompassing venture studios and incubators. This influx of pre-seed venture dollars in circulation has increased competition with accelerators and influenced more funds to pursue a “platform VC” model, with some even having a venture studio (e.g., building companies in-house) or incubator (e.g., long-term support at the earliest stages).
Importantly, VC firms pursuing pre-seed funding have managed to sidestep the traditional stigmatization often associated with accelerators, offering more favorable terms. Many VCs have also fostered communities around their accelerator models, a facet where traditional accelerators often fall short. Thematic platform VCs have curated advisory networks for specific sectors, sparking collaboration within their portfolios.
In essence, both micro VCs and established names are embracing the platform approach. Sequoia Capital’s Arc and a16z’s Crypto Startup School exemplify this trend, luring quality startups with attractive terms, capital, and strong brand recognition. The landscape is undoubtedly undergoing a transformative phase, one where the VC accelerator model is adapting to align with evolving startup needs and investor strategies.
By Impact Lab
