- The Washington Times - Monday, November 6, 2000

Even the idea came together quickly.

Mary Knebel already had a job as the senior manager for electronic commerce at Proxicom Inc.

But she and Tom Gillespie, who was working as a senior manager at AT&T; Solutions, invited 10 friends with experience at technology and consulting firms, mostly in Northern Virginia, to her Reston town house on a Sunday afternoon in August 1999 to talk about starting a new business. Ms. Knebel and Mr. Gillespie wanted to figure out how to make a living helping tech start-ups.

A month later, the group started LaunchFuel Inc.

"We wanted to find a new model for the new economy," Ms. Knebel said.

LaunchFuel is among a small but growing group of companies known as accelerators, consultants that help small tech firms grow swiftly into large publicly traded companies.

Accelerators do that by working on site with companies, helping with everything from hiring key employees to attracting venture capital.

Accelerators adding up

Accelerators still don't have a track record they can use to illustrate they work, but more and more are popping up.

Tysons Corner accelerator Synfusion opened in June 1999.

Philadelphia-based Katalyst LLC started a D.C.-based accelerator in September 1999 to mine the region for promising tech start-ups to help move to the next level.

Alexandria accelerator ASAP Ventures opened in May.

Global consulting firm McKinsey and Co. also has started offering accelerator services, with its D.C. office consulting with companies from Philadelphia to North Carolina.

Each accelerator seems to go about consulting differently, and no two definitions of an accelerator are identical. Despite their differences, accelerators share a few common traits:

• Their goal is to speed a company to an initial public offering (IPO).

• They typically agree to work with companies that have attracted a round of private equity investment, either from friends and family members or angel investors.

• The firms they agree to work with are small and employ few people.

• The accelerators often take a combination of cash and equity in return for the consulting services they provide.

• They establish partnerships with venture capital firms, either notifying them of promising start-ups or agreeing to work with companies that venture capital firms have invested in but think need consulting help.

Incubators don't cut it

Katalyst co-founder Mark Bolger said accelerators fit in a niche between the services venture capitalists provide and those offered by incubators, the companies that give office space to cash-poor start-ups.

Venture capital firms give advice to their portfolio companies through a single person they have placed on the board of directors of start-ups they invest in.

Incubators give start-ups a place to slowly nurture their companies and offer a little business advice.

Accelerators get much more involved, giving executives access to a range of experts. Katalyst has 55 persons on staff to farm out to portfolio companies. LaunchFuel is smaller, with 15 persons, but it has a swagger.

"We have access to capital, but start-ups need talent. Our talent is our intellectual capital. That's our value proposition," said Roger Yee, co-founder and chief technology officer of LaunchFuel.

ASAP Ventures is just two persons Cal Simmons and Jeff Weiss but it enlists the help of outside advisers.

Their common message: Speed up your company's growth and go public. Many accelerator advocates say the Internet economy demands speed to market, and incubators fail to provide companies with the expertise needed to move quickly.

"I can't think of any company that has come from an incubator and gone on to superstar success," said Philip Garfinkle, president of Yazam, a Reston-based company that provides acceleration services for wireless communications and Internet infrastructure companies.

Christopher Stammer, president of the Alexandria incubator Start-up Generator, said the criticism misses the mark, and placing too much emphasis on going public could be a mistake.

"The intent of an incubator and an accelerator, the end result, is the same," he said. "It's more important to have a solid business structure, a good management team and a good product or service. Best beats first."

Incubators give free office space to select start-ups that can't afford rent, secretarial help or an espresso machine because they have no revenue. In exchange, companies "renting" an office in an incubator give up a massive equity stake in their new business sometimes up to 70 percent.

That's too steep for many start-ups, and the payoff is too slight, accelerators say.

Accelerators typically take an equity stake, but all say it's smaller than the share incubators take though they routinely decline to identify how much equity they take in a company and say it is different for each, based on the services provided.

But accelerators also charge their portfolio companies a fee to ensure they have revenue and don't have to wait for an IPO before making money.

"The incubator model is a flawed model," said Dale Mietla, co-founder of Synfusion. "It takes too long to produce a home run. What are you going to do until that happens and you begin making money?"

In fact, some incubators are falling on hard times. Because they rely solely on their equity stake in a company and don't collect fees for the services they provide, incubators don't make money until one of their tenants has its initial public offering.

David Wright, vice president of private equity services for the Boston-based researcher Aberdeen Group, predicts 70 percent of incubators will go out of business within the next 36 months. They will become a venture capital fund or adopt the fee-for-services model embraced by accelerators, he said.

"Incubation is valuable and can work, but there are few ways to make money," Mr. Wright said. "There's not as much risk in an accelerator, and that's why they have cash flow."

As an example of the difficulty incubators have had, Los Angeles-based incubator Idealab, which opened in 1996 with plans of making money when companies "renting" office space from it go public, withdrew its plans for an initial public offering in October because investors became skeptical of its business plan.

Faster, faster

Just as the number of accelerators has grown, so has interest in their services among start-ups.

LaunchFuel is guiding five companies through their formative stages. ASAP is working with six companies although three were started by the founders of ASAP. Synfusion works with five. Katalyst has three in its D.C. accelerator program and 18 worldwide. Yazam has 25 portfolio companies worldwide. McKinsey's D.C. office has about six corporate clients.

Leslie Sadler had no trouble giving LaunchFuel what she describes as a small equity stake in her company in return for help honing her company's message as she prepared to make a pitch for venture capital.

Now she is in negotiations on a $5 million to $7 million round of venture capital for New York-based DesignCenter360 Inc., an on-line company marketing furnishings to designers.

She worked with LaunchFuel for two months.

Roy Kime started Star Remote Wireless, based in Alexandria, in March to develop a technology to give people access to information in a corporate database when employees are out of their offices.

But he wanted a guiding hand.

"We were looking for people with connections. We were looking at how to build our mass, and at who could be mentors," Mr. Kime said.

In June he picked ASAP Ventures.

ASAP took a "minority" stake in Star Remote through its investment. Like Ms. Sadler, Mr. Kime didn't mind giving up equity in his start-up in return for consulting help.

The move could pay off by getting Star Remote to the stock market six months sooner than it would get there otherwise, Mr. Kime said. That's important because it could result in Star Remote getting millions of dollars to fund its growth long before it otherwise might.

ASAP Ventures also got one seat on Star Remote's board of directors, and Mr. Simmons and Mr. Weiss began working with Mr. Kime to get Star Remote a $500,000 loan from a venture capital firm, a loan that will be convertible to stock, to fund the company's research and growth.

With that loan in hand, ASAP then directed Mr. Kime to define a series of hurdles he had to meet, all with the goal of putting Star Remote in position to attract its first round of venture capital.

The hands-on approach doesn't sit well with everyone, said Doug Epstein, managing director of Katalyst's D.C. accelerator. But most come around.

"We find once we get in there they welcome the involvement," he said.

After Mr. Kime defined his short-term goals, ASAP stepped in to introduce him to investors and Star Remote got $5 million in venture capital.

But that was no surprise.

Why? Because accelerators are closely aligning themselves with venture capitalists.

"We feel it's our responsibility to get a company groomed so it is a good prospect. We hope our relationship with venture capital firms enables our clients a fair look," Mr. Weiss said.

A sure thing

That partnership between accelerators and venture capital firms is the new trend in investment, Mr. Wright said.

In most cases, start-ups use accelerators to refine their company, then rely on an accelerator and its contacts as Mr. Kime did to provide help finding a willing venture capitalist.

With McKinsey and Co., venture capital firms bring start-ups in need of consulting help to the accelerator. The venture capital firms invest in the companies once they are done with the accelerator program. Many accelerators give venture capitalists a spot on their board of directors.

"One of the drivers here is that VCs (venture capitalists) are looking for more of a sure thing," Mr. Bolger said.

So far, accelerators have little evidence that they are the "new model for the new economy" because few companies have left the accelerators and gone on to IPO stardom.

But one has.

One of Katalyst's early portfolio companies, Boston-based Breakaway Solutions Inc., went public nine months after it hired Katalyst to accelerate the company. Breakaway Solutions had a $42 million IPO in October 1999 and saw its stock price triple in first-day trading.

If that keeps happening, accelerators will do more than make their clients wealthy. The people running them will make themselves wealthy.

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