What Weakening Accelerator Companies Mean for Policy

The last decade has seen an exponential increase in the number of establishments of accelerator firms. Since the quantity of U.S.-based business accelerators has increased from just one in 2006 to more than 500 in the present, the number and size of classes offered by accelerators have increased, and the number of potential startups getting financing from these companies has grown at an exponential rate. However, this increase is a worrying trend that has decreased the quality of businesses that have emerged from accelerators. For policymakers, this pattern is a significant indicator.

Before I discuss the implications of this policy, Let me begin with the facts. In the last decade, startups in accelerators have declined in several aspects. Today, the typical accelerator firm produces less accurate forecasts for its finances, offers a less effective pitch deck, gives fewer details about its customers, and is less well-developed in its product. And so on, than the average accelerator business in the past ten years.

Startups have a spectrum of quality ranging from incompetent founders with mediocre concepts to the top. This distribution hasn’t changed much over a decade. We have this information because the probability of companies failing at various stages of their life has not changed as the age-adjusted revenue of the average business are roughly identical in terms of inflation as it was back in.

This pattern can tell us something about what’s happening. Accelerators are diving further into prospective businesses. Since they can select a greater part of the distribution that is high quality their selections, the mean of the companies they’ve selected has dropped. Next, Airbnb or Dropbox could still be present among businesses that have emerged from accelerators for business. However, the percentage of accelerator companies eventually becoming unicorns is lower than ten years ago.

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The Policy Implications of Weaker Accelerator Startups

The declining quality of accelerator firms reveals an important issue that policymakers must solve. The majority of institutions that support entrepreneurial ventures do not make them better. The more successful institutions – accelerators, venture capital funds, or any other type of entity- will take in a higher proportion of new businesses than less successful ones. Because the more successful institutions have a greater share of new ventures, the overall quality of the businesses analyzed by these organizations decreases.

It is a pattern that could have implications for policymakers. Suppose funding institutions do not enhance the quality of startups but instead determine which ones are chosen. In that case, the policymakers will not see much return on their investment by encouraging the creation and development of these institutions. If the funds spent affect which institutions are selected to receive the startups and not how good the businesses they acquire, then the types of results that the policymakers are concerned about, such as job creation or wealth generation, won’t be affected.

There are also programs policymakers can help to can improve the performance of startups themselves. For example, the policymakers can instead invest in helping entrepreneurs better assess potential business opportunities, create products or meet with customers. Government programs that enhance the efficiency of startups make better use of funds than these alternatives.

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