Down Times Look Like Up Times For Accelerator Applications

This is the third installment in a four-part series featuring workers displaced by the recent waves of tech layoffs who used the transition to found their own companies. In Part One we chatted with investors and founders and looked at data for early-stage startups. In Part Two we met tech-worker-turned-entrepreneur Peter Henry. Part Four introduces legal tech entrepreneur Anmol Sahai. Today we visit the state of accelerators during the downturn. — Special Projects Editor Christine Kilpatrick

It’s never easy to get into the most competitive accelerator programs. These days, however, there’s good reason to believe the competition is getting even fiercer.

From fewer slots at top programs like Y Combinator to reduced seed-stage funding for newly minted founders, the environment for launching a startup has changed considerably in the past few quarters. Meanwhile, the alternative — a job at someone else’s tech company — is neither as stable nor as lucrative as it used to be.

“The sentiment is: It’s not nearly as attractive to be at these large techs in May of 2023 as in June of 2021,” said Melody Koh, a partner at NextView Ventures, an early-stage investor that runs a small accelerator program for pre-seed and seed-stage teams.

The rise in layoffs over the past year has also broadened the pool of potential entrepreneurs with more time for other pursuits now that they’re not toiling for a paycheck. Close to 140,000 workers at U.S.-based tech companies have been laid off in mass job cuts so far in 2023, per Crunchbase’s Layoff Tracker. Job openings, meanwhile, are down sharply since the market peaked in late 2021.

Accelerator applications pile up

Of course, entrepreneurship doesn’t happen in a vacuum. One doesn’t just leave a 9-to-5 job, devote a few late nights to coding, and create the next big software platform. Building something scalable typically takes networks, business plans, pitching, sales calls, term sheets and a lot of rejection along the way.

That’s where accelerators and incubators come in. While programs vary widely in size, duration and sector focus, most pitch themselves as a way for founders to get access to the networks, investors, advice and support they need to turn a vision or prototype into a more viable business.

It’s a compelling offer, which helps explain why the best-known programs are notoriously tough to get into. Only an estimated 1% of Y Combinator applicants make it into the storied program, while the acceptance rate for Techstars is said to be approximately 1% to 2%.

There’s no established index of acceptance rates across the accelerator ecosystem, so it’s tough to say what the average is for the space. As programs become more known and established, however, they attract more applicants. And downturns don’t have a history of deterring would-be entrepreneurs.

There’s no time like a down time

At NextView, for instance, the pool applying for the latest accelerator class was larger than last year’s, and the quality of applicants was also higher, per Koh. Although founders will be founders regardless of where we are in the market cycle, she did point to several factors that make this a particularly compelling time to launch.

One factor, she noted, is that plummeting valuations at public and private technology companies have left employees with stock compensation packages that look far less valuable than they were a year ago. As a result, many are “free from the golden handcuffs” of an anticipated options payoff.

Startup founders today also face less competition, and lower advertising and marketing costs. True, their prospective customers are also likely to be tightening their belts, but Koh believes this will mean that: “the companies rising to the top in this generation are going to be stronger.”

Stephanie Simon, head of admissions at Y Combinator, shared this viewpoint in a recent blog post titled: Why would you start a startup in an economic downturn?

“Cost-sensitive customers can be helpful in the early days of your company. If they pay you in this tough environment, it’s a stronger signal. There’s a higher likelihood you’re building something they really want,” Simon wrote. She added that it’s likely not a coincidence that two of the top YC companies, Airbnb and Stripe, were started in the depths of the last recession.

That said, saying now is a great time to launch a startup and actually investing more in the current environment are two different things.

Last summer, Y Combinator reduced the size of its cohort by 40% from peak levels, citing the downturn and a more muted funding environment. The accelerator also announced in March that it will be decreasing late-stage investment in companies that go through its program.

So while the present moment may be a great time to launch a startup in many respects, it’s certainly not an easy one.

Illustration: Dom Guzman

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