500 Startups, the early stage venture fund and seed accelerator based in Mountainview, recently announced the launch of 500 Labs, a venture that they hope will lead to internally-spawned and spun-off companies at the anticipated rate of a few companies every year.
SeedDB has 500 Startups ranked third amongst accelerators and incubators in terms of both number of companies funded and total amount of funding provided. Their leap into the startup studio/foundry space makes them the largest accelerator in that game, and it could be a sign that the startup world is shifting away from garage-based workspaces and independent investors towards an “ecosystem”-driven model that keeps innovation in-house and under a watchful eye.
Foundries Could Be Good for Founders and Backers Alike
Multiple outlets have been reporting a slip or a downright drop in VC funding over recent quarters. The number of completed VC funding deals peaked in the second quarter of 2015 at 2198, while the dollar value of completed deals peaked one quarter later at $39 billion. That dropped to $27.7B in Q4 2015, and $25.5B the first quarter of this year (Q2 data isn’t yet available).
Some have interpreted this as the long-predicted deflation of the startup bubble—the beginning of the end of the startup era, as it were—while others insist it is merely a blip in the same league as any other “market correction.” The National Venture Capital Association, for instance, claims that VC firms in the US raised $12B in capital in Q1 of this year, more than any other quarter in the past decade. We’ll have to wait and see if that capital actually makes its way into startups to turn things around.
Regardless, there’s never been a question that venture capital is an uncertain endeavor, for the VCs themselves and for the founders and startups they back. As the app and IoT industries continue to gain mainstream steam, investing in twenty different trios of college-dropout whizkids with the hopes that one of them hits the big time is losing steam as a favored investing strategy. From the startup perspective, putting a your company and your tech’s potential fully in the hands of your pitching game is an unsteady way to achieve progress with any sort of efficiency and predictability.
The accelerator industry, on the other hand, is doing quite well. The number of new accelerators sprouting up in the US peaked in 2012, but 15 more were added last year in the US and Canada—a year that also saw over $90B of accelerator capital invested in startups in North America alone. Compare that to the 2015 global investment by VC firms of just $25.5B, and it seems clear that the tide is turning.
We also ought to consider the slew of university-based startup programs that have sprung up over the past few years, funding research with relatively little risk and spinning off viable advances and technologies when they’re close to being market-ready. It’s all a sign that the smart money is streaming towards more proven and later-stage startups. That’s the way 500 Labs is planning on doing things, too, and it might prove better all around.
500 Labs Experimenting With Scratch
The plan is to take salaried entrepreneurs with complementary skillsets identified through 500 Startups’ extensive global network of founders, peers, and the like, put them together in a room, and then see what they come up with. Anything that seems like a viable business will get set up as such, and 500 Labs expects to spin off about 30-40% of the companies it seeds in this fashion.
By the time they’re out in the open and courting further investment, they’re likely to be close to product launch, if not further along. It’s a plan that seems to make better bets for investors, and give founders more freedom to fail on their way to greatness.
It’s also, of course, less like a startup and more like internal R&D. There’s hardly a Fortune 500 tech company that doesn’t have some sort of think-tank/innovation program. Google’s “20% program” is probably one of the most famous; modeled after 3M’s program, which allowed employees to spend up to 15% of their paid working hours on creative and innovative ideas not necessarily related to their everyday work, Google’s program of workplace playtime led to Gmail, AdSense, and more (we wouldn’t have Post-Its without 3M’s program).
It’s true that the funding approach and end-game strategy are far less entrepreneurial in spirit when it comes to internally-spawned “startup” ideas. But the fact that 500 Labs is creating a more reasonable, restrained, and productive environment for startups isn’t a bad thing. It’s just another sign that the startup model is maturing, just like the tech companies that have come out of it.
Back In The Startup Studio
BuildTogether.co counts more than 150 startup studios worldwide. Stefano Bernardi, former startup founder and current investor through his micro-VC firm Mission and Market, keeps a running list of studios/foundries as he finds them, and notes that model stretches back decades—Idealab was founded in 1996 and is still going strong, churning out new companies like codeSpark and Branch. The foundry/studio model is a well-established one, and big money is starting to get involved in a big way.
The Startup Foundry spun off crowdSPRING way back in 2008 with a $3M funding round, Paris-based Efounders was the birthplace of Mailjet, which has currently secured more than $17M in funding (the bulk of which came with an $11M Series B round last summer), and Pioneer Square Labs was launched in Seattle just last fall and is backed by some of the biggest names in Emerald City’s tech space, including investment firms backed/controled by Jeff Bezos (Bezos Expeditions) and Paul Allen (Vulcan Capital).
Startups and VCs will never go away, but a large part of the next generation of tech companies might be coming our way from the laboratories of seasoned accelerators that provide capital, workspaces, mentors, and more to entrepreneurs with a bit of experience…instead of the basements of a handful of tech bros freshly dropped out of college. It is a future that I for one am looking forward to.
Daniel A. Guttenberg is an Atlanta-based writer who fell into the startup world by accident and has been gleefully treading water ever since. He will be survived by his beard and his legacy of procrastination.
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The VC’s might not disappear for a little while, but once the up and coming youngsters with all the money get older, getting investments through the accelerators is the best option.
I wonder if this startup boom was just something created by the investors or if there have always been startups like this that had to pay their own way. Doesn’t it seem like every Tom, Dick and Harry with an idea is getting money somehow?
All of these accelerator projects look promising. If VC funding seems to be taking a back seat, there is a whole open road for the others in these markets.
I would have to say that as long as the VC funding is dipping and the accelerator is looked at like the next step, the answer would be yes.