[MUSIC] Hello again. And welcome back to Beyond Silicon Valley. I'm Michael Goldberg. Entrepreneurs in Silicon Valley have an array of options, to provide the financing and support they need to grow their companies, including seed accelerators, well-developed angel networks and a vibrant venture capital community. Private sector investors are putting up the capital to support these investments with a focus on achieving a healthy return on investment. But what if you're an entrepreneur and you live in a transitioning economy, where private investors are not willing or able to put the resources necessary into early stage capital vehicles. [MUSIC] During the next three lectures, we will examine how government and donor resources are being used in communities like Cleveland, to support access to capital and mentorship. In this lecture, we will look at seed accelerators, and some of the key points you'll learn are. The history of seed accelerators, and why they are important? How seed accelerators work, and measuring the success of seed accelerators? The seed accelerator movement started in Silicon Valley in 2005, with a creation y combinator. It incubated several successful companies, including Dropbox and Airbnb. Entrepreneurs apply for admission to seed accelerators based on their idea and, if accepted, receive mentorship, training, and support over several months in exchange for giving up an ownership percentage of their company to the seed accelerator. Seed accelerators try to provide their portfolio companies, with access to talent, business development partners, and follow-on investors during the program. Y combinator is funded by private investors, who's investment is driven by a focus on making a profit. There are now approximately 200 seed accelerators around the world. Unlike y combinator's private investment model, most of the seed accelerators in transitioning economies are supported in part by governments or donors, since the private sector alone is not providing the necessary resources. Entrepreneur Mike Belsito is the co-founder of eFuneral. >> In the United States, funeral services are actually performed by outside companies, by for-profit business that help families with all of the end of life planning. And eFuneral.com is a place where families can go to to get more information about those companies, and about funeral planning in general. >> Mike and his business partner were working full-time at a technology company in Cleveland, when they came up with their idea for eFuneral. They decided to apply to a new seat accelerator program called 10X. X, that was being funded in part by the State government of Ohio's Third Frontier program to develop their idea into a company. >> We also found that about this accelerator program the State of Ohio was launching called the 10 Accelerator. And basically it worked the same that a lot of accelerators work, where they'd offer a small amount of money. It was $20,000, and in this case it was a grant. So they weren't asking for equity. But it was a, it was a grant where we wouldn't have to pay it back. But the real key to us was they're offering a lot of mentorship. They're offering connections to, entrepreneurs that have done this before. To investors. To people who can help us realize our vision. And so we decided, if we could get into this accelerator program. That might be the opportunity where this could be more than just a side project for researching mornings, and nights and we would actually dedicate ourselves full-time. >> Dorothy Baunach believes it was critical to provide entrepreneurs like Mike Belstedo with early stage capital. >> What we needed to do was find the tools that they needed, once they got the bug about being entrepreneur. They needed early stage capital, they needed mentoring. Legal and accounting systems that were geared for a start-up not for a billion dollar corporation. And so, we were really changing our whole way of thinking about business and the infrastructure necessary, necessary to support an entrepreneurial culture. >> If the State government of California is not putting public resources into wide comminator, why is it considered necessary for the State government of Ohio to fund seed accelerators? Lisa Delp is the former executive director of Ohio Third Frontier program. >> In addition to losing our manufacturing jobs in Ohio, we also suffer from low brain drain. Our kids want to go some place where there's exciting opportunities. There's startups. There's entrepreneurship. And they're attracted by things like the y-combinator and tech stars. You know, and the other organizations that have created accelerator programs. That say, you know, come to Silicon Valley and we'll help you start your business and it'll all be wonderful. We didn't have anything like that in Ohio. We didn't have any, any opportunity to give those young students who have that idea, and that entrepreneurial spirit. So, the Third Frontier brought in a new program called The One Fund. This came in about 2010, and it was designed to help accelerate those companies, to provide the resources to an institution a university in the early stages. That would mentor and coach those, those young entrepreneurs through, get them started in business. And then bring the rest of them that work around them to provide the services, and the capital resources and then the later term coaching, and talent and all of those things. >> Similar to the Third Frontier program we discussed in earlier lectures, seed accelerators that want to receive a grant from the one fund are required to find local matching private investors or donors. Morris Wheeler is a leading angel investor in Cleveland. >> The one fun match, I think is a very interesting and important way for an accelerator to work. In, in my view for an accelerator to ultimately be successful, and for the start up community to be ultimately successful. Private capital needs to be engaged. And, what the One Fund Match does, is it allows a, a group to, raise money from private individuals and essentially leverage and give them a higher return than they would have had. And, by having the matching fund. >> Entrepreneur Mike Belsito argues that the support, he received through the 10X Accelerator by the Third Frontier was critical. >> I think it's interesting that the State of Ohio decided to start their first accelerator program, as a non profit accelerator as a sort of a government venture. I think the reason why they did that is they realized that competing with Silicon Valley, is something that's really difficult to do, and in fact, they have to act differently if they want to get companies to start their businesses here, as opposed to Silicon Valley. So, from the State of Ohio's perspective, yes, it does take a little bit of money to put in and start this program and continue to fund it. But at the same time, they're seeing tech companies get their businesses started here. Rather than it be just a foregone conclusion that, hey, if you want to start a tech business, you're going to have to go to San Fransisco. They wanted to actually take action. They actually wanted to something about seeing these entrepreneurs leave. And try to keep them here. And I can say with our experience. It was a big reason why we stayed here, the fact that we could access those funds, even though they were small amount of funds in the grand scheme of things. And, and never have to pay it back right. It, it came to us as a grant, that was really attractive for us as opposed to going to an accellerator where we had to give off equity right off the bad. >> There are different ways government or donor support, can be structured to back entrepreneurs through seed accelerators. As Mike describes, the investment he received from the third frontier through the 10X feed accelerator was structured as a grant. Another scheme utilized by the third frontier allows feed accelerators to use the one time grants to take equity ownership, in the start up companies they are supporting. Typical terms for an accelerator in Ohio, is to take 8% ownership for a $25,000 investment. Most of the seed accelerators in Ohio, including 10X, are organized as non-profit organizations. If any of the companies from the accelerators are acquired or have an initial public offering, the proceeds that come back to the seed accelerator from an exit would be invested in new companies. Similar to the Evergreen fund model that JumpStart uses. >> The nice thing about some of these non-profit accelerators in particular is the way that their model works when an exit happens, when they see capital return. Where does that go? Well it goes right back into starting new companies. It goes to make sure that a new fund can be developed. I think that's the whole point of some of these non-profit accelerators. Lets get tech businesses started. Lets create this platform for them, and lets continue to provide the resources. So those exits make that happen. >> Although only a handful of accelerators in the US are beginning to see some of their portfolio companies grow significantly, the accelerator model is spreading quickly both in the US and internationally. A 2013 report by AD and Village Capital found that outside the US. That 75% of seed accelerators rely on some type of philanthropic support and, over 50% of seed accelerator overall funding comes from donors. kLab, in Kigali, Rwanda is an example of such an international seed accelerator. kLab's funding comes from the Rwandan government and foreign donors. Jovani, Ntabgoba is the general manager at KLAB. >> Without kLAB [INAUDIBLE] we get people from [INAUDIBLE]. Our success, we measure it when that company, or that setup can begin making money that can lets us move out of our space. So, with that, you're not really looking at big sums of money. Because they not looking at them, break with them and work, and be able to higher their own offices and create jobs. Maybe hire two or three more guys, because as you know developing countries already have a very high number of unemployment. So, whatever small an impact that we cannot, can make outside to us is considered an achievement. So that's the story. >> Despite their short history, seed accelerators have grown rapidly worldwide in the span of nine years. The Silicon Valley model for seed acceleration, is not feasible in transitioning economies, so government support and donations have provided alternative ways of supporting entrepreneurs. For this model to work in a transitioning economy, governments and donors are being asked to provide support alongside private investors, to fund accelerators. It remains to be seen if the seed accelerator model, will ultimately be successful in helping transitioning economies develop and scale start up companies. Eventually, investors in start up companies need to exit their investment, through an acquisition or an IPO for there to be a return on investment. Time will tell if entrepreneurs in Cleveland or Kigali can create compelling enough start up companies, and seed accelerators to achieve even a fraction of the financial returns coming from the top accelerators in Silicon Valley. Some have commented there might be a seed accelerator bubble, given the rapid spread of the model across the world. Nevertheless, the spread of the model is a good example of the type of creative intervention that transitioning economies are using, to help young entrepreneurs turn a business idea into a company. In the next lecture, we will look at what transitioning economies are doing to help encourage angel investment through a variety of incentive programs. See you next time. [MUSIC]
