Early-stage investment isn’t dead. It’s merely more competitive and less reliant on venture capitalists. So seems to be the conclusion of a recently issued report from the Kauffman Foundation that details the rise of the startup accelerator. Unlike the business incubators of yore, which the report likens to "real estate deals,"  the accelerators group entrepreneurs and investors together. The process enables entrepreneurs to vie for funding and investors to help guide the process.

In a way this seems to add another layer of competition to the funding process. No longer must your startup be deemed worthy by a venture firm after a series of meetings. Now, once an entrepreneur is deemed worthy, he or she joins other startups, and then the funding group decides which startup should get funded.

The report says that many accelerators focus on a specific industry; currently they target medical devices, biotech and Internet companies. For the capital intensive biotech and medical device companies, an accelerator or even incubator model makes sense because equipment and lab space are expensive. Combining that with business acumen could be valuable, which is what Pfizer Inc. and Biogen Idec Inc. are hoping with their accelerator efforts. They also provide seed capital.

Internet companies, even though they cost less to create, are also likely to benefit from having extra help before getting full funding. It may not cost a lot to get a site up and running, but locating an accelerator such as YCombinator gives your startup immediate cachet in the media, which can in turn drive traffic to a fledgling site. Since users are generally the most valuable aspect and a barrier to entry for many Internet companies today, an accelerator can help attract a user base thanks to the number of entrepreneurs there as well as through media exposure. Additionally, since Internet companies need less capital, an accelerator and its seed money can sometimes be enough to get a startup to a deal or at least to a higher valuation. —Stacey Higginbotham

See report form the Kauffman Foundation
See June 22 story from The Deal

Tags: vc, venture+capital