The Startup Ecosystem Pipeline: What comes after the Funnel

Standard

Two weeks ago, Jacquelyn Cheok of The Business Times wrote an interesting piece on the unabated rise of new technology accelerators across Singapore. In it, she openly poses the question concerning the number of technology accelerators, and whether this was another case of ‘too much of a good thing.’

It’s an interesting dilemma. On one hand, you have the positive iterative feedback loop of startup creation and growth and reinvestment back into the ecosystem. On the other, as accelerators become increasingly competitive, you risk accepting entrepreneurs and companies of lower quality, substance or investment fit.

So if the question was to raise concerns about the sustainability of the startup ecosystem here, well … it sort of misses the point.

What’s of concern here isn’t the number of accelerators, but whether there are enough follow-on investors to support the increased quantity of companies. That is a truer measure of sustainability.

When reviewing a tech ecosystem, it’s useful to see it as a pipeline. At the early-stage, you have the accelerators and incubators; these serve as the funnel. Next, you have your seed- and Series A investors. This is the pipe. After that, you have your Series B and growth-stage investors, so on and so forth. And at the end of this pipeline, you have your exits, such as strategic acquirers or stock exchanges.

A healthy ecosystem is one that has a robust, uninterrupted pipe: investable startups can progress along said pipe, transitioning from one section to the next, until they have the opportunity to exit. And as Jacquelyn rightly pointed out, Singapore has been adding a tremendous number of accelerators and incubators to grow the funnel and increase the number of startups entering that pipeline.

And therein lies the danger of having too many.

The attraction isn’t really a surprise. Accelerators and incubators are sexy. They generate great press. And cognitively speaking, the concept of an incubator just makes sense: put smart people in a room, give them a small check, an unhealthy amount of coffee, and mold them into Steve Jobs’s and Elon Musk’s of the world.

But what happens afterwards?

The problem with expanding the funnel is that oftentimes there aren’t corresponding initiatives to grow the rest of the pipeline. It’s just as important to ensure that there aren’t any gaps from one section of the pipe to the other, say, from Seed to Series A, Series A to B, and so on and so forth. To complete the metaphor, if pipeline is leaky, startups — even viable ones — will begin to fall through the cracks.

Failing startups can be just as harmful to an ecosystem as a lack of them. And I’m not speaking from a cultural standpoint, either. Indeed, Silicon Valley treats failure as a badge of honour. Simply put, a failing startup will not make a return on investment.

One failing startup is a blip; an entire year’s worth of failing startups can be a disaster. Investors watching on the sidelines — or worse, those that invested into the incubators with a right of first refusal to invest into their startups before anyone else — might see these failures as a lack of financial support within the ecosystem, making their own investments much riskier.

If these failures become systemic, early-stage investors may be more disinclined to invest into the ecosystem, or will wait until it becomes more mature. This has a knockdown effect on downstream, later-stage investors, who are often unwilling or unable to write smaller checks. The worst case scenario is that a leaky pipe becomes even leakier.

Conversely, an incubated startup — even one — that successfully secures subsequent funding not only validates the incubator model, but gives others, investors and entrepreneurs alike, an aspirational example to emulate.

Understanding this is key to improving a tech ecosystem. By ensuring the pipeline is as secure as the funnel is wide, an ecosystem has a far greater chance at sustaining itself.

At the end of the day, the important issue isn’t that there are too many accelerators. Let’s be frank: this is going to be one of the most attractive investment regions in the world. After China and India, Southeast Asia is poised to break out, thanks to countries growing at a torrential pace like Indonesia, Vietnam, and the Philippines. Companies have only barely begun to scratch the surface of potential there.

And it says something that you have billion dollar industries in markets that haven’t achieved the same kind of consumer spending, purchasing power, or even credit card and internet penetration rates of their more mature neighbours.

It’s an incredibly opportunistic time to start a company in Southeast Asia, and incubators and accelerators are perhaps best suited to helping guide local entrepreneurs to take advantage of that fact. There are still more than enough problems, solutions, and talented folks out here to fill out a dozen incubator classes and then some.

But now is perhaps the time to start refocusing on the pipeline, to ensure that after our incubators find the best entrepreneurs and startups Southeast Asia has to offer, we have the best investors waiting for them, chequebooks in hand.