MGMT 265 Write Up Final - MGMT 265 Spring 2021 - Professor Lori Rosenkopf PDF

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MGMT 265 Spring 2021 - Professor Lori Rosenkopf...

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Accelerating Accelerators Wharton School of Business - MGMT 265 Professor Lori Rosenkopf

2 Motivation of Project In this paper, we will be addressing the generalizability of the Hallen et al. study, Do Accelerators Work? If so, How? We explore whether or not this study can be applied to Southeast Asia, considering the rise of Southeast Asia as a venture hub due to increasing government support, foreign investments, and internal internet R&D spend. We argue that there is evidence from academic articles, interviews, and data that support the generalizability of Hallen et al’s conclusions and the BIP consultation framework to our focal context.

Methodology For academic articles, we utilized Google Scholar to search for both qualitative and statistical research on the Southeast Asian entrepreneurial ecosystem. For interviews, we gathered insights from accelerators and venture capitalists in SEA to understand different specialists’ perspectives surrounding accelerators’ effectiveness. We spoke with a range of accelerators, from generators to later-stage, including Sequoia’s Surge, Google Developers Launchpad, Antler, Entrepreneur First, Iterative and Digitaraya as well as Intudo Ventures, a SEA-focused VC, to understand how investors perceive accelerators’ effectiveness. For data, we screened for SEA companies backed by accelerators on Pitchbook, gathering summary statistics on 635 companies, 700 deals, and 94 investors.1

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In our preliminary data search, we centered on Pitchbook, which allows for screening of accelerators, incubators, and businesses located in specific countries. In terms of search criteria used, to ensure that the data we examine is relevant to the topic of the paper, we narrowed our search to companies and deals located in Southeast Asia backed by accelerators or incubators, as well as investors located in Southeast Asia that identified as an accelerator or incubator. Applying these criteria, we were able to gather aggregate data and summary statistics on 635 companies, 700 deals, and 94 investors.

3 Differences in Challenges across Geographies To be able to generalize the value-adds of accelerators in the US to Southeast Asia, we first have to identify the differences in challenges across geographies. Firstly, the market in Southeast Asia is less mature than the US. Brian Ma of Iterative explained that “Southeast Asia’s ceiling is very high and we are currently at the very beginning of this journey”. While there is a focus on differentiation for existing products in the US’s developed markets, there is a focus on creating products that did not exist in Southeast Asia. Next, the nature of the Southeast Asian markets are unique to each country. For example, Alyssa of Entrepreneur First explained that in Singapore, considering market expansion and going global is critical due to its limited market size. On the other hand, in Indonesia and Vietnam, focusing operations on these markets is enough. Furthermore, Southeast Asian countries have a less mature funding ecosystem than the US, resulting in a lack of access to capital. Jussi of Antler explained that on average, VCs in Southeast Asia are more risk averse than in the US because they typically invest in proven business models from other parts of the world being executed in the region, allowing them to only take execution risk and not business model risk. Moreover, Alyssa of EF mentioned that the funding gap is demonstrated through much lower valuations of similar products in SEA compared to the US. Lastly, Brian of Iterative elaborated on the unique fundraising practices across regions. In Southeast Asia, investors are more diverse, ranging from family offices to mutual investors. In fact, within Southeast Asian countries, terms and negotiations are very different across different countries. Another notable challenge in Southeast Asia is the lack of talent pool, especially in engineering skill. Jussi of Antler emphasized that the biggest differentiating factor between a weak and strong startup ecosystem lies in its talent pool. For example, in Indonesia, only 10% of the total employment is highly skilled, reflecting a huge mismatch in what is taught in institutions and what industries require. Lastly, there is a lack of institutional support for doing deals, characterized by high political uncertainty, weak legal/financial support for investors, corruption/red tape and inefficient government support for SMEs in Southeast Asia compared to the US.

4 Value add: BIP and Non BIP Hallen et al. found that accelerators do accelerate ventures, primarily through three main learning factors: breadth, intensity and paced structures of consultations (known as BIP factors). We argue that these conclusions are generalizable to our focal context of Southeast Asia, due to evidence collected primarily from interviews and academic articles. Through our interviews, we found that one of the strongest sources of value-add from accelerators in SEA is through broad consultations, one of the three factors of the BIP framework. Digitaraya would pair startups with mentors from McKinsey to assist with strategic direction and with mentors from UBS to map out financing needs. Some accelerators would also provide direct advice to startups. Iterative’s co-founders would utilize their shared experience founding 3 startups to help startup founders avoid common first-time mistakes. Moreover, accelerators such as Sequoia would hold weekly seminars on topics such as increasing customer base and preparing to fundraise. The breadth of learning opportunities that these accelerators provide is evident to be one of the main ways in which ventures can improve and better themselves. We have also found evidence pointing to paced structures and intensive interactions as other sources of value, but they were not as emphasized. In terms of paced structures, Digitaraya mentioned that they organized demo days at the end of each month and would schedule seminars and 1-on-1 mentoring sessions around the date. This format provided structure to the program, which encouraged founders to continuously forge progress. Academic articles on SEA incubators have also pointed to the relevance of the BIP framework. We believe that this is applicable to our context due to the term “incubators” in the academic literature broadly encompassing accelerators as well, in which they are differentiated through their scope of role (Wiradinata et al). From a study by David Ng Wai Lun from Singapore University, Lun quantitatively and qualitatively measured the impacts of successful and unsuccessful ventures in accelerators and concluded that SEA accelerators can have a positive impact on startups if they prioritize a “detailed execution-orientation, including regular communication with all stakeholders in the program.” Taking a

5 different approach from Hallen, Lun shows through this study that accelerators can accelerate through facets similar to the broad and paced consultations in the BIP framework. We have also found various studies, although not causal, but points to key factors of effectiveness for accelerators, that are in line with the BIP consultation framework. A quantitative study shows that accelerator program factors that most explain venture success include incubator governance, entry and exit criteria, and mentoring and networking (Gozalil et al). Other quantitative studies also point to factors such as business coaching and mentoring, variety of seminars, robust social and professional environment, access to business development advisors, and an extended network of organizations and investors (Wiradinata et al). Studies also point to the importance of regular coaching and networking interactions based on continuity and frequency (Games et al). Overall, these factors fall within the categories of the BIP consultation framework, and although do not necessarily prove causality, the abundance of academic support suggests that the Hallen et al. study would be generalizable to the context of Southeast Asia. We also identified additional sources of accelerator value-add that is not encompassed by the BIP framework. First, signalling effects were identified by interviewed accelerators as highly significant. As explained by Intudo Ventures, it is more advantageous for startups in developing countries to join global accelerators due to reputational effects and a lack of access to capital markets. For example, startups that participate in Iterative’s program often receive an increase in inbound requests from the press, engineers and VCs. Although the Hallen study controls for signalling effects, we were unable to identify the magnitude of effects from learning vs. non-learning factors. Second, accelerators provide support in key functional areas, primarily in hiring and fundraising. Sequoia highlighted that their edge is in hiring due to their vast network and brand reputation. For example, they supported Telio, a B2B marketplace in Vietnam, to hire engineers after their Series A. Notably, generators such as Antler and Iterative and venture builders such as Entrepreneur First also specialize in co-founder matching during the pre-seed stage. Academic articles also highlight the importance of funding and support, system infrastructure, and governance protection as other indicators of accelerator effectiveness (Gozalil et al). Ultimately, our evidence from interviews and academic research suggests that the BIP framework can be generalized to

6 SEA accelerators, but there are also non-learning effects that are present. We are uncertain about the magnitude of how they affect accelerator effectiveness relative to the learning effects (BIP), in contrast to the findings of the Hallen et al. study.

Data Findings To analyze the data from Pitchbook, we first created visualizations using Tableau to determine the largest accelerators in SEA in terms of total investments and exits. Given the limited data on startups that were not accepted into SEA accelerators, we used the Emerging Market Private Equity Association’s data on VC activity in SEA as a benchmark for comparison against Pitchbook’s performance statistics on top SEA accelerators to determine effectiveness of accelerators in our chosen geography (Exhibit A). According to Pitchbook, $2.74M of capital was raised for accelerator-backed companies in 2019, and median deal size and post-deal valuation were $0.96M and $0.3M respectively (Exhibit B). In comparison, EMPEA reports that VC-backed companies raised $2.3 billion in 2019, and median deal size and average valuation among notable exits were $5M and $70.5M respectively (Exhibit C). Based on capital raised, VC activity dominates the region. Moreover, average deal size is five times larger for VC-backed companies than accelerator-backed companies and average post-deal valuation is considerably higher for VC-backed companies. Using valuation as a gauge for efficacy, SEA accelerators, in comparison to VCs, are not correlated with better outcomes for startups. However, it is important to note that accelerator-backed companies are typically earlier-stage and lack publicized detailed information, which may explain lower average valuations.

Risks and Mitigants While our overall findings generalized to the target context, there were also a few risks associated with Southeast Asian accelerators that we wanted to address and find solutions for.

7 First, many accelerators face a significant challenge in procuring and sustaining a network of mentors who are dedicated to the cause of growing startups. A solution includes incorporating a more rigorous interview screening process with clear sets of criteria that match with the strategic focus of both the startup and the accelerator. Second, the geographical configuration of Southeast Asia serves several accessibility, infrastructure, and logistical constraints. Many startups lack the funding necessary to participate and travel to programs in major accelerator hubs (ie Java, Bangkok, etc.). Mitigations include providing stipends for successful startups outside of accelerator hubs as well as increasing the prevalence of online programs to promote inclusivity. Lastly, accelerators tend to focus on promoting quantity over quality when it comes to accepting startups. This has resulted in a lower quality Southeast Asian entrepreneurial ecosystem and has increased due diligence requirements across the board. According to research, the solution requires having a higher level of selectivity for accelerators focusing on mid to growth-stage ventures. To further encourage quality standards amongst all stage ventures, accelerators should incorporate various performance-based KPIs for each subsequent stage (Bhardwaj et al.).

Limitations & Future Directions A key limitation we faced was that most of the insights from academic research do not test for causality. Moreover, most of these studies also provided limited insight on the impact of learning effects relative to non-learning effects. Additionally, the sources we analyzed were unable to provide detailed insight into how effective accelerators were beyond funding and valuation amounts. However, there may be other variables that affected startups’ performance outside of the observable scope. In the future, we would search for data on other pre- and post-accelerator performance metrics for startups that have gone through Southeast Asian accelerator programs.

8 Finally, given time constraints, our interviews were primarily done from accelerator perspectives as we had difficulty scheduling meetings with startup founders. In the future, we hope to be able to interview startup founders both with and without accelerator experience to gain more diverse perspectives on the accelerator scene in Southeast Asia.

9 Appendix & References:

Academic Articles: 1. Scheela, W., Isidro, E., Jittrapanun, T., & Trang, N. T. (2015). Formal and informal venture capital investing in emerging economies in Southeast Asia. Asia Pacific Journal of Management, 32(3), 597-617. doi:10.1007/s10490-015-9420-5 2. Bhardwaj, R., & Ruslim, C. (2018). START-UP ASSISTANCE ORGANIZATIONS IN INDONESIA. 1-77. 3. Lun, D. W. (n.d.). The business of accelerating the acceleration of startups. Institutional Knowledge at Singapore Management University. doi:10.1007/springerreference_61782 4. Gozali, L., Masrom, M., Zagloel, T. Y., & Haron, H. @. (2016). A framework of successful business incubators for indonesian public universities. International Journal of Technology, 7(6), 1086. doi:10.14716/ijtech.v7i6.3351 5. Wiradinata, T., & Antonio, T. (2019). The role of curriculum and incubator towards new venture creation in information technology. International Journal of Education and Management Engineering, 9(5), 39. doi:http://dx.doi.org.proxy.library.upenn.edu/10.5815/ijeme.2019.05.05 6. "Incubating success: How aspiring incubator participants are encouraged towards success in Indonesia", Strategic Direction, Vol. 37 No. 1, pp. 39-40. https://doi.org/10.1108/SD-10-2020-0191 7. Escobal-Luea, J. (2020). Incubating the transnational entrepreneurial ventures in the ASEAN-X group: A quantitative study (Order No. 28000862). Available from ProQuest Dissertations & Theses Global: Business. (2426543802). Retrieved from https://proxy.library.upenn.edu/login?url=https://www-proquest-com.proxy.library.upenn.edu/diss ertations-theses/incubating-transnational-entrepreneurial-ventures/docview/2426543802/se-2?acc ountid=14707 8. Gozali, L., Masrom, M., Zagloel, T. Y., Haron, H. N., Garza-Reyes, J. A., & Tjahjono, B. (2020).

10 Final framework for a successful business incubator for indonesian public universities. Interdisciplinary Approaches to Digital Transformation and Innovation, 70-98. doi:10.4018/978-1-7998-1879-3.ch004

Data Sources: 1. Pitchbook (2019) Southeast Asia. Accelerator/Incubator-backed. Companies and Deals Profile. Retrieved from Pitchbook database https://my-pitchbook-com.proxy.library.upenn.edu/search-results/s65256055/overview_tab 2. Emerging Market Private Equity Association (EMPEA), 2020, Southeast Asia Data Insight (Year-End 2019), www.empea.org/research/southeast-asia-data-insight-year-end-2019/. Informants: To get a comprehensive understanding of Southeast Asia’s startup ecosystem and the role accelerators play in it, we wanted to interview a range of perspectives from all stakeholders in the ecosystem. Hence, we reached out to accelerators, including generators, later-stage accelerators, corporate accelerators and university-backed accelerators to understand how their programs are structured, the type of resources they offer and their verdict on the most significant value-adds they provide for startups. As accelerators inevitably have a positive bias towards their role in scaling startups, we also targeted venture capitalists to understand their perspective on the effectiveness of accelerators and specifically how accelerators support their acquisition strategy (ex. demo days) or the performance of their existing portfolio companies. Lastly, we also reached out to entrepreneurs and startups who have gone through accelerator programs to evaluate if accelerators were indeed helpful for their growth and what aspects (mentorship/funding/workshop/etc) was most applicable and beneficial to them. In the end, we were able to schedule interviews with 6 prominent accelerators in Southeast Asia. Specifically, we interviewed the two main generators (founder-matching accelerator), which is Entrepreneur First and Antler. We also interview later-staged accelerators, namely Sequoia Capital’s

11 accelerator fund Surge, Google Launchpad Accelerator, Digitaraya and Iterative Capital. Unfortunately, we were unable to get responses from corporate accelerators and university-backed accelerators. Next, we also interviewed a venture capital, Intudo Ventures, to get the perspective of an investor. Lastly, we also interviewed serial entrepreneur Brian Ma, who founded Decide.co (acquired by Ebay), Egg Sprout, Weave Networking and Divvy Homes, who then went on to start Iterative Capital (accelerator). Unfortunately, the startups he ran were based in SF, hence we were unable to understand a SEA founder’s perspective on accelerators. Moreover, we were unable to secure interviews with many founders we reached out to due to confidentiality reasons and their busy schedules. Moving forward, we hope to interview startup founders to get a more holistic understanding of an accelerator’s role in Southeast Asia. Below we have provided information on the informants we interviewed, their respective company roles, as well as how they contributed to or was limited in answering our research question: ●

Eddy Chan is a founding partner of “Indonesia-only” Independent Involved early-stage venture capital firm Intudo Ventures, that acts as the Indonesia beachhead strategy for dozens of leading institutions, VC/PE/hedge funds and family offices from the United States, North Asia and Southeast Asia and supports the “digital transformation” strategy of dozens of Indonesian conglomerates. Eddy presented his thoughts on the value-add of accelerators from the perspective of an investor, but was somewhat limited on commenting on the learning effects derived from accelerator programs due to his role. Linkedin: https://www.linkedin.com/in/eddychan/

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Alyssa Maharani is a business development and engagement manager at Sequoia Capital and Surge. Specifically, Surge is Sequoia Capital’s accelerator fund that backs early-stage startups in India and Southeast Asia with seed capital, mentorship, immersion trips and workshops. Prior to that, she was a Launchpad Accelerator Startup Success Manager at Google, a six-month acceleration program for growth-stage startups from emerging markets. Alyssa is also a proud graduate of the Wharton School in 2015. Alyssa shared her thoughts on the value-add of

12 accelerators from the perspective of an accelerator, but was unable to provide the perspective of a startup founder due to her role. Linkedin: https://www.linkedin.com/in/alyssamaharani/ ●

Brian Ma is the founder...