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Idealog—in the ideas business

Lightning Lab: NZ’s first startup accelerator gets lift-off

We've got the digital talent here. Now we just need to build more of the high-tech businesses that are our best shot at supercharging the economy. New Zealand's first startup accelerator, Lightning Lab, is out to jumpstart the Kiwi software scene in Silicon Welly.

lightning lab nz startup digital business accelerator

PHOTO: Mike Heydon

New Zealand’s a fantastic testing ground for some things (EFTPOS and the new LinkedIn feature that’s clogged up your feed with contacts ‘endorsing’ people left, right and centre) yet indisputably slower to get others (the new iPhone), and a robust startup ecosystem arguably falls under the latter heading.

That’s slowly changing, and the launch of the country’s first accelerator programme is the latest milestone along the way.

There’s already a solid number of incubators dotted around our major centres, and in fact, Wellington’s CreativeHQ is responsible for bringing Lightning Lab into being.

Conflict of interest? Not at all. While incubators usually house businesses for 18 months or more, accelerators compress learning and company-building into a much shorter period – about three months – in which start-ups are expected to develop and test their business ideas and build them to the point of being investment-ready by the end of it all.

CreativeHQ board member Melissa Clark-Reynolds, founder of online children’s game MiniMonos and an accelerator alumni herself, says the idea has been in the pipeline for a couple of years.

“We know incubation really improves the likelihood of a company surviving and doing well. But we weren’t so sure if that was true across every category of company. I think that’s what’s been great about the accelerator movement – we’ve realised that classical incubation slows some businesses down, particularly online B2C and some B2B businesses,” she says.

“That really to me is what the accelerator movement is about – how do you get particular kinds of companies to go faster?”

Pedal to the metal

Lightning Lab will operate independently as a standalone entity on separate premises. Its core purpose is to prepare companies for investors – selecting top-calibre teams and taking them through the steps of market validation, building a product and finding customers – in a “high octane, 24/7” environment, programme manager Tui Te Hau says.

The programme will run for three months from February 2013, culminating in a ‘demo day’ in May, where companies pitch to a room full of investors and market partners. Eight to 10 teams (each with a minimum of two founders) receive $6,000 per founder (up to three founders) in exchange for eight percent equity, allowing them to focus on building their business. Entrepreneurs get access to training, expert mentors, office space, pre-seed funding and a free pass to pitch for investment at the end of it all.

Lightning Lab is based on a mentorship-driven model and so far has 45 mentors on board, with plans to recruit others into the pool. They’ll be sourced locally and internationally, committing to getting hands on with companies, though some may be more closely involved than others.

Among those confirmed are Clark-Reynolds, Powershop's Ari Sargent, Miki Szikszai of Snapper, Angel Association executive director Suse Reynolds, MOVAC’s Phil McCaw and Dion Mortensen, Ed Robinson from Aptimize, Sonar 6’s John Holt, Ben Pujji from M&C Saatchi, ClickSuite’s Emily Loughnan, Dave Moskovitz and Stefan Korn of WebFund, and Laura Humphreys of Red Rocks, Pet Angels and Liber8me (see here for a full list).

“It’s about having a great pool of people and a large pool of people around the companies,” Te Hau says.

“The huge advantage we’ve already found with just the mentors we’ve secured is the energy it’s creating around the start-up community. Even if mentors aren’t in there meeting with companies daily or weekly there’s still that network – they’re exposed to the excitement, they know what’s going on – it’s a community they can draw on.”

Mentors can be driven by any number of motivations, but on the whole, they’re eager to be part of the energy and buzz, as well as paying it forward. Says TradeMe strategy manager Mike DelPrete: “I love the excitement of starting a new business. I did it myself back in New York and it’s such a thrill watching a company and its people grow.

“Entrepreneurship is such an important part of business – every business – that I want to do whatever I can to support it. An accelerator is a great way to focus these efforts around a limited group of people in a limited timeframe to maximise the return. I’m excited to see what comes out of it.”

Jos Ruffell (formerly of Pikpok and game development studio Sidhe, now founder of craft brewery The Garage Project) has been through an incubator (not an accelerator) before and experienced both the good and the bad. As a Lightning Lab mentor he’ll be helping teams refine their business plans and define their focus.

“I’m keen to give back a bit and work with some of the younger companies coming through,” Ruffell says. “It’s an exciting thing to be around and a part of.”

Running the whole show is the accelerator ‘driver’ or programme director Dan Khan, a mainstay of the New Zealand entrepreneurial scene, tasked with heading it all up and delivering for the founding investors. The driver will have “skin in the game” by way of equity share, with a programme manager (Sam Bonney) operating one rung below. There’ll also be a number of paid full-time interns providing technical or business support to accelerator companies, with the former type having picked up their own title – ‘hackstars’. Lightning Lab is also seeking 'lab assistants' – students or part-time workers to help with keeping the programme running smoothly.

“What we’re seeing in the States is [those interns] are becoming really hotly contested, especially the hackstars,” Te Hau says, adding that sometimes applicants declined by accelerators try to get in as hackstars instead.

“It’s great on their CVs and a lot of people do it in the States to try and land some equity or a role in an exciting start-up.”

Business interns could be students or even corporate staff taking some time off to do something a little different.

“In the incubator we’ve actually had a few people approach us like that. They like their job, they’re getting well paid and their organisation is supporting them to come and do some more exciting work with start-ups to keep them motivated.”

Show me the money

The Lightning Lab accelerator is a wholly owned subsidiary of CreativeHQ, which will contribute 20 percent of funding, matched by the Ministry of Business, Innovation and Employment. Another 40 percent will come from a group of founding angel investors, with the remaining 20 percent made up from a range of sponsors. In October, Sir Stephen Tindall’s K1W1 investment fund and specialist high-growth startup fund Sparkbox announced their buy-in.

Joseph Stuart, principal business advisor to the MBIE’s science and innovation group, says the ultimate aim is to create more businesses.

“Accelerators create opportunities for entrepreneurs to succeed fast and grow opportunities for their business, or fail faster and increase their capability,” he says.

“The key for us around this is that it brings the full ecosystem around an initiative – entrepreneurs, investors and mentors as well as support services for the ecosystem in a concentrated activity. It’s a really good way of growing the entrepreneurial community.”

Stuart says the Lightning Lab also lines up quite nicely with the Catapult programme at the Kiwi Landing Pad in San Francisco (another ministry-backed initiative) and the two “support each other in the value chain”, rather than competing.

Investor and mentor Dave Moskovitz had been in the process of setting up an accelerator through his company Webfund when he realised CreativeHQ was working on a similar initiative.

“It’s something we’ve been thinking about for the past three years or so,” he says. “If you look at the data from similar overseas initiatives, [accelerators] are really good in terms of their ability to crystallise stuff that works into a business.

“This accelerator programme is like a 12-week long StartUp Weekend. With the standard incubation model, the missing element is time pressure, which an accelerator programme really provides. You have 12 weeks to either prove or disprove your initial hypothesis, what you’re trying to achieve. With an incubation programme you can actually get stuck for several years chasing this ephemeral vision of what you saw in the first place and then find out the market conditions are quite a lot different.”

Moskovitz says he’s also raising a fund that will invest in some of the accelerator graduates (as well as in Lightning Lab itself ) from the first intake. Realistically, though, he says it could be years before it sees returns.

“You can hope for a quick exit from the companies but in my experience, it generally takes four to 10 years, really, for any given company from pushing the go button.”

The local factor

MOVAC managing partner Phil McCaw is another founding investor in the accelerator and a mentor. He says the benefits of an accelerator are two-fold.

“One is getting the businesses up and running first of all, and secondly getting them into a structure that makes them investable. Many of our entrepreneurs lack experience in some of the fundamental disciplines, in my experience, for how they get the businesses started and growing.”

Lightning Lab will be specifically targeting scalable digital businesses, though they may be at different stages in terms of how far along the journey they are. That could range from start-ups with the bare bones of an idea to the likes of MiniMonos at the advanced end of the spectrum, which already had hundreds of thousands of users when it was accepted into a UK accelerator last year.

However, Te Hau says the most important factor is the people on the team: “The idea is highly likely to change – it’s more about the quality of the people and that their ability to execute on it is proven. The mantra is ‘team, team, team, market, product’.”

MiniMonos was the first non-European start-up to be selected for entry into Springboard in Britain, and Science Exchange, which was started by a couple of Kiwi expats, recently went through the granddaddy of all accelerators, Y Combinator in the US. If New Zealand companies are making it into programmes abroad, do we really need one of our own?

Te Hau says it’s about providing different pathways for different companies.

“People definitely have the choice. It provides the opportunity for more people to do it locally.

“For some it’s like, ‘Why don’t you apply for that accelerator in Singapore and do it that way?’, or try to apply for one in the US – though you’ve also got to be mindful of immigration, visas and all that kind of stuff. But for the vast majority it’s actually going to be about formulating that idea here first, getting it up and running, testing it and validating it, making sure it all works before you actually think about where the right place is to be heading off to.”

The stakes

There are more than 200 accelerator programmes worldwide (in the US they tend to be private and equity-based; in Europe there are some university and government-backed ones), with the two giants being Y Combinator and TechStars.

TechStars offers $18,000 in return for six percent equity and Y Combinator up to $20,000 for a similar stake, though that can vary from 2 to 10 percent. Y Combinator has spawned a legion of high- profile start-ups such as Airbnb, Dropbox, Reddit and Posterous – its alumni have collectively raised more than a billion dollars to date – while TechStars’ success stories include Sendgrid, Contently, and Vizify. According to a study by Texas-based VC Aziz Gilani for the Kauffman Fellow Program, ‘start-up factories’ like these could churn up 50 to 200 startups a year.

According to Gilani’s accelerator study, which has gotten plenty of airplay in recent months, nearly half of the North American accelerators surveyed did not produce any graduates who went on to raise venture funding, and investor awareness of accelerators was low. Gilani concluded there was a quality gap between well-recognised programmes run by experienced entrepreneurs and, well, the rest of them. In other words, not all accelerators are created equal.

But when it comes to gauging the success of accelerator programmes, there are a few things to consider. Most are only a few years old, so their track records are limited. There’s geographic and industry variation to account for. And there’s a filtering or selection bias, as accelerators accept only the best (Y Combinator, which has two intakes a year, accepts less than five percent of applicants), so you’d be comparing a very small sample of companies – most likely clustered in a particular area of the tech industry – who are primed for success.

Gilani eventually expects to see a move toward industry-specific accelerator programmes and believes that’s the way forward for savvy entrepreneurs. Meanwhile, TechStars founder and CEO David Cohen told Businessweek last year that as many as 400 or 500 accelerators might spring up globally before trimming back to a more sustainable number. Y Combinator’s Paul Graham agrees; he’s quoted in a CNet story as saying that many accelerators won’t last and people are forming them “because it’s the cool thing to do”.

Canadian entrepreneur and investor Ben Yoskovitz, who blogs, funnily enough, about entrepreneurship and start-ups, also anticipates both increased specialisation and attrition – but he thinks there’s plenty more room to differentiate right now.

“There should be programmes of varying lengths, more clearly defined goals (not all accelerators have to be about fundraising), unique opportunities (such as bringing entrepreneurs to the Valley), key partnerships that are put in place, [and so on]. Accelerators need to think about their unique value proposition, so they can differentiate and stand out. Entrepreneurs need to look for the unique value of each accelerator and in turn decide which one is best for them,” he wrote recently.

Down under, though, the ball is only just picking up speed, and Clark-Reynolds says there are others looking at starting up more accelerators locally.

“Within the accelerator movement there are two kinds of schools of thought. There’s the Y Combinator/Seedcamp approach, which is very much about picking a team and putting a dedicated small number of mentors and investors around that team. The dedicated group works then works with them for 12 weeks. So you might have four to six mentors that pack around the single company. Springboard was more part of the TechStars or the Global Accelerator movement and they pick lots of 150 mentors... you speed-date with those mentors and self select.

“There were probably 10 percent who had no idea what we were on about but their questions were so good they were worth it. The middle group confirmed what we thought or were vaguely interesting. A small group was just a waste of time. You learned to assess whether someone’s advice was good or not.”

As a result, MiniMonos altered its business strategy, built key relationships in the UK (which now accounts for the bulk of revenue, something that was never part of the original game plan) and raised a million Euros after graduating (its last investor bought 10 percent of the company after a Skype pitch, and Clark-Reynolds didn’t meet him in person until after the deal). The intensity of working essentially 24/7 and the support of mentors shaped a laser-like focus. Where they were focused on brand-building to start with, she says they quickly learned to hone in on core metrics and on the key things to “make the boat go faster”.

She cautions that the Lightning Lab will, by necessity, operate on a smaller scale. It aims to impact 30 companies over three years and gain investment in half, so it needs to be sustainable.

Global networks

As part of the TechStars-founded Global Accelerator Network, which consists of independent programmes around the world, members of Lightning Lab receive freebies and other perks from the likes of Microsoft, Amazon Web Service and Rackspace – and the associated prestige. TechStars, Y Combinator and Seedcamp are the most prolific and successful accelerators out there. TechStars claims that close to 90 percent of its start-ups reach profitability or raise venture capital, with companies averaging about $1 million in outside investment. To date, three-quarters of its alumni are still active, and nearly 10 percent have been acquired (blog commenting system IntenseDebate by WordPress owner Automattic, for one).

Te Hau says the GAN declines on average two-thirds of applications and the Lightning Lab is one of only four Australasian members. With the right people and the backing of the GAN framework and brand, CreativeHQ has high hopes for the programme’s success.

“We’ve been able to mix with the other programme directors and managers and get their input into how to set this up and run it successfully. How do we do it so that it starts producing results as quickly as possible?”

Wellington likes to call itself the ‘digital capital’ and Te Hau says it’s a great place to start a tech company.

“You just have this huge group of talented people around the film and animation industry. We’ve got James Cameron locating here shortly, Peter Jackson and Park Road Post Production and all of those guys that are employed there. It’s that level of creativity, buzz and excitement that comes from all those industries and collaboration of things and people.”

As well as creating global companies, the aim is to attract businesses from overseas to our shores.

“Compared to countries like the States that have a huge domestic market on their doorstep, one of the unique things about New Zealand is that our companies here need to be global from day one. It’s a national play and a international play. We want to attract Wellington businesses, businesses from around the country, and also over time, attract businesses internationally to come and be part of the accelerator.”

Originally published in Idealog #42, page 46

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