This week, Start Engine will unveil the latest class of companies to emerge from its startup accelerator program.
The group is the accelerator’s fourth since it launched in 2011 and the unveiling is one of many during this graduation season for the regions’ accelerators. In the past few weeks, both Santa Monica’s MuckerLab and Amplify LA in Venice have also trotted out the companies under their tutelage in front of potential investors, family and the public.
The presentations are like a debutante ball for high tech, with a startup showing off its potential market size and revenue stream like an elegant curtsy. And companies carry the hope that a good showing in front of business’s high society might catch the eye of an investor-gentleman suitor.
A bit more than a year after four startup accelerators popped up more or less simultaneously in Los Angeles, the programs already have established a central role in tech’s local culture. About 80 companies have come through the area’s most active accelerators – MuckerLab, Amplify, Launchpad LA in Santa Monica and Start Engine, which recently opened up a downtown Los Angeles office in addition to its Westwood location. Many of the emerging startups have gotten investments within weeks of graduating; others have stumbled out of the gate. But beyond money, the local accelerators have helped bring credibility to a startup community yearning for respect.
“We’ve definitely carved out our piece of the puzzle,” said Howard Marks, who manages Start Engine. “It’s definitely not the only part, but accelerators are good fit for a company that can benefit from a college-type community and atmosphere.”
Up to speed
An accelerator is essentially a boot camp for startups, where companies can get guidance and some funding while working out the kinks of their business model. The ultimate goal is to attract investors at the course’s conclusion. Unlike incubators, such as Idealab in Pasadena or Santa Monica’s Science Inc. that traditionally develop business models in-house and then hire outside talent to build the companies, accelerators only accept existing startups. In return, the accelerators get a piece of equity in each business.
Generally, accelerator classes involve eight to 12 companies that work alongside each other for a few months while mentors help them develop their businesses. To the classes of entrepreneurs, that professional camaraderie has a big appeal.
“Being a CEO of a company can be a lonely job; we’re known as the hardest working people in Silicon Beach,” said Jerry Jao, whose startup, Retention Science, was part of MuckerLab’s first class “It’s nice to see other people struggle too.”
The local accelerators all tout the big names – well, big for the local tech scene – who serve as professional mentors to the programs: both MuckerLab and Launchpad list ShoeDazzle Inc. founder Brian Lee on their team of advisors; Amplify works with Jason Nazar of Docstoc, among others.
Like colleges, each accelerator has crafted a distinct identity that helps it stand out. Start Engine is the lenient one and appeals to companies at the earlier stages (though it takes the largest equity stake at 10 percent). MuckerLab lays claim to a sterling record, saying all eight of the companies from its first class received follow-up funding. Amplify is the most flexible and accepts startups on a rolling basis. Launchpad is the “entrepreneur friendly” one and takes the smallest equity stake, 6 percent in common stock.
Most of the accelerators in Los Angeles are backed in part by local venture capital firms. Amplify is financed by Rustic Canyon Partners, Launchpad is bankrolled by GRP Partners. Start Engine is backed by private investors.
Directors at the accelerators are still tinkering with the programs, however, trying to find the right balance after feedback from graduates.
“For six weeks there was a class every day almost – marketing, HR, legal – to the point that there was no time to build our product,” Jao remembered. “I’ve heard that they really toned it down with the classes.”
This year, Launchpad threw down the gauntlet of funding battles among the accelerators when directors announced it was upping the initial funding of its companies to $100,000. (It’s actually $50,000 up front with an option for entrants to take the remaining money as a follow-on investment.)
That amount eclipses the standard $20,000 that MuckerLab and Start Engine offer, as well as the $50,000 Amplify uses for its standard up-front investment. Sam Teller, managing director at Launchpad, said the move to up the ante for incoming companies will give more help to companies at a time when venture capital investments have slowed.
This year, he said, “will be a more challenging year for fundraising. The goal of the $100,000 is not for the companies to hire more people or spend faster, but to last longer without the fear they’re going to run out of money.”
The other accelerators have taken notice of Launchpad’s increase, though none have yet to make any changes to their models. Erik Rannala, who heads MuckerLab, said he’s considering raising the initial investment, but pointed out the accelerator already offers follow-on rounds even though it’s not as explicitly stated as Launchpad does.
There’s also a question of whether the increased funding really makes a difference in the continuing success of a startup. Y Combinator, the Mountain View firm that’s considered the originator and reigning standard-bearer of accelerators, only fronts about $18,000 a company. That amount has apparently been enough for tech hits such as Airbnb and Reddit.
Indeed, the bigger selling point for most of the local accelerators has been the ability for startups to come out of the program with a good shot of attracting a quick investment from angels or venture capitalists.
Richard Wolpert, who manages Amplify, said his goal is to see companies receive funding of between $500,000 and $1 million within four to six months of graduating. Of the 18 companies to come from the program, he said, 12 have received seed funding. Those include crowdfunding site builder Invested.In, which raised $875,000, and StackSocial, which took in $800,000 for its technology that lets publishers engage in e-commerce.
“Taking on a company that can’t raise money quickly is too early for us,” Wolpert said. “Sometimes there will be an applicant who’s a great tech guy but doesn’t have a business guy, and we’ll say ‘Come back with a well rounded team before you join us.’”
Still, getting money is no guarantee of continued success in a startup landscape where a majority of new companies fail.
Last year, Pop-Up Pantry came through Launchpad’s third class and quickly raised $1.7 million to fund its high-end frozen meal delivery service. But after barely half a year in business, the company shuttered after it was unable to scale the business to where it could offset its huge shipping and production costs.
Launchpad’s Teller said he was disappointed to see the subscription food service go belly-up, but the harsh reality for startups is that the guidance from an accelerator isn’t enough.
“You can always say ‘what if,’ but we were proud to have invested in that company. Pop-Up Pantry took on an incredible challenge,” Teller said. “That doesn’t worry us or change anything; it’s expected that most companies will not ultimately succeed.”
The founders of Pop-Up Pantry didn’t return requests for comment.
Lid on money
StartEngine’s Marks, a former executive at Activision Inc., said the true worth of a program isn’t how quickly it can get a company to raise money. For his accelerator, which unlike the others will take on startups long before they’re ready to bring in outside capital, the value comes through building up the business model and assembling the right team for future success. Y Combinator may have the advantage of working in a region that’s flush with tech capital, but L.A. accelerators have to manage the rougher investment climate.
“In a market where there’s a nearly infinite amount of money it’s different, but in Los Angeles there’s a lid on money and resources,” Marks said. “Going through a grind that builds team character is better than just raising money.”
As the success of local accelerators raises their profile, their greatest addition to the local scene may be an ability to attract talent from outside the area. Amplify has taken in startups from Oregon, Utah and Canada; at MuckerLab’s recent demo day there were two companies from outside Los Angeles, including GetMeRated, a picture-based social network that began in San Diego.
But after four months spent working in MuckerLab’s Santa Monica offices and building up contacts and potential investors from the area, Duncan McLaren, GetMeRated’s founder, is seriously considering making the move up the coast permanent.
“It’s been a tremendously valuable experience,” McLaren said. “There’s a huge value to the footprints we’ve made in Los Angeles that will benefit us for a long time to come.”
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