Report Reveals Emerging Trend in Start-up Venture Formation
KANSAS CITY, Mo., July 23, 2007 – Just as the "American Idol" television series is stirring up the music business, a group of entrepreneurs is quietly adopting a similar format to change the face of the venture capital and angel investing industry, according to an analysis on venture financing by the Ewing Marion Kauffman Foundation.
According to the paper, while "American Idol" has proved to be a major success in identifying and establishing entertainment stars, the reality show also has tapped industry experts to groom and coach the top talent in the competition, who have gone on to sell tens of millions of albums.
A similar "Idol" formula is emerging among a new wave of entrepreneurs and venture capital funders. The model is radically transforming the entrepreneurial process, from identifying new entrepreneurs to providing the expert advice and support in launching and accelerating new business operations. The new "Idol-based" models vary in their details, but their contest-based method of selection and subsequent grooming are a common feature. This new approach to finding and nurturing innovative entrepreneurial enterprises seems to be catching on like wildfire, not only in the United States but in Europe and other parts of the world.
"We believe this development has important implications for the way many other early stage companies may be launched and financed in the future," said Robert E. Litan, Kauffman Foundation vice president of Research and Policy and one of the report’s authors.
In a report titled "Finding Business Idols: A New Model to Accelerate Start-Ups," the Kauffman researchers outline several variations of this new form of early stage acceleration and venture investing.
Not Your Father's Business Incubator
This so-called new "accelerator" model differs from previous early stage investors, such as incubators, which are oftentimes limited to real estate deals, with start-ups as tenants who pay for shared overhead. In contrast, the accelerator typically helps form companies as legal entities, interviews and hires the appropriate initial management team, and lends its own management expertise. In short, the accelerator becomes the "new company" throughout seed-stage development.
Like American Idol contestants who audition their skills before a panel of judges, new business start-ups compete for slots on the accelerator's "team."
Accelerators believe that by assembling groups of potential entrepreneurial superstars, they will hatch better ideas than if they fund a series of them in isolation," said Christine Gulbranson, director of Advancing Innovations for the Kauffman Foundation. "Accelerators also appear to be concentrating on specific industries or sectors, such as technology and biotech, since it often takes a critical mass of people with similar educational and business backgrounds to come up with cutting-edge commercially successful advances."
Though venture capitalists and even some angel investor groups have backed away from seed-stage financing, others are now showing interest in the accelerator model of picking and grooming the next wave of potentially high-growth start-ups.
The paper includes examples of several accelerators. "Our impression is that the floodgate has opened and more accelerators will be created both nationally and internationally," said Litan.