Innovative Funding Model from Silicon Valley Could Change How Non-Profits and Socially Responsible Firms Do Business

By Jonathan Porat, Regulatory Economist

Startups such as Dropbox, Reddit, and Airbnb have become aspirational success stories for entrepreneurs. They have made people’s lives easier, disrupted established industries through simple innovations, and in some cases received billion-dollar valuations. Some people however may not be aware that these high-growth and high-value startups have all taken advantage of an innovative funding mechanism for small businesses: the accelerator program. Now, startups in the non-profit sector are taking note and hoping to use this model traditionally leveraged by the tech sector to advance important public policy goals.

To paraphrase recent research from Cohen and Hochberg, accelerator programs are short-term mentorship programs for groups of startups that culminate in a demo day or a public pitch to large groups of investors. Often accelerators are for-profit entities that will provide mentorship services as well as some seed funding and additional resources in exchange for an equity stake in a participating startup. While accelerators have been around for almost a decade, due to the success of prototypical accelerators such as Y Combinator (the accelerator behind the companies mentioned at the top of this post), their popularity has surged.

Catalyzed by accelerator success stories and investors’ increasingly favorable view of them, the non-profit sector has started experimenting with this innovative model. Startups in the non-profit sector may have difficulty getting early-stage venture capital funding making these entrepreneurs hungry for an alternative.

One exemplar of this type of new “social accelerator” program is Conscious Ventures Lab, a benefit corporation located in Howard County, Maryland. In September, Conscious Ventures held its first demo day for its first cohort of five companies: all startups with social-welfare goals. These included one startup designed to connect women entrepreneurs to resources and funding sources and another that provides a curated marketplace for socially conscious consumers. The local economic development authority has even partnered with the accelerator to work toward its economic development and public policy goals. It will be interesting to see from these early efforts what lessons can be learned about future applications of the accelerator model in the non-profit and public sectors.

Clearly, the accelerator model has a lot of potential to be used to grow small businesses and could act as an agent of change in meeting public policy goals. However, there is no guarantee of success when participating in one of these programs. More importantly, there are still many unanswered questions about the accelerator model. There is little authoritative data available on accelerators, and it is unclear how to evaluate their success. In addition, possible unintended consequences and policy resistance of applying this model outside of the tech sector have been largely unexplored.

To add to the scarce research on this topic, on October 16th the Office of Advocacy released the new research report, Innovation Accelerators: Defining Characteristics among Startup Assistance Organizations, plus an issue brief. This research highlights key questions around accelerators as well as further explores the relevance of these programs for small businesses and policymakers. Advocacy looks forward to continuing to contribute to research and discussions on small business marketplace innovations.