Likely due to some well publicized successes, the concept of startup acceleration has spread like wildfire over the past decade. This idea — nurturing nascent innovators for a small slice of the pie — has developed worldwide. Every cluster of startups that considers itself an ecosystem needs at least one accelerator to take itself seriously. The first Middle Eastern accelerator, Jordan’s Oasis500, saw the light of day in 2010. Lebanon’s first accelerator, Seeqnce, launched its first batch of startups in 2012 but then disbanded soon after the group graduated. Since Seeqnce was established, many calls have been made for a new accelerator as something badly needed for the entrepreneurial ecosystem. Finally, a well meaning and perhaps a little exasperated group of individuals from Bader, Berytech, Lebanon for Entrepreneurs and Middle East Venture Partners came together to create Lebanon’s second accelerator, [email protected], which will launch its first round of acceleration in early 2015, according to Fadi Bizri, Speed’s CEO.
Adapting to local specificities
But the region’s relatively new accelerators couldn’t simply copy their peers elsewhere. Accelerators in the Middle East have some basic elements in common with accelerators in Europe and the United States: a business development program lasting several months, where the accelerator’s fund takes an equity stake for a cash and in-kind investment. However, accelerating in the Middle East is a different beast from operating anywhere else, and accelerators have to adapt even further to take local specificities into consideration.
Making a carbon copy of a foreign accelerator in the Middle East is perhaps among the worst ideas if one wants to be successful. “If we just tried to copy and paste [US based accelerator] Techstars’ model in Bahrain it wouldn’t have worked,” says Hasan Haider, CEO of Bahraini accelerator Tenmou. “We looked at [their] program, looked at curriculum [and] it just didn’t sit with [the] characteristics of the market. We did a lot of niche things to change the way it’s delivered. We also decided we’re not going to focus on tech, we’re not going to be a Silicon Valley, we’re going to invest in any good team,” adds Haider.
Those behind the accelerators confess that they had to adapt their programs to local specificities. Ramez Mohamed, CEO of Egyptian accelerator Flat6Labs, acknowledges that their programs have to provide more basic training, since they were seeing entrepreneurs in emerging or developing markets with little experience in business. “The format of the program kept developing cycle by cycle until we develop[ed] something fit for Egypt and the region,” he says.
MEASURING ACCELERATOR EFFECTIVENESS
In physics, when charged particles go through a cyclic accelerator, they are propelled through a circular vacuum tube by electromagnetic fields until they reach an intense energy level, at which point the beam of accelerated particles is then directed at a certain target. The radiation — fundamental particles and combinations thereof — emanating from the collision with the target are captured and recorded by sensors to draw conclusions on the nature of the universe.
In business, a startup accelerator propels startup founders through a rigorous cycle of coaching, exposes them to mentors and markets, and provides them with seed capital for a small slice of equity. The anticipated result is to accelerate the process of customer acquisition and have the business mature faster than it would outside of the acceleration process.
But measuring the success of the companies, and therefore the effectiveness of the accelerator, follows a slightly less scientific process than that of measuring radiation, despite the various metrics that have been identified to ballpark the success of the process. Some accelerator rankings have focused on the valuation of the companies that came out of different accelerators after a certain period of time, while other measurement factors taken into consideration include how much funding the companies have been able to raise post-acceleration, what percentage of the companies have been acquired and what percentage of the companies have gone out of business.
While some accelerators are highly successful, the overall performance of the industry is by no means uniformly stellar. According to a 2014 report by US academics Susan Cohen and Yael V. Hochberg, while on average each accelerator examined saw 4 percent of its own startups successfully exit via sale or initial public offering, this percentage varied between 0 and 13 percent, depending on the accelerator in question. Among different accelerators, the percentage of companies receiving financing of over $350,000 within a year after graduation ranged from 5 to 78 percent. The very wide discrepancy between the range of results is one indicator pointing to the fact that not every accelerator adds the same value, and some perhaps add close to none. It is important to remember that better known accelerators attract the best deal flow, often by virtue of having been around for the longest time — as well as having older graduates that had more time to build and sell their companies. But ultimately, the programs and resources offered by different accelerators also account for their different levels of effectiveness in advancing startups.
Those familiar with the lean startup model know that you have to keep changing, iterating and adapting your product until it fits the market. The work of those guiding an accelerator is not dissimilar to this. Over the course of several cycles, a successful accelerator adapts to the market and figures out the best way to help the startups it is supporting meet their business goals. This, perhaps more than longevity, can account for some accelerators’ successes. “Our accelerator has been developing to the needs of the market since we began in September 2010. So we’ve been very fluid [in order] to identify the most appropriate way of what works and doesn’t,” says Oasis500’s CEO, Yousef Hamidaddin.
In this context, Executive took a look at three regional accelerators to examine the models and the value that they add to their incubated companies. While measuring the performance of accelerators is an imperfect science (see box), one ballpark metric is how well these companies are doing.
The accelerators identified were established before 2012, as it is difficult to assess the performance of companies established much later than this. We looked at Oasis500 in Jordan, Flat6Labs, which was established in May 2011, and Tenmou in Bahrain, launched in November 2010.
The first on the list and by far the most successful is Oasis500. Out of 75 startups that have graduated from it since the first quarter of 2011 when its first batch was launched, 55 are still active and nearly half have raised follow on funding with a combined total of $18 million as of Q3, according to the Oasis500 team. It is the only regional accelerator that has witnessed an exit for one of its startups. In 2013, their graduate, Run to Sport, was acquired by Jabbar Internet Group, an investment group made up of former employees of Maktoob, a Jordanian internet company acquired by Yahoo in 2009. The deal brought the Oasis500 shareholders a return of three times the original investment of $30,000 for 10 percent equity, according to Hamidaddin, meaning the company was acquired at a valuation of little under $1 million. Hamidaddin sees exits, rather than reaping dividends, as the only strategy by which the accelerator can become financially viable. Their strategy thus is to hold equity for five years and then divest in the next five.
The team states that now for a 10 percent equity slice, Oasis500 gives between $53,000 and $80,000 direct cash investment per startup, in addition to $12,000 worth of in-kind services, such as office space and internet connection. For making these investments, Oasis500 currently taps into a $6 million fund. They are also launching two more funds according to Hamidaddin, though they still have to deploy 20 percent of the first. According to Hamiddadin, the anchor investor is the King Abdullah II Fund, a non profit initiative by Jordan’s king.
In terms of their acceleration model, Hamidaddin stresses that it is the accelerator team that adds the most value to the program. “It’s the group of people who spend hours with the startup [working] on how to develop value. We work a lot on bringing things back to the fundamentals. And the fundamentals are importance of delivering a business.” Everything else is “dressing on the salad,” he says. Even mentorship takes second stage next to the core team. “Mentors, if they are given too much high ground, distract the business,” explains Hamidaddin, cautioning against too heavy a focus on mentorship. “Mentors, because we position them as a thought leader and a reference, sometimes, or in other cases many times, cause the business to lose focus. And they do become a crutch and a handicap for some startups.”
Hamidaddin also frowns on practices that focus too much on pitch events, and claims that he only lets some of their entrepreneurs do them. “There is a buzz around startups. You push them into competitions, you push them into PR [public relations] driven activities,” says Hamidaddin.
But not all PR activities are bad PR activities, especially when it comes to attracting deal flow to the accelerator. To spread their name, Oasis500 organizes ‘bootcamps’ across the Middle East — training programs lasting several days with the chance of being accepted into the accelerator — to attract companies to their program in a region that lacks deal flow. According to Hamidaddin, they have received applications from companies from as far away as Russia, Kenya, Brazil and the US.
Flat6Labs, the Cairo based accelerator, has had comparable success having graduated 57 startups, 70 percent of which are still active, according to CEO Ramez Mohamed. Over 50 percent raised follow on funding totalling $2 million as of Q3, according to Mohamed. The accelerator takes a 10–15 percent equity slice for $15,000–$20,000 in cash investment and $15,000–$20,000 of in-kind services.
Mohamed explains that Flat6Labs has a heavy focus on mentorship. “It’s more like Techstars than Y Combinator [another US based accelerator] because we are more mentorship driven. Techstars has a huge network of mentors and support,” he says. “I think it stands for every accelerator in the world; [it’s] not just about pipeline, [but] all about [the] quality you provide, the quality of the mentors, what mentors you are engaging with,” says Mohamed.
[pullquote]In terms of a success formula, “There is no magic wand … Just put the structure for them in the environment, and it’s always up to them to drive”[/pullquote]
In terms of a success formula, “There is no magic wand,” says Mohamed. “Just put the structure for them in the environment, and it’s always up to them to drive. We buy them the car, show the road, but never drive for them. We always push the entrepreneurs in any country to have confidence to drive the team [and] talk to investors. This is one of the very basic steps that we tell them at the beginning of the cycle. It’s your business,” he explains.
Bahraini accelerator Tenmou has a different approach to supporting startups. CEO Haider says, “We try to give the startups enough money to make the cash flow break even. We try not to rely on raising money to survive.” This has proved successful thus far; of the 18 startups Tenmou has graduated, 10 are still active, according to Haider. They invest between $53,000–$80,000 for equity stakes of 20–30 percent. As of Q3, seven companies have raised follow on funding, for a total of $500,000 according to the CEO.
Haider describes Tenmou as a hybrid between an accelerator and an angel network. About $2.7 million has been invested to build the accelerator, while its shareholders consist of 14 private sector family groups and two semi-governmental entities. Tenmou’s program comprises a three month acceleration period in which the accelerator’s ‘strategic partners’ come in to provide advice on marketing, finance and PR, at the end of which they have a session with investors. Haider explains that they also organize one on one mentorship. “I think having a structured program to take the entrepreneurs from the idea stage is useful. There is a major difference in companies who have gone through accelerators.”
[pullquote]The secret to success is perhaps not just in the content of the program itself, but also in the resources at their disposal[/pullquote]
But the secret to success is perhaps not just in the content of the program itself, but also in the resources at their disposal. Accelerator programs require an important upfront capital investment, since the companies do not start making returns for the shareholders in the first few years after they are created. The accelerators then need funding until they become sustainable from the returns of shares they take from their graduated companies, a situation in which no MENA accelerator is yet finding itself.
Even management fees derived from the seed investment fund would not necessarily cover any given accelerator. According to Hamidaddin, Oasis500’s functions run on a budget derived from a 3 percent management fee per year, providing them a total of $180,000 per year. While he would not specify the exact amount, Hamidaddin concedes that operating costs are more than $500,000 per year; however, considering they have a staff of around 22, these costs are likely to be much heftier.
With no immediate returns, acceleration is certainly a project for the long haul. No Middle Eastern market is alike, and accelerators will face varying degrees of success not only based on their programs and resources but also on their local business atmosphere. Accelerators in the Middle East are still quite young and it is impossible to compare them to the big players in the US and elsewhere, yet a glimpse at their performance is worthwhile to make sure they deliver tangible business goals to the companies they host, and not just glorified office space.