Incubators and accelerators – an accessible route into tech equity investment

By Lisa Walls-Hester on Thursday 22 September 2016

Savings and Investment

Accelerators are a fairly new player in the startup ecosystem but their growth and an infinite supply of budding tech entrepreneurs mean that these types of funds will become more and more common on equity crowdfunding portals. 

This week Seedrs has hosted campaigns for Ignite and Webstart Bristol, an accelerator and an incubator for technology startups.

A recent report highlights that London is ranked second worldwide for supporting innovation and entrepreneurship and the city hosts over 36 business accelerators including Seedcamp, Wayra, Techstars, Microsoft Ventures, Future Fifty and London Stock Exchange’s Elite.

Throughout the wider UK, there are over 27 thriving tech clusters which are predicted to grow rapidly. The UK’s app economy alone is forecast to increase more than 10-fold between 2013 and 2025 from £2.9bn to £30.8bn.

This growing sector is fuelling not just accelerators and incubators but also drawing venture capital (VC) firms. In 2015 as a whole, UK tech investment reached a total of $3.6bn, a 70 per cent increase in VC funding on the previous year.

These equity crowdfunding campaigns help retail investors without any specialised knowledge or experience of the tech sector to get in on the digital revolution because participating cohorts are shortlisted and screened by the accelerator.

The Ignite raise has yet to select the participants for its next programme. This means investors are taking a leap of faith in the Ignite team and gambling on their ability to pick a winner from countless tech startups.

What do accelerators do?

Accelerators provide mentoring and business support for entrepreneurs with good ideas and big ambitions.

The programmes can bring more than just business coaching because the accelerator often takes an equity stake in the participating ventures, thus giving the startups much-needed seed funding. Other benefits include facilities such as office space, IT services and access to a network of startup experts.

Incubators also nurture fledgling ventures but differ from accelerators in that they tend to support enterprises for longer. This can be anywhere from one to five years, compared to the typical three-month duration of an accelerator programme.

The offer for investors

Ignite, is an angel-led accelerator and is raising funds for another London programme, which will start later this year. Ignite has previously raised money on the Seedrs platform for earlier programmes.

Source: Ignite

The company says its last intake (earlier in 2016) was its strongest yet and it adds that six of the participants, selected from hundreds of prospective applications, raised seed funding from £120,000 to £400,000 since the program ended.

It is now giving investors the chance to take a stake in ten new companies with a single investment via a fund.

Ignite gets six per cent in ordinary shares of each cohort and investors in the fund receive a proportion of the equity in each company directly proportional to their individual investment.

The Ignite team claim to be one of the most experienced accelerators in Europe. This upcoming programme will be their tenth and it will focus on highly scalable tech businesses.

Ignite has so far made over £2m of pre-seed investments and has created a portfolio of companies valued at over £80m. Ignite says its investors’ stake in these companies is worth over £6m, a 3x uplift on their original investment.

WebStart Bristol launched in 2014 and has raised investment for two programmes, each with a cohort of ten companies. The earlier fundraising campaigns were structured as funds with an average net investment of £10,000 going directly to each startup in exchange for 10 per cent equity.

The incubator then went on to raise funds in its own name, WebStart Bristol Ltd and has so far funded 24 companies. Nine have ceased trading, seven have yet to raise additional funding and eight have raised a total of over £2m additional funding, according to the company, at greatly increased valuations.

WebStart Bristol wanted £50,000 which is needed to continue the support for the remaining startups in the programme and cover pre-emption rounds.

The campaign is offering a five per cent shareholding in WebStart Bristol Ltd and the company overfunded.

Proceeds from any successful exits will be retained by WebStart Bristol Ltd until either further major outside investment would allow investors to exit at a premium or the company distributes the proceeds of share sales to its shareholders.

Why invest in an accelerator or an incubator?

Backing startups is high risk but WebStart Bristol founder Mike Jackson believes this is the best way for him to invest in tech startups. He said: "Investing in any start-up is a bit of a lottery, only a few succeed but out of 10 the odds are that at least one will be successful. And with the high multiples in the internet sector, you might only need one."

Investors can choose 10 digital startups themselves from any equity crowdfunding platform, but accelerator or incubator cohorts have a better chance of survival. The crash course in business and entrepreneurship gives them an advantage. In addition, access to experienced advisors and support from their cohort peers gives these enterprises more motivation than if they have been backed by a standalone angel with limited time and excessive equity demands or an apathetic crowd.

Entrepreneurs are eager to join accelerators but the burgeoning sector means that the best ideas can to some extent ‘shop’ the accelerators and it’s not unheard of for budding entrepreneurs to relocate to get access to a preferred regional supporter.

For investors who want a ready-made portfolio of early stage, pre-vetted enterprises, investing in an accelerator could be the answer, but the overriding risk factor is the accelerator team’s experience and their history of success.

Investors should be aware that investing in early stage companies means that any exit is likely to be a long way off. Investors will undoubtedly suffer dilution in later funding rounds unless they can stump up for pre-emption rounds. Furthermore, a company’s book (paper) valuation is not an indication of success; greatly increased valuations do not guarantee a return for investors. 

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