In 2012, startup accelerators rise in Asia, but venture funding yet to catch up


JFDI.Asia held its first bootcamp in Asia. The question remains whether it and Asia's other startup accelerators can keep the momentum going.

Asia has become a much friendlier place to do a startup. That’s because throughout the region, more startup accelerators have been launched to provide aspiring entrepreneurs some handholding as they search for the next big idea.

In 2012 alone, at least 4 startup accelerators have begun their inaugural bootcamps. Singapore’s JFDI.Asia held a successful one from January to May, while South Korea’s SparkLabs unveiled their first batch of startups in August. Philippines’ Launchgarage and Hong Kong’s AcceleratorHK too have started their programs.

A startup accelerator, essentially, is a type of seed startup funding (see: stages of a startup) vehicle that offers a structured mentorship program and support services over a fixed duration of time — often from 3 months to a year. Investees typically have to go through a rigorous selection process.

Typically, accelerators invest small five to six figure sums in selected applicants, in exchange for a small percentage of equity in the single digits. At the end of a bootcamp — or the structured program — accelerators will hold a demo day where they invite venture capitalists or other early stage funds to scout out the graduates in the hopes of giving follow-on funding.

The pioneer of this concept is Y Combinator, founded by Paul Graham in 2005. Accelerators have since been launched in Europe before making its way East in the 2010s. The timeline below charts the spread of startup accelerators across the world, focusing on Asia.

These new startup accelerators are good news to Asia’s aspiring entrepreneurs now. They are part of an emerging startup ecosystem in the region, consisting of early stage funds, co-working spaces, government support, niche online media, and startup incubators.

The challenge lies in sustaining the momentum. Revenue-wise, startup accelerators function like venture capital firms in that they primarily make money through investment returns. If they fail to do so, funds dry up, they lose credibility, and they give up the ability to operate into the foreseeable future.

So, the success of startup accelerators depends on how well the startups they’ve invested are able to increase their valuations by growing the company, raising venture funding at higher valuations, and ultimately exit via an acquisition or IPO.

But here’s the problem: outside of China and India, the venture capital industry in Asia is dismal. According to the Asian Venture Capital Journal,  Southeast Asia accounts for only 4% of Asia’s VC market by investments made, and this share has dropped further to just 1%, or USD 7.8M for 2012 up to September. Greater China and South Asia make up a combined 74% share in 2011, while North Asia contributed 19%.

Taking AVCJ’s figures at face value, we estimate that Asia’s VC market is around USD 780M. That’s peanuts compared to the United States’ annual size of investments, which hit USD 32.6B in 2011.

This mismatch between early stage funding and venture funding explains why promising startups in Asia are facing problems raising Series A rounds. It also doesn’t help that venture capitalists in Asia favor later stage investments. With the lack of options, promising startups in Asia face a tougher road towards profitability and exit.

Sure, the region’s small venture capital industry could be a strike against the eventual success of its startup accelerators. In the worst-case scenario, new startups that emerge from these bootcamps would not be matched by a growth in the venture capital industry, leading to the much talked about Series A Crunch that is being predicted for Silicon Valley right now.

But there’s another way to look at it: The startup accelerators could be the catalysts that attract more venture capitalists here. After all, in any startup ecosystem, entrepreneurs are the lead actors. The rest of us, investors, lawyers, and the media — we play supporting roles. Investors simply go to where the opportunities reside, and accelerators can certainly polish up the startups under their care and increase their attractiveness.

Ultimately, we need to view Asia’s startup accelerators not simply as money-making machines, but as community builders aimed at developing their respective startup ecosystems. After all, it can be argued that they are absorbing more risk than venture capitalists by investing in companies at such an early stage.

With a good amount of luck and a dose of ingenuity, they will succeed.

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