What do Stripe and Airbnb have in common?
They were both incubated by startup accelerator Y Combinator during the financial crisis in 2009. Now, many VC firms are hoping lightning will strike again as they have been rolling out and expanding accelerator-style programs of their own recently to source founders before they even have fleshed out a vision for their startup.
Y Combinator, the most prolific generalist accelerator, saw its applications skyrocket 20% in 2022. A spokesperson for the firm said that in its most recent batch of applicants, they received over 20,000 and accepted 282 startups—making their acceptance rate 1.4%. “This was one of the most competitive batches ever,” the spokesperson explained.
Sequoia and Accel are both already expanding recently launched accelerator programs. Accel redesigned its accelerator program, called Atoms, to focus specifically on A.I. and “Industry 5.0.” Each company selected will receive “personalized learning, sector-specific mentors, and up to $500,000 in seed investment,” according to Accel.
Sequoia announced in January that it was going to increase the class size of its Arc "catalyst" program that launched in March 2022, up from two classes. The firm also rolled out a $195 million seed fund in January. Andreessen Horowitz launched its own a16z START program last year and just launched a $500 million seed fund to target companies in its “American Dynamism” investing category.
“We've seen a lot of these large firms just add a seed strategy to their investment base that allows them to increase the pool of LPs, and they'll get those LPs that want a little higher risk in their portfolio,” explained PitchBook venture capital analyst Kyle Stanford. “Accelerators are one way a firm can build a brand and get some really good talent and technologies through there, especially for A.I. If you can source 15 A.I. companies through an accelerator program, that's 15 opportunities that you have to do a deeper due diligence than you might if you just came across 15 companies through a pitch deck,” said Stanford.
Yet seed investing is notoriously risky, and working with a company to help build out its vision is a much more involved process than writing a check. According to investor Bob Ackerman, who cofounded the cybersecurity foundry DataTribe, launching these programs is in vogue now, but not everyone will necessarily be successful. “The venture community is populated by visionary sheep,” he said, explaining that he sees many VCs wooed by low valuations in seed-stage companies. “If you're gonna step into that real early stage, you need to be honest with yourself in terms of asking, ‘Do we have the expertise and the resources to take a raw idea and shape it into a viable fundable business?’ I think that's where, ultimately, the rubber hits the road. And some of these groups are going to struggle,” he added.
Some have stumbled. For example, accelerator Techstars abruptly announced in late March it was discontinuing its Swedish arm after its current cohort due to high costs, market conditions, and the difficulty of running the program.
Yet for firms that are successful, there are huge profits ahead. “In a downturn valuations are going to be relatively depressed…but the potential upside, especially if the market turns around in a year and we have another 10-year bull market, that's a lot of tailwinds that you can capture by starting a company now,” said Stanford.
“It will be a very strong group of startups that will come out of this environment because they've had to basically survive a test by fire,” added Ackerman.
Lucy Brewster
Email: lucille.brewster@fortune.com
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