Chris Heivly has a lot to celebrate, and a lot to mourn.
After five years accelerating and funding early stage startups in downtown Durham, his brainchild The Startup Factory
announced today it will no longer make new investments and will eventually shut down. Over the last year spent raising a second fund of much greater size than the first and creating a new model of bootcamps, accelerators and venture investments, it became clear to Heivly, partner Dave Neal and associate Lizzy Hazeltine, that the market wasn't ready to support The Startup Factory version two.
"We got about two thirds of the way to a first close—and we set a high bar," Heivly says. "But at the end of the day, we just couldn't get it to go."
The news is a shock in some ways—the accelerator funded 35 new companies and brought at least a third of those to our region from outside of it. In other ways, it's a sign of the times.
There are more early stage funding options than ever before in the Triangle region, and nationally, many accelerators have either shuttered or changed their business models to adapt to the needs of entrepreneurs as they grow their companies.
According to Heivly, it feels as bittersweet as when he sent his three kids off to college.
"You're excited for them, but you don't need to be a parent to this thing any more," he says.
Few organized efforts around startups
The impetus for TSF came in 2009, when Heivly, a Mapquest co-founder and serial entrepreneur from Philadelphia, famously met with 250 people over just three months in an effort to build his network and get involved in the startup community.
In 2010, American Underground was just beginning and there were few other organized efforts to support entrepreneurs in the Triangle. Heivly wanted to bring the accelerator trend, launched by Y Combinator in the Bay Area in 2005, to the Triangle, so he raised enough money to host a single accelerator class of Launchbox Digital in Fall 2010.
It was enough to capture the enthusiasm of Durham, and Neal, a local lawyer and serial startup executive.
The pair raised a $6.64 million TSF fund over several months in 2011, and opened the three-month accelerator with a class of six companies the following spring. In the years since, portfolio companies went on to raise more than $20 million in follow-on funds after their initial $50,000 TSF investment. Two startups were acquired. About 20 are still around in some form, with about half of those showing the most promise.
Archive Social, for example, has more than 25 employees working on its social media archiving platform since its start at The Startup Factory in 2012. Though the downtown Durham startup has raised less than $1 million in venture funds, it has amassed 600 customers, most of which are cities and government entities across the U.S. CareLuLu moved to Silicon Valley, raised $1.7 million from 500 Startups, Khosla Ventures and others and has become a site of choice for parents searching for day cares. And Offline Media just raised $700,000 after several years of work on a new way for people to discover new experiences in their towns and for restaurants, venues and events to advertise.
Plans for a $25M Fund
These and other stories made the partners confident they could raise a $25 million fund two. Last fall, they began to cast a new vision that included accelerators as well as short bootcamps
in North Carolina and other states and extra funds for making follow-on investments in the most promising portfolio companies. Heivly also published a book
, took on more speaking engagements and upped TSF branding efforts.
"An entrepreneur starting a company right now in the Triangle has a lot of options to grow their company versus six years ago, when there were very few," Heivly says.
Accelerators: Mixed success
Accelerators have also had mixed success nationwide. Turner Broadcasting shut down its media innovation accelerator and Greenstart, its clean tech accelerator in 2013. Fortify Ventures shut down in DC, Execution Labs in Canada, Portland Startup Accelerator in Oregon and Bizdom in Cleveland. And Citrix closed its corporate-funded program nationally, though locals in Raleigh have revived it here.
Even the largest programs nationally have mixed results. According to a report by CB Insights earlier this year, 35 percent of portfolio companies in the 10 most active accelerators around the nation raise $750,000 or more in the year after completing a program. Only 25 percent of those companies raise funds from an institutional venture capital fund. And follow-on funding was particularly difficult in smaller tech hubs like Portland. Follow-on funds are a key way accelerators measure their progress.
That's why most major accelerators—Y Combinator, 500 Startups and Techstars to name a few—have also raised their own funds to make bets on their portfolios.
But The Startup Factory's successes weren't always obvious. Michael Hoy shut down his startup Boombox.FM about nine months after finishing the program, but his experience building a startup and learning from TSF helped him land a sales role at Pendo, the Raleigh software startup that raised an $11 million series A last year.
"Being a part of the program and running Boombox afforded us the ability to pitch to Warner Brothers and ReverbNation and VCs in New York," Hoy says. "It gave us credibility and I probably wouldn't be at Pendo without having gone through it."
It was the first real push for Anil Chawla, founder of Archive Social, to treat his startup like a real company.
"It was our first funding and got us some press and the spotlight in the community," he says. "It changes behavior in a good way and makes you think more like a company."
A loss for the community
Both men admit the community loses with the end of The Startup Factory. Chawla wonders which organization in the region will be responsible for attracting companies from outside—TSF drew companies from Washington D.C., New York, Kansas and San Francisco. The free Groundwork Labs accelerator and NC IDEA grants are focused only on North Carolina companies.
Hoy is just frustrated.
"They've done so much to propel younger entrepreneurs," he says. "If the best accelerator here in the area is going out of business, I think we are further away than we think we are from having a community that really fosters that part of the ecosystem."
The trio aren't yet sure of their future plans. Neal and Heivly will continue to manage the existing fund for five or 10 more years, but will likely work separately on other projects or companies. Hazeltine says she's ready to work on a product after two years spent observing and coaching startups.
In the meantime, Heivly wants to celebrate The Startup Factory's contributions to the Triangle. So look out for invites to an epic party—a celebration of four years The Startup Factory spent accelerating and funding early stage startups in Durham.