In the past 10 days, four accelerators announced that they would be starting operations in India. This has created considerable buzz and just about every pundit following this space is asking, “Are we witnessing the emergence of a bubble in the Indian accelerator space?”
Fair enough, but let’s take a step back and examine the landscape here in India. First, these four new accelerators take the number of accelerators à la Y Combinator/TechStars to a whopping 15. With cohorts of 5-10 teams each, that would bring the total number of start-ups being accelerated across India to somewhere over a 100. Y-Combinator’s last cohort size was 63. So India is nowhere near having the capacity to accelerate the number of companies that even the top three US accelerators have. And you can imagine how dismal this number looks if you start comparing the ratio of accelerators to (software) engineers!
So what’s a bubble? In its most general definition it is understood as “a trade in products or assets with inflated values.” In the accelerator space, I would argue that we’re trading in seed-stage tech ideas. It’s a little too early to say if the venture capitalists (VCs) and potential acquirers are shunning away from “accelerated deals” because of inflated and unrealistic valuation expectations from entrepreneurs—which, by the way, is a top concern in the venture capital-private equity (VC/PE) industry. Morpheus, one of India’s first accelerators, recently had a partial exit from Practo Technologies when it raised $4.5 million from Sequoia; whether or not it was “overvalued”, the point is that there are too few data points to draw any conclusive trends at this stage. Furthermore, since accelerators are unregulated and exempt from reporting their numbers, there is a definite survivor bias in the success stories that are contributing to the hype.
What we can do is examine what typically drives a bubble. I can imagine a scenario in which just about any would-be entrepreneur with an idea could find his or her way in to an accelerator program, regardless of if their magic masala was no different from an off-the-shelf MTR pack. If they were led to believe that they also had a chance to be the next Facebook or Instagram, then, yes, we would be witnessing the emergence of a bubble. The situation bears analogies with the housing bubble where just about any want-to-be homeowner could find a bank willing to give them a loan on the basis of a sustained bullish real-estate market. And we all know how that story panned out for funds investing in CDOs (collateralized debt obligations).
For this scenario to play out in India, or elsewhere for that matter, we would need Lps (limited partners) gullible enough to believe that any entrepreneur, just because s/he had built a couple of successful tech companies, could pick the “right” deals and then bake ‘em into mouthwatering, best-selling soufflés. On one hand, partners at accelerators might be able to ride a growing wave of disenchantment with the traditional VC model to raise money. On the other hand, the current accelerator model requires the partners to put a substantial amount of skin-in-the-game to become operational just because the upfront costs are high and the traditional 2/20 success rate or even 3/30 VC model would not pay enough in management fees given the relatively small corpus needed for investments. So there are some serious barriers to entry in this market. Not to mention that one of the major value-add an accelerator brings to the table is its connection to the ecosystem, in India and globally. And not everyone is that well connected.
That said, in India, the ecosystem is in its early infancy. I haven’t done enough research to say if people were claiming in the late ‘90s, after a dozen or so IT training institutes à la NIIT started mushrooming, that they were witnessing a bubble in that space. Eventually, there was a glut in the market and any kid whose uncle thought that being an IT engineer was the path to the future could learn the basics of programming. But it’s not because you could write code to display “Hello World!” that you would be welcomed in the competitive marketplace. So perhaps, in a not so distant future, we will witness an exponential growth of accelerators in India despite the barriers to entry I just mentioned. Armed with their fair share of jugaad (grassroots improvization), entrepreneurs wanting to get into the accelerator business will find a way around them, and the market will triage.
But we’re not there yet. Not even close. And that’s good. In India, starting a business is difficult (it ranks 166 out 183 economies surveyed by doingbusiness.org). So just growing an ecosystem that will help start-ups take care of the red-tape to get their business off the ground from a legal, statutory and regulatory standpoint can only be beneficial to this nation. I can only hope that India’s version of the Startup 2.0 Act, which was recently submitted to the government, will be pushed through rapidly in the current wave of reforms.
What’s more is that there are a number of social shifts in this country that are giving a little sheen to the title of “entrepreneur” at all levels of the social pyramid. There are also a dozen or so accelerators/incubators funding social entrepreneurs, and that in itself is a huge market which needs to be cracked. So, from the bottom to the top of the pyramid, accelerators will start catering to the various segments of the market coming up with new magic masala recipes to make the business model work. Business schools of the world, beware, this is where disruption will emerge for you.
India returned from the 2012 Olympics with its highest count of medals in history: six. Accelerators, like new training facilities for athletes, are coming up catering to a pent-up desire of Indians to excel, to become role models for their country’s youth. With so many potential heroes, I think we can agree that there aren’t enough of both to meet the tremendous potential this country has to offer.
I’m not saying that it will be easy—there are still many obstacles to surmount in order to have a vibrant start-up ecosystem on par with the US, or even China for that matter, but then they wouldn’t be heroes if it was.
Call me an optimist because the jury is still out, but I believe that the only bubble that our small accelerator fraternity is looking out for is the one that will be rising from our glass of Champagne.
Larry Glaeser is a French-American national and a seasoned executive who has spent 10 years in India in the venture and technology arenas.