A = OE + L
Part 2 of 2
I was a bit surprised that I haven’t written an article for 2 months. Interestingly, I was quite focused on writing my thesis that I had to be reminded (thank you love) about penning my thoughts. Nonetheless, this write up is a follow on from article 1 ‘Eat while it’s Hot’; I am going to share some views on how and why accelerators can give banks traction in the Fintech market.
Accelerators are organisations that aim to accelerate successful venture creation by providing specific incubation services, focused on education and mentoring, during an intensive program of limited duration.
South African Banks should start to embrace the concept of accelerators as a means of keeping pace with the speed of change and innovation in a globalised economy. Enabling an accelerator model is a way for banks to fast track the development of fresh ideas or companies that could make a real impact to the economy.
How to set up an in-house accelerator?
The option of developing an accelerator that is managed and\or funded by a bank is feasible however; the leadership team must first acknowledge the best practices of an accelerator before embarking on this journey.
Best practices: set up of an accelerator
- Understand what an effective mentor is and knowing how to effectively engage with them throughout the program’s duration.
- Have a good rhythm for the program that can be absorbed by the founders; don’t go too fast or too slow.
- Create awareness of the stress and conflict points among and between the various participants (companies, founders, mentors) that will inevitably occur throughout the program, and strategically channeling those into learning opportunities embedded in the program itself.
- Build a culture and network around the accelerator that feeds on itself and perpetuates a lifetime process of learning.
At the same time, problems arise when accelerators:
- Fail to have a clear view of the mentor dynamic by not helping mentors understand how they can be effective in working with companies.
- Fail to set expectations at the outset around what the accelerator can do, and what is sensible given a company’s individual situation.
- Fail to focus on the people, rather than idea because it is the people that matter most and will be lasting, while the idea will transform a lot.
- Fail to understand how to scale their program (how fast do you want to grow? What is your strategy? What is your intention to expand geographically?)
- Fail to have a point of view about what they are trying to accomplish. Simply emulating what other accelerator programs are doing, for example, fails to understand that there is more than one approach.
The operational set up of an accelerator can ultimately determine its success or failure within a given market. It is recommended the bank create a core-operating model for its accelerator so as to ensure the philosophy of what is trying to be achieved is aspired to from first day of execution. The set up of the accelerator should encompass a design dimension, a specific organisational charter and certain key features.
Designing a bank accelerator
The design dimensions for a bank accelerator should fulfill each of the core points below,
- Proposition: what the program offers?
- Process: how the program is run?
- People: who is involved?
- Place: where the accelerator is hosted?
A guideline for setting up the bank accelerator wherein each of these questions should be answered,
|Design Dimensions – Questions to be answered by Executive Leadership|
|Which strategic intent do we pursue with our bank accelerator?|
|How can we align our corporate objectives with start-ups’ expectations?|
|Which startups do we want to partner with? Are they early, mid, or late stage?|
|What role do financial objectives play? Are we taking equity? If yes, which equity model do we choose?|
|How do we frame our innovation challenge? How much diversity of ideas do we want?
Do we focus on a narrow problem, or do we explore broader innovation opportunities?
|How long should our accelerator program be?|
|How do we structure the program to accelerate the start-ups?|
|Which program elements should we include in the process to support start-ups and foster corporate innovation?|
|How can we make it easy for start-ups to work with us?|
|How can we identify the right start-ups to accelerate?|
|How can we ensure internal buy-in from our executives and managers?|
|Which internal and external mentors can we bring on board to accelerate start-ups and ensure corporate alignment?
Which mechanisms will facilitate interactions between employees and start-ups?
|How do we foster networking to support start-ups and foster corporate innovation?|
|How can we tap into existing start-up communities and add value to the ecosystem?|
|Where should we host our bank accelerator?|
|How do we manage the interactions between executives and managers with start-up teams?|
|Are we running a physical or virtual accelerator? How can we use technology to enrich support online?|
|Should we run our own program or be in partnership with a third-party intermediary?|
|How should we design the space?|
Organisational charter – recommended
Essentially, the set up of the accelerator should answer some the following questions aligned to its organisational charter,
Which methodology will the accelerator adopt as part of the start-up support process?
What metrics will be used to gauge success or failure?
How much of funding can the successful entrants expect?
Which network will the accelerator align with to drive entrepreneurial outcomes?
What sort of mentorship model will the accelerator use?
Features – recommended
- An application process that is open yet highly competitive.
The application process usually consists of filling out an online application as the first step. If an application is deemed interesting by the accelerator, the applicants will be called upon for an interview. Many of the programs have a very high application rate whilst well-managed accelerators accept less than 1% of the applicants. It is therefore important that a qualified and experienced jury that can assess the applicants and their potential makes the selection.
The screening process and selection criterion is an imperative step in enabling success for an accelerator. The focus should be on technology innovations that can add value whilst looking to invest along certain themes or within certain key industries. An accelerator may reject good ideas because they do not believe that they can assist the venture.
Interestingly, as much as three-quarters of the accelerator companies believe that next to funding, the greatest obstacles that new technology ventures face are not understanding their target market, not having a strong marketing expert working for the business, difficulty reaching their customers, and lacking overall experience in their proposed business. Accelerator companies have experienced that marketing expertise is crucial for the success of a new venture and that an inexperienced entrepreneurial team could break the business. An additional obstacle commonly viewed by accelerators was that the founding entrepreneurial teams either did not understand the target market or were having trouble reaching their target consumers. The in-ability of entrepreneurs to assess or understand this need indicates that an accelerator managed by a South African bank must have a rigorous screening process to test for these challenges.
- Provision of pre-seed investment, usually in exchange for equity.
The accelerators typically invest a nominal amount into the startups during the program. This investment is first and foremost meant to cover their living expenses during the program. External investors generally fund these expenses. There is an option for additional funding however; it is usually only available at the end of the program, on demo day. This is when the entrepreneurs have their best chances to come in contact with interesting venture capitalists and other investors. They will not necessary receive funding on that particular day but it nevertheless presents possibilities for future funding.
Concern: the option of pre-seed investment in exchange for equity will more than likely not work for a South African bank, more so due to Group Regulatory Compliance conditions placed upon the bank by industry regulators. The alternate option would be for the bank to have in place a few conditions aligned to the pre-seed fund, i.e. right of first refusal for banking products\services, promotional marketing for home/emerging markets wrt brand building or preservation, sales provisioning where the bank’s product houses, channels or customers get first access to the innovation or first option to buy, once the start-up has reached a certain turnover.
- A focus on small teams not individuals.
Most accelerators are of the opinion that running a start-up during the early period of the business program would be too much work to handle for just one person. Therefore it is very rare that an accelerator program accepts a single entrepreneur.
I suggested in Part 1 of this write up that IT employees working at the bank should be given the opportunity to test their entrepreneurial mindset in the technology space. Should the bank be open to empowering small teams from within its banking halls in becoming entrepreneurs capable of solving key business problems, then there is a mandatory requirement that the bank first understand the unique needs and talents of their employees, as well as the resources they need to successfully innovate.
- Time-limited support comprising programmed events and intensive mentoring.
Most of the startups going through an accelerator are working with web related products, hence iterations and product development can be done rapidly. The programs are usually limited to about three months and this is believed to create a sense of urgency that encourages intense work and rapid progress. During the program the start-ups receive mentoring from experienced founders and investors. It is also common with structured events treating subjects like pitching practice, which means practicing presentation skills, or legal advice. The programs usually end with a demo day in which the teams pitch their products to investors.
When you’re creating something new, there is always a risk that the project will turn out much different than what you intended it to be, for better or worse. It is a known fact that South African banks have a very low risk tolerance. It is imperative as part of the accelerator process that defining expectations up front of what your start-up is and is not willing to act on helps to build understanding. To get the scope right, there needs to be enough risk tolerance from the bank to allow new ideas to be born and tested, but enough definition and honesty to protect start-ups from spinning in circles expending effort on something that will ultimately get squashed.
- Start-ups supported in cohort batches or classes.
The peer support that the classes provide is an important advantage for the startups. The teams can for example get help from each other with different problems and moreover, receive early feedback on their ideas.
Why should a bank consider setting up an accelerator?
According to Brad Feld, a cofounder of Tech Stars likened the accelerator experience to immersive education, where a period of intense, focused attention provides company founders an opportunity to learn at a rapid pace. Learning by doing is something that all company founders eventually go through, but it’s a highly inefficient process that drags out over time. The point of accelerators is to accelerate that process by speeding up the learning cycle in a time constrained format. By applying this approach, founders compress years’ worth of learning into a period of a few months. In terms of the impact on the local startup community, indications are that accelerators may have a big effect on attracting seed and early stage financing, as well as additional investors to a community, including outside of the accelerated companies. This could bring additional spillover benefits to the wider regional economy, all of which is benefiting to a bank (see example below).
The business-banking ecosystem:
Let’s assume ABC Holdings (an entrepreneurial team) is accepted onto the bank accelerator whereby they have found an innovative method to utilise solar paneling in the commercial industry. The ABC team develops the product within 2 months and is ready to distribute into the market.
The outcome could go one of two ways,
ABC Holdings accelerated by the bank, receives external funding from venture capitalist and enters regional market. ABC Holdings executes its B2B operating model and begins selling panels.
Connecting the Dots in the Ecosystem
ABC Holdings accelerated by the bank, receives personal mentorship from CEO of business banking, gains product orders in advance from interested parties (aligned to the bank), acquires funding from bank for working capital and enters regional market. The business-banking channel is funding a commercial property development in a specific region. The CEO of business banking has brokered the opportunity with the property developer to pilot solar energy consumption as part of the development. The intention is to pilot solar energy consumption with a branch (belonging to the same bank brand) being developed at that commercial property. The CEO of business banking has also influenced the CEO of consumer banking to pilot solar energy at one of the mobile branches serving the rural community (same region as property development). The business banking team manages the account of a specific franchisor wherein 40% of the franchisees bank with this brand. The business banking team acquires permission to promote the solar energy consumption opportunity to interested franchisees, seeing as electricity consumption is a considerable cost associated with running a franchise.
The primary motivation for the creation of an accelerator company was to help entrepreneurs succeed, grow, and provide capital to launch. Virtually all the accelerator founders explained that they created their accelerator company to help support entrepreneurs and to help fill a gap or lack of capital during the early years of operating a new tech venture.
Should a bank want to set up an accelerator to test the market, the underlying motivation must be assessed in relation to why such an innovative avenue is being explored, how the structure will be managed within its highly inflexible governance environment and what would be its operating mechanism in the market.
I would expect certain bankers to say that pursuing the set up of an accelerator would help ‘support entrepreneurship and remediate the early stage capital gap being experienced by technology start-ups in South Africa’. I would be more selfish by admitting what the bankers actually meant to say is, ‘we are setting up an accelerator to assist develop our ecosystem comprising customers, products, services and\or channels’.
The opportunity of bank accelerators lies in bridging the gap between large corporations and start-ups. Banking corporations and startups are decidedly different organisations because one has what the other lacks. Start-ups are innovative, growth-oriented businesses in search of a repeatable, scalable business model. They are a great source of innovative ideas, talented yet passionate founders build new technology and they operate using nimble processes. Nonetheless, their liability of newness makes execution difficult where increasing ease and decreasing costs of launching a startup puts competitive pressure on successful ventures. By contrast, banking corporations are best designed to execute a repeatable, scalable business model. The processes that firms have optimised for execution might interfere with the search activities required to discover innovation outside the core business thereby leading to missed opportunities. The complementary nature of startups and banks suggests that both can benefit from collaborating; in doing so, start-ups receive help to improve execution and corporations receive support to search for innovation.
The opportunity of setting up a formalised bank accelerator can make collaborations more efficient, cost effective and might result in a range of bank start-up collaborations, see below,
Bank supports pilot project:
Funding the development of innovative solutions and products by startups rather than attempting to do so internally affords the bank an opportunity to explore innovation prospects at a lower cost, in a shorter timeframe and with fewer risks in relation to the core business. Banks may develop new products together with start-ups, explore market opportunities through startups or solve business challenges via startups’ technology or talent.
Bank becomes startup customer:
Interaction with multiple startups during an accelerator program allows banks to learn about different solutions to their business challenges. Mutual benefits result if the startup wins the company as a high-profile customer and the bank finds a solution to its pain points. Working with a banking group can be an important step for start-ups to test their product-market fit and scale their operations.
Bank becomes distribution partner:
Channel partnerships can be mutually beneficial in that they provide a joint solution for both the bank and the start-up. A start-up wouldn’t need to build out their own distribution networks where they can offer their products through the bank.
Bank invests in startup:
Backing and supporting a start-up is beneficial for the bank because this approach provides access to innovation at a lower capital requirement and higher speed compared to internal R&D whilst enabling new markets and capabilities. Interestingly, technology start-ups benefit from favorable terms relative to traditional sources of venture capital.
Bank acquires start-up:
Acquiring start-ups is a quick and impactful way to solve specific business problems and enter new markets. Bank accelerators allow for the rapid exploration of many start-ups that could be a target for acquisitions because scouting for new capabilities to tap into new markets or products is a time consuming exercise. Alternatively, start-ups view acquisition as an appealing exit strategy.
These five points offer a compelling view on why it makes sense for a bank to consider setting up an accelerator however; they are very much outward looking. Should the bank also want to consider the inward looking benefits, the following points should also be contextualized,
Bank adopts a ‘lean learning’ approach:
Technology entrepreneurs experimenting in an accelerator can help large companies (like South African banks) to combine relentless focus, expansive search and a bootstrapping mentality. In a start-up, if entrepreneurs don’t focus relentlessly on the core of their idea, the results can be devastating. These constraints encourage entrepreneurs to focus on their existing advantages and remain experimental. Entrepreneurs invest primarily in not maintaining the familiar, as those with excess resources tend to do; they invest heavily in active search for unmet needs, creative ways to recombine knowledge or resources, and new opportunities to apply their competitive advantages.
Technology entrepreneurs experimenting in the Fintech space understand that testing a theory can be an expensive one, where to ‘build, measure or learn’ an idea or competitive advantage does come at a cost. This is a reality all technology entrepreneurs have to deal with that complexity from day one. Technology entrepreneurs can help banks try on a bootstrapping mentality, where there is no time or budget to lose focus. This may seem counter-intuitive in a larger organisation because banks have the luxury of experimenting broadly, right? The former statement may be true in terms of financial luxury (big budgets) however; this perception can also be misleading. It can take the perceived pressure off, while underestimating the fact that it takes dedicated time and human resources to build a promising idea into a viable product, and those resources are often already accounted for on other projects.
Bank adopts a venture capitalist outlook:
Technology entrepreneurs are continually questioning their inner rationale, looking to extend themselves a little further and find new gains within the market. The ability to continually look at outcomes with a disrupting nature means that nothing is ever taken for granted. This mentality and approach to a business is exactly where banks (more specifically, Heads’ of Departments like Product Houses or Channels) should be exposed to.
Here are a few questions below that are rarely heard off between bankers,
Why this? How does your new venture connect to customer needs, industry structure, technological advancements, growth strategies, or other market forces?
Why now? This is about timing, obviously. Is there a new gap in the market? Was there a competitive shift? Is there an opportunity for a first-mover advantage? What new corporate strategy will your idea(s) play into?
Why us? Why should your division be the one to act on your big idea? What competitive advantage or key assets does your division have that make your venture a good fit? How does your vision complement the existing business or strategy?
Bank discovers the power of agile leadership:
There’s a big difference between being a founding owner who epitomises a brand and an employee with share options. There is a large body of research that suggests founder led companies are more successful than those led by professional managers. Bain & Company suggested there are three consistent qualities in the 200 founder-led companies they analysed over a period of time, i.e. insurgency; a front-line obsession and an owner’s mind set. Founders take full responsibility for decisions where they have a bias to attack problems fast, rather than to delay things or deal with issues via committees. The knock on effect on having senior leaders exposed to start-up entrepreneurs in an accelerator is that they start to see and apply themselves very differently.
The success of accelerators in the U.S. market makes for interesting reading,
During the 2005 to 2015 period, these 172 U.S. based accelerators invested in more than 5,000 U.S. based startups with a median investment of $100,000. These companies raised a total of $19.5 billion in funding during this period or $3.7 million per company on average reflecting both the relatively small investments made in these early stage companies by accelerators, and the fact that many go on to raise substantial amounts of capital later on.
During the periods of completing or recently completing accelerator programs, the median and average valuation of these companies was $5.5 million and $7.1 million, respectively. However, those that went on to raise additional venture capital had a median valuation of $15.6 million and an average of $90 million. In 2015 alone these numbers were $30 million and $196 million, respectively. Indeed, some very well known companies belong to this group, including those dubbed “unicorns” (private companies valued at $1 billion or more), such as AirBnB, Dropbox and Stripe, among others.
Notes to consider:
Accelerators can be effective at helping high potential companies reach goals more quickly and assuredly. More importantly, accelerators have been shown to attract more investors and focus energy on the nascent startup communities that have been spreading worldwide, which will no doubt be critical for boosting high impact entrepreneurship and growth targets in the future. Fintech start-ups are a major source of innovation, as they employ emerging technologies to invent products and reinvent business models. Corporations that embrace an open innovation strategy increasingly look to startups as a source of external innovation.
Accelerators can provide immense value to a South African bank if a suitable model is applied however; there are limitations to setting up a bank accelerator.
The challenges result from immense gaps in work practices, substantial cultural differences and different organisational clocks. The are other critical points to be cognisant of, i.e. (1) the incentives between corporations and startups might not be aligned where the bank could limit a start- ups’ freedom to pivot, (2) bank involvement might stifle the progress of start-ups to a point where instead of achieving product—market fit, start-ups must also achieve product—corporate fit in a bank accelerator; hence, the start-up could end up with a fitted solution to one company’s challenges rather than building a scalable solution to a general industry problem, (3) there is the risk of over-protection through bank support, which leads to dependency or increases the likelihood of sunk costs or later failure. If a bank shields a start-up from market forces, they could miss out on important feedback that would enable them to adapt and (4) close ties with the bank hosting the accelerator could prevent start-ups from pursuing partnerships with competitors or from developing competing products that might disrupt the bank.
To address these challenges and concerns, bank accelerators need to achieve mutual benefit. An effective bank accelerator fosters innovation and offers valuable support for start-ups. With experience seen in the U.S., early examples of accelerators do not represent the end of the story, but rather just the beginning.
In closing, I pasted below an excerpt from an academic journal indicating the difference between an incubator and accelerator. The intent of this visual representation is to assist certain readers from specific banks (Hint: if you mix these two colours, you get a colour aptly known as Cyan) understand the difference.
In my humble opinion, the definition of ‘accelerator’ doesn’t conform to what these banks currently offer in the market. Nonetheless, I applaud each bank for taking the initiative to strengthen its support for entrepreneurs in the South African market.
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