Accelerators' Big Brother

I must say it's amazing. Accelerators has become a virus that spreads so quickly it's purely scarey. Don't get me wrong. I think accelerators is great for the startup eco-system and in general it elevates and promotes innovation and entrepreneurship like never before. It's the sheer numbers of them is mind boggling.

It feels as if there is one new accelerator that opens every single week. More and more brands join the party and it's fair play. The barrier to entry for accelerators is reasonably low. Take a brand like coca-cola for example. They opened a number of accelerators world-wide, with its local Israeli accelerator called "The Bridge" offering a 6-months program with no cash for equity deal. Coca Cola aims to focus on their core experties which are: Consumer Engagement, Consumer Retail, Supply Chain, Marketing Innovation and Health & Wellness.

Accelerators

Here are some of the accelerators opened in the last 12 months:

  1. The Bridge by Coca Cola
  2. WHLabs by William Hill
  3. Ingenuity Partner Program by Intel
  4. Runway by Samsung
  5. Cockpit by El Al + Microsoft Ventures
  6. SigmaLabs by Yahoo + Entree Capital (UK-Israel VC)
  7. 8200 The Social Program
  8. Inno-Negev in Beer Sheva
  9. ... and many more

* There are 2 more I'm aware of that are in the making as we speak and I'm sure many more will follow

The accelerators market is booming and ever-expanding. The brands are joining the game which creates tremendous opportunities for aspiring entrepreneurs. These models have also shifted from small cash for large equity plus services to cash w/o equity or no cash at all (e.g. Microsoft Ventures). I remember that with 5skills, my 2nd startup, I took too high of a risk by joining a local accelerator that gave $30k cash + services for 10% equity. The newer models have proven themselves to be far more successful and generate better deal-flow for the VCs involved.

The name of the game is to support startups until 'true value' is achieved and then deep-dive, invest, take equity and push the company past the 'chasm'.

Accelerators are considered to be lean, mean and very fast moving. Allow me to introduce you to their big brothers, the Incubators.

Incubators

In this post, however, I wanted to talk about this interesting beast called the OCS, or in long, The Office of the Chief Scientist. It's a government body that has been known by a few and misunderstand by many. I figured I'll share some of my learnings on the matter, especially in light of the recent increase in funding they provide.

The OCS is a government unit, funded by the Ministry of Economy. It has a whopping yearly budget of 1.2B NIS ($316m USD !!). It offers many support programs and grants to startups, entrepreneurs, businesses and corporates. The most interesting program I want to discuss is the 'Incubators Program'.

You see, the 'Incubators Program' provides a support framework for incubators and funds for the startups that join. They are also very generous. They can invest up to 85%! of the allowed budget. Now, despite the anticipated 2015 budget increase of $200m, which was canned, the OCS have announced a new tender for supporting the creation of 4 new incubators. 2 in Tel Aviv, 1 in Jerusalem and 1 in the West Bank.

Currently, there are 18 OCS incubators in the country. With the addition of these new 4, we would have 22. Each new incubator must bid for a license, given by the OCS, to operate an incubator for a period of 8 years.

The rules are simple:

  1. License is given for 8 years
  2. You need to have a team of 4 individuals: CEO, CTO, VP Business Development and COO
  3. The office provides up to 85% of the funding for each attending startup
  4. You must commit and prove you can provide the additional 15% funding to the startups you recruit
  5. Commit to recruit at least 4 companies in the 1st year and at least 8 companies in any consecutive year
  6. Each startup can stay for up to 3 years in 2 batches. The first batch will last up to 2 years and the 2nd for up to 1 year

When you start an incubator, you also need to prove you have enough cash to cover basic operational expenses. You are required to show that you have at least 1.2m NIS ($332k USD) in cash to fund the operations each year. You can get a grant from the OCS of up to 49% for these expenses if you build the incubator in a peripheral area. If you're a Biotechnology incubator, this minimum is double that amount and set at 2.7m NIS.

After getting the approval to build your incubator, you need to find the appropriate startups or entrepreneurs and apply for funding from the OCS for each startup (also called 'Projects').

Now, not all incubator are equal. There are 4 distinct types of incubators. Each has their own funding framework for the startups you incubate. The 4 types are:

  1. Technology - 2m NIS approved funding (85% grant = 1.7m)
  2. Cleantech or cyber - 2.2m NIS approved budget (85% grant = 1.87m)
  3. Medical devices or Health - 2.5m (85% grant = 2.125m)
  4. Biotechnology - 3m (85% grant = 2.55m)

* Incubators that are built in peripherial areas throughout the country, gets extra benefits, including an increase of up to $500k in the approved budget for each project.

Those startups that stay longer than the 2 years can apply for additional funding but they are then capped at 1m NIS for all types of incubators.

Once the budget had been approved for the project, both the entrepreneur and the incubator need to negotiate the company's holding structure. Here are the guidelines:

  1. The entrepreneur must have a minimum of 50% holding
  2. The incubator must have a minimum of 20% holding
  3. If the IP of the project was developed by a research institute, the institute has the right to obtain a portion of the entrepreneur's shares in the company (as long as the entrepreneur is left with no less than 15% of the overall holding)

* The institute can elect to convert some or all of their shares to a % from all future revenues of the company

Once the startup has successfully secured the desired funding, they kick the project off. They are then required to report progress on a regular basis, e.g. a project progress report must be generated every 6 months and a detailed financial report every 3 months.

Don't forget that the government grants are 'loan-based'. I.e., the startup will need to pay the 'loan' back. The good news is that the OCS grants are based on a 'success-only' formula. Once the startup starts generating revenue, a % of these revenues is paid back to the government. It is treated as 'tax'. The amount is determined by the Incubators' Committee.

The OCS and the incubators in Israel provide a worthy parallel funding avenue for upcoming startups. I know that an accelerator is the first thing that comes to most entrepreneurs, but I think the OCS has a solid value proposition and a 'reduced' risk in securing medium to long term funding with favorable conditions.

Anyone wants to join forces and take one of the 4 slots available? :-)

Tomer


-- References: ABCDE