The Corporate Accelerator Program Flood – A Blessing or a Curse?

Starting a startup company is becoming an increasingly attractive career choice for graduates, although most startups will eventually fail. Depending on how failure is defined, according to Harvard Business Professor Shikhar Ghosh, we can expect 70-80% of startups end up being a failure. Startup Genome data suggests that 75% fail within the first two years – with or without venture capital backing. CB Insights finds that failed startups typically shut down 20 months after their last funding round having raised a median of USD 1.3 m. The top reason for failure: no market need for the product.

Accelerator programs are the “new MBA” for startup founders trying to identify the most promising startups and to help them succeed – hopefully mitigating the risk of failure. The role model for accelerator programs are large programs, such as US-based Y Combinator. 72% of their startups raised money after demo day (the final event of the three-months-program) and, as of May 2013, 37 startups have a valuation higher or have been sold for more than USD 40 m (ca. 12% of their startups not counting their last 2012/13 classes). The latest statistics including their winter 2015 class are impressive: 842 startups since program launch, total market cap of over USD 30 bn, total money raised USD 3 bn and, most interesting, birth of four unicorns (private companies valued over USD 1 bn, e.g. AirBnB) with a total number of startups valued at over USD 100m: 32.

The accelerator model has been copied around the world and has also been picked up by corporates as part of their innovation strategy. Looking at those Corporate Accelerator Programs (CAPs) in Germany we can identify 16 by end of 2015, a number which has quadrupled in the last three years. The programs concentrate in Berlin – however, Munich represents a strong second place as the local CAPs benefit from their proximity to the corporates’ headquarters.

With the number of CAPs also the number of graduated startups is increasing – we count 334 by the end of 2015. However, it is by far not easy to be accepted to a program. For instance, ProSiebenSat.1 Accelerator claimed to have more than 300 applications to their sixth batch, while only five have been accepted – roughly a 2% acceptance rate (in comparison: “Ivy League” universities like Harvard or Princeton accept about 6-7% of their applicants). While we can find a multitude of different business models among the CAP startups, there is a clear bias towards e-commerce (11%), marketplaces (13%), consumer app (15%) and software-as-a-service (16%) models.

The duration of the programs is typically three months and includes mentoring, workshops or presentations by internal and external experts. Typically, for the program duration, a workplace for the team and a small funding ticket of ca. EUR 25 k is granted (to cover the costs during the program). Eight out of the 16 CAPs ask for 5-20% in the startup’s equity in return.

Performance

Based on our data analysis, the performance of CAPs in Germany is not yet promising from a financial perspective

  • 8% of the CAP startups founded in 2013 or before are inactive according to their website. Besides the many unreported cases and “zombies” (startups that are being kept alive although it doesn’t make sense), CAP startups seem to outperform the 75% of startups that fail within two years
  • We can identify 33 CAP startups, which account for a total of USD 300 m in venture capital funding (source: Crunchbase), i.e. only 10% of the startups manage to raise venture capital with an average of USD 9 m
  • Lighthouse examples of startup success cases are still missing, e.g. large exits or high valuations – however, the CAP ecosystem is still young

Strategies

If the CAPs do not perform financially, what are the corporates’ expectations in respect to their CAP’s performance?

The selected examples of Hub:raum, Wayra and ProSiebenSat.1 Accelerator (all taking equity from the participating startups) show that value growth is only one element in their strategy – soft factors, such as partnerships, know-how, and human capital also count.

From the sample of German CAPs, we can identify two distinctive strategies: “Mass Accelerator” and “Super Strategy Accelerator”. Mass Accelerators are following the original role model of Y Combinator and have the goal to find and accelerate great startups. They are not necessarily biased towards certain business models or industries and take an equity share in the participating startups in order to participate in the value growth. If the startup has potential synergies with the corporate, even better but this is not their focus. Super Strategy Accelerators have a very strategic approach, ideally playing a role in the corporates innovation strategy. They accelerate only startups with synergies in respect to their current strategic initiatives. Of course, the financial performance or value growth of the startup is not in their focus.

Recently, some German CAPs have made some adjustments in their positioning in order to support their future CAP strategy:

a) Increased focus on corporate strategy  – Wayra Munich

Although Wayra is “not the me too, but the me first” as Tanja Kufner, former Academy Director of Wayra said, they have to rethink. Wayra Munich recognized already in 2013 the necessity to change the focus of their business idea: They wanted to diversify the focus in to Machine2Machine (M2M) or Internet of Things (IoT), as there are so many companies from the automotive and IT-industry in Munich. With startups like mynudge (M2M) or Centersonic (IoT) they pursue this vison partially. By focusing on these two segments Wayra fits perfectly into his parent company Telefónica – a clear move towards the Super Strategy Accelerator model.

b) Strategic risk reduction – ProSiebenSat.1 Accelerator

In future, ProSiebenSat.1 Accelerator will focus on consumer startups, which are already in an advanced status and will accelerate their growth by advertisement. From now on, every later-staged startup gets EUR 500 k TV-advertising budget which they can reinvest in TV-Spots of the ProSiebenSat.1 Group. In parallel, venture capital partners like b-to-v, Earlybird, E.ventures, Lakestar and Holtzbrinck Ventures signed a partnership agreement with the accelerator. ProSiebenSat.1 clearly reduces its risk profile and therefore, this move seems to be part of a respective set of measure (for instance, the group has recently divested their company building arm Epic Companies). In addition, ProSiebenSat.1 accelerator will cooperate with the Axel Springer Plug and Play Accelerator to support new digital business models by consolidating their efforts (although the merger between the two groups was canceled).

c) Combination of accelerator and corporate venture capital – Hub:raum

Following up with startups in the CAP, Hub:raum decides whether the startup gets a seed investment from their investment arm. Therefore, Hub:raum can first push the early-stage startups and then invest and accompany the later-stage startups, if they find it attractive enough – a clear focus on financial performance and a more Mass Accelerator-like approach.

Outlook

Given the performance of Corporate Accelerator Programs in Germany so far, a focus on the pure Mass Accelerator model does not seem promising. Best-in-class pioneer Y Combinator has launched with a long haul vision and has accelerated over 800 startups so far with some significant financial performance. This approach with its order of magnitude is clearly not what German corporates have in mind.

We believe that more and more German CAPs will move to the Super Strategy Accelerator model in order to support their corporate strategy more effectively. The accelerator program will be an integral part of the innovation strategy.

This study appeared first on the Strtg.io blog. About the authors: Alexander Mahr is the Founder & Managing Director of Strtg.io, Markus Dirr is a Business Analyst at Strtg.io.

German Real Estate Tech Market in 2015 – A ®evolution?

Germany is the largest country in the European Union by population and hence, its real estate market has a significant volume: in 2014 EUR 195 billion have been invested in the real estate market overall and in 2015 a total investment volume of EUR 230 billion is expected in the building sector. Despite of 245 thousand newly constructed buildings, the number of properties is still under the required level. According to the German real estate index vdp-Immobilienpreisindex the real estate prices increased up to 6% in Q3 2015 compared to the second quarter.

The Deutsche Genossenschafts-Hypothekenbank estimates that one out of three Germans will move his or her domicile in the next two years. The situation in Germany´s major cities has intensified – for example: in the last ten years, the annual growth rate for the population in Bavaria’s major city Munich has been about 14%. Therefore, it is getting more and more challenging to rent an apartment in Germany´s high-density areas like Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart. Also, it is getting more complicated for landlords to cope with the number of applicants entering the market.

Recent changes in legislation trigger a tectonic shift in the conventional real estate market for rental properties. As of June 1, 2015 the “causer principle” has become effective. It states that real estate agents have to be paid by their mandating clients and not – as it has been the case before, no matter who initiated the mandate – by the tenants.  Typically, this means shifting the obligation to pay the agents to the landlords, who have often enjoyed a free service in the past.

While landlords face the new challenge of how to finance the agents’ fees (increasing the rent is probably not an immediate solution, since this market is to some extend regulated), an increasing number of startups is taking on the opportunity to offer renting services on a low-cost basis. For real estate agents this potentially results in a disruptive shift in their industry, although – according to industrial estimates – their income comes to 80% from selling and only to 20% from renting properties. Unsurprisingly, some startups go after the selling part of the business, too.

Real Estate Tech Ecosystem Germany 2015

More than 24 startups have launched respective selling and renting services in the last 12 months in Germany. Our Real Estate Tech Ecosystem for Germany illustrates the startups´ business models (non-exhaustive):

We count seven different business models. By definition, the incumbent players in the real estate agent market such as Sparkassen Finanzgruppe, Engel & Völkers, LBS Immobilien NordWest, and Postbank Immobilien, which accounted for a total of EUR 1 billion in commissions in 2014, are not included.

Selling and renting services are the startup business models that intend to replace the real estate agents as described above. These startups typically build their services on top of existing market places or classified models, i.e. they use existing online channels to gain access to prospects. We see similar concepts in other industries, e.g. for pre-owned cars (Beepi.com).

Therefore, the marketplaces are the backbone of the ecosystem, e.g. ImmobilienScout24. They have brought real estate classifieds online and bring demand and supply together. Meta listing services help property owners to create a listing on multiple marketplaces in one user interface. Meta search services provide a similar service to property seekers and, hence, provide search results from different marketplaces in one user interface.

Agent matching services are lead generation models that help the property owner or seeker to find a relevant real estate agent in their region. Crowdfunding / investment players are the fintech elements of the ecosystem and enable real estate investments in a more accessible way.

In total, we can identify 47 startups in this ecosystem. In the last two years we have observed 4 funding rounds (mainly seed) with a total funding volume of more than EUR 12 million. Clearly, once the new selling and renting services startups show traction, we expect more early stage funding to be available. The critical question for us is whether their business model is really scalable through technology?

Case study selling/renting services

Note: prices for rent assume that landlord mandates the agent.

Based on three selected examples each for selling and renting services we have analyzed their proposition along the typical selling/renting process. Since there are process steps involved that simply cannot be automated through technology (for instance, on-site gathering) or – at best – can be supported by technology (for instance, organisation of on-site appointments for prospects), it is not surprising that the main share of the process has to happen offline, just as typical incumbents would do it. Overall, we are unable to identify significant efficiency gains in the process through the use of technology.

Where the disruption kicks in is the pricing – clearly, the respective startups are much cheaper as compared to their incumbent counterparts. Example calculation: a regular agent used to collect up to EUR 2,380 in fees for an appartment with EUR 1,000 monthly rent from the tenant (2.38  times an one-month-rent, including VAT); the cheapest player in our case study charges EUR 199 from the landlord.

Outlook

We believe startups are currently too focused on pricing and consequently on deflating the market, while it remains unclear how they actually can win market share on a sustainable profitability level. The startup that can manage the selling/renting process most efficiently has a competitive advantage over its peers and the incumbents. Further, due to the necessary on-site elements in the process, the startups will have to build a business model that can cope with its local nature. Typical in such cases, execution speed and a smart roll-out strategy are keys to success. A team that provides convincing solutions for these issues is well positioned to attract funding from venture capital firms interested in this industry.

Incumbents are exposed to the risk of declining profits in case these startups succeed. The aggressive pricing of the startups shows their appetite to win this market. Small real estate agents with a high dependency on rental transactions will feel the impact first.

This study appeared first on the Strtg.io blog. About the authors: Alexander Mahr is the Founder & Managing Director of Strtg.io, Helena Auer is a Business Analyst at Strtg.io.

The State of European Tech

Atomico, the venture capital firm, and Slush, a startup event organizer, have teamed up to create the “The State of European Tech.” 

This insightful analysis sheds light on what is the current state of European ecosystems around entrepreneurial mindset, tech community, talent, capital flows and success stories. Here are some highlights:

London, Paris and Berlin seem to be the most active tech communities by number of meet-ups in 2015 (Jan-Oct) with London far ahead of other ecosystems (or with the highest penetration of Meetup - which provides the data for this analysis). Of course, London is significantly larger than Paris or Berlin by population - 3.9x and 2.4x, respectively (city only).

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Startup spaces

Startups tend to create great places to work. Maybe because they have to in order to motivate the high potentials to choose to work for them over a better paid corporate, consulting, or bank job - or Google and Apple. But - I think - also because they can. 

Officelovin’ (based in Prague) is promoting cool work environments:

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Or check out TechCrunch Cribs for amazing videos:

Startup spaces are small ecosystems for themselves - great places to work. When corporates try to copy this for parts of their premisses, it really doesn’t feel the same.

Unicorns - past, present & future

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Unicorns are private companies valued at one billion US dollars or above. And most venture capitalists are in the business of hunting unicorns due to the economics of larger funds.

There are some interesting statistics about unicorns, for instance (based on 2013 US data):

  • the average age of the unicorn’s founders is 34 years - ca. 80% of those have previous founding experience
  • enterprise-oriented unicorns raised on average USD 138 m venture capital
  • consumer-oriented unicorns raised on average USD 348 m - 2.5x more than their enterprise peers

Based on this first time unicorn analysis there have been 39 unicorns identified in the U.S., i.e. companies started 2003 or later and reached the one billion dollar valuation until 2013.

Is the number of unicorns growing?

Since there is so much buzz around it, it seems that the number of unicorns has increased over the last years. But is that true? Here are two sources for unicorn lists (both world wide):

  • unicorn tracker by CB Insights - currently, 132 startups (81 in the US)
  • billion dollar startup club by Wall Street Journal / Dow Jones VentureSource - currently, 116 startups (77 in the US)

It seems to be true: the number of unicorns in the US has doubled since the first analysis in 2013.

Klaus Hommels, founder of VC firm Lakestar, has outlined his findings in his speech at this year’s NOAH conference in Berlin (I was attending). He explained that tech companies go for a much later IPO nowadays - while, for instance, Cisco, Amazon and Microsoft IPO’d at a valuation of USD 0.2 bn, 0.4 bn, and 0.7 bn, respectively, LinkedIn, Twitter and Facebook went public with a valuation of USD 5 bn, 18 bn, and 104 bn, respectively. Therefore, the “magic” in value creation is happening before the IPO rather than after. This lets money, formerly invested in public markets with decent returns, shift over to the private sector in order to participate in the private companies’ late stage performance, which otherwise would not be addressable. As a consequence, more money is available in series D financing rounds today (with a median series D round size in 2015 4.7x the size of 2010). These structural changes in late stage vs. public investments (i.e. later IPOs + larger series D rounds), naturally, are significant drivers of the unicorn’s ecosystem. 

So, where to find the next unicorns?

Of course, this is literally the billion dollar question. Forbes comes up with a list of 25 startups that have the potential to join the unicorn lists in 2015 (their analysis is survey-based). CB Insights and The New York Times identify 50 startups based on an algorithm-supported approach analyzing an array of signals, e.g. financing volume.

Good Hunting!

PS: since equity shares in unicorns can be very small, when investment happens late stage for a very high valuation, venture capitalists start hunting for dragons now (a company that returns an entire fund; 17 have been spotted so far in the wild). Basically, this means investing in unicorns when they are young at a decent valuation.


Photo credit: Flickr user Ancella Simoes

The ecosystem trap for Pebble

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Last week I have received my Apple Watch (I was traveling for business, so I had to wait an extra week or so to get it) and yesterday finally my new Pebble Time has arrived. Great.

Pebble’s Kickstarter campaign was insanely successful - largest funding so far with a little over USD 20 m. Clearly, there is a large crowd of supporters and Pebble, as a startup company, is doing an amazing job. With currently around 130 people and a total of USD 46 m in funding (with 67% coming from Kickstarter campaigns and USD 15 m “real” venture capital) Pebble pulled off a great device with all major smartwatch use cases (calling, messaging, calendar, …).

As you can see from the picture, which I have taken this morning, I have had the Pebble Steel before and I am very excited that I can test the new Pebble Time now. However, now there is also the Apple Watch in the market. Which makes me wondering what will happen to Pebble?

Pebble was the first smartwatch in the market, before Android Wear devices or the Apple Watch, and - for instance, compared to the Apple Watch - it has some advantages, e.g. it is 30 meter water resist, has a much longer battery life and is retailing for a much cheaper price. 

It has a SDK for developers to create watch faces or apps. These apps can be native (running on the Pebble watch, e.g. little games such as Tiny Birds) or extensions of iOS or Android apps (e.g. making the Pebble watch to act as a GoPro remote). While the capacity of Pebble/Pebble Steel was limited to 8 places for watch faces or apps, the new Pebble Time doesn’t have that any more. It uses companion apps on the smartphone, i.e. apps on iOS and Android, that have Pebble extensions. Pebble is therefore piggy bagging on two large app ecosystems - great, right?

According to TechCrunch Apple had already 3′500 app extensions ready for the launch of the Apple Watch. And there are some quite delightful use cases based on the seamless interaction between phone and watch, e.g. having Passbook on your watch to quickly check your boarding time, gate or seat and then even pass the gate by showing the QR code on the watch.

Early 2014 it was claimed that the Pebble app store holds around 1′000 apps - maybe today they have as many as Apple for their watch. However, although the early success is quite impressive, it is exactly that seamless user experience and the power of the iOS and Android ecosystem that could break Pebble’s neck. 

  • It is very painful for developers to maintain their apps on different operating systems and it is easier for, for instance, an iOS-focused developer to release an Apple Watch extension than to deal with Pebble’s SDK. So, I assume in the long run, Apple Watch and Android Wear devices will have a much greater experience as they simply have a larger developer community and app base, they can build on
  • While Android is much more open, iOs is more limiting in what other companion devices can do (e.g. as explained here). And don’t forget the hassle of releasing the Pebble app on iOS. Assuming the future of smartwatches is defined as being a companion device to smartphones, Pebble will probably not be able to reach the user experience of an Android or iOS device

Now, if Apple limits competitors and Android Wear has already competing device partners, what is left for Pebble? Here are some scenarios:

  • Continue building an ecosystem around customizable e-paper hardware based on Pebble OS - I doubt that the features of the Pebble Time are good enough to compete on hardware with the ecosystem of iOS and Android for the reasons given. At best Pebble will be able to occupy a geeky niche, but if this is not profitable, the company will have to close shop at some point
  • Abandon Pebble OS and build hardware on Android Wear - the competition based on Android Wear is strong and a differentiation on hardware design or price is extremely difficult
  • What about a third ecosystem? According to IDC the mobile operating system market is split into 78% Android, 18% iOS, Windows Phone 3% and others (incl. Blackberry) 1% in Q1 2015. I believe it would be a smart tactical move for Pebble to get closer to the Windows Phone ecosystem, strike a deal with Microsoft to create a superior user experience there and maybe eventually get acquired by Microsoft, so Microsoft can strengthen their Windows Phone ecosystem in return.

I hope Pebble can find a way to continue building their story. It has been amazing so far and it would be very sad to get stuck in a native but sub-scale ecosystem.

E-Commerce and marketplaces are hot in Europe

I have been attending the Noah conference in London in 2011 - that was quite interesting, but since there have been mainly Germans, there was no point for me to fly to London. This year they also have a conference in Berlin, to which I am looking forward.

This week, the first Noah newsletter arrived and interestingly, this newsletter included trading comparables from listed companies. Until now, Jefferies’ Internet Monthly was the preferred report to look up this kind of data.

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Noah includes a similar data set but provides smaller segments, e.g. sub-segments of classifieds and e-commerce, and also cuts the segments differently, e.g. in Jefferies’ data set Rakuten is a marketplace, in Noah’s set it’s e-commerce diversified.

These sub-segments add additional value to your analysis, since the median EBITDA multiple for e-commerce (fashion & flash sales) is different from e-commerce (lead gen) with 25.5 and 12.9 (both 2015e), respectively. Jefferies shows a median of 13.4 for online retail.

Also, they provide the comparison of US vs. Europe-based players (see picture). Compared to the US, in Europe e-commerce and marketplaces seem to be super hot. While e-commerce models typically have a very low EBITDA margin (in Europe 2015e on average 6% according to Noah’s report), this is not necessarily true for marketplaces: on average 25% in Europe 2015e. 

Marketplaces always have been my favorite business models, mainly because of the decent EBITDA margin outlook and their hard-to-build and therefore hard-to-copy nature. The EBITDA multiple difference in Europe vs. US is nevertheless surprising and probably reflects the fact that they are even harder to build in Europe as compared to the US.

In terms of VC funding in Europe - only Germany, UK and Switzerland are in the 2 bn Dollar plus club

According to CBInsights there were 1,274 VC, Corporate (incl. Corporate VC) and Business Angel deals closed in Europe in 2014 - with a total volume of USD 13,266 m.

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Interestingly, only Germany, UK, and Switzerland are in the USD 2 bn plus club with Germany leading in overall deal volume (indicated in the graph in dark blue). Here are the top 5 according to funding volume:

  • Germany with USD 2,989 m through 215 deals
  • UK with USD 2,749 m through 421 deals

  • Switzerland with USD 2,348 m through 35 (!) deals

  • Italy with USD 1,370 m through 61 deals

  • France with USD 1,038 m through 99 deals

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Why consultants should start startups together

It’s common knowledge that a large portion of startups do fail. According to CBinsights’ recent findings 29% of startup failures happen due to running out of cash. 42% face a missing market need - I would argue that this is also another formulation for “running out of cash” since these teams simply haven’t found a product-market-fit before they eventually ran out of cash.

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