The DMZ has made major changes to its startup programming, eliminating its “crown jewel” accelerator in favour of a new incubator program for early-stage startups.
The Ryerson University nonprofit, now in its 11th year, is currently in the process of launching a new 18-month incubator program for early-stage startups that will see the innovation hub take up to 2.5 percent equity in exchange for in-kind services.
“It became pretty obvious for us that the space was getting pretty busy in terms of how many accelerator programs existed.”
As a result, the DMZ has eliminated its accelerator program, which catered to scaling startups. Speaking with BetaKit, executive director Abdullah Snobar called the accelerator DMZ’s “crown jewel” and its most successful program to date. A “massive increase” in early-stage companies applying to DMZ programs amid COVID-19 and a glut in the local accelerator space, however, prompted the hub to re-focus on incubation.
“It became pretty obvious for us that the space was getting pretty busy in terms of how many accelerator programs existed in Toronto,” Snobar told BetaKit. “And that wasn’t really the core need, and what was actually being neglected more and more was the earlier-stage support that people were looking for.”
The accelerator’s final cohort ended in December, leaving the new incubator as the only major program the DMZ offers. The hub will continue to provide its Sandbox, Women Founders Fast Track, and Black Innovation programs. The new incubator, which also replaces the DMZ’s prior incubation program, will be focused on pre-revenue companies with small teams that are working to build out a minimum viable product. As part of the programming overhaul, companies part of DMZ’s prior incubator were asked to re-apply to be part of the new program. The pilot cohort currently consists of mainly existing DMZ members with a couple of new additions as well.
Snobar told BetaKit that the programming changes at the DMZ were spurred by the desire to both ensure the incubator’s sustainability and fill a gap in the ecosystem.
“We said, ‘let’s really focus down and become very intentional on who we want to support and what stage we want to support them at,’” said Snobar. “And [do so] without losing sight that we still have two top priorities from an equity diversity perspective, which is Black founders and women founders.”
New program, new model, new fund?
With the change in programming comes a change to the DMZ’s revenue model. The Ryerson-affiliated organization has eliminated membership and desk fees for portfolio companies in favour of taking up to 2.5 percent equity in the companies that participate in the new program. The DMZ also makes money from consulting work with similar organizations around the world and receives financial support from Ryerson and corporate partners.
DMZ began running a pilot version of the new program this month with approximately seven companies in the first cohort. The goal is to officially launch the program on March 1, depending on feedback from the pilot cohort companies. While the initial group of companies is smaller than DMZ’s previous cohorts, Snobar told BetaKit that the plan is to support a similar number of companies, approximately 40 to 50 across a range of cohorts, by the end of the year.
The DMZ’s switch to taking equity for in-kind services puts it in contrast with incubators across Canada. While accelerators tend to take equity as part of participation in programs, it is often offset by financial investments in those companies. Many early-stage incubator programs across Canada opt to not take equity at all, focusing instead on membership fees, or other similar revenue models.
Comparatively, Velocity, the University of Waterloo-linked accelerator program, does not take equity or intellectual property stakes, but does have its own Velocity Fund to invest in companies as it sees fit. Similar early-stage-focused programs, run by Invest Ottawa and Co.Labs, also do not take equity. Those that do, such as FounderFuel, typically make investments (FounderFuel takes five percent equity in exchange for $100,000).
Notably, the equity stake for incubator participants will be held by DMZ Ventures, the for-profit investment entity established and owned by Ryerson University, and formerly known as Ryerson Futures Inc. (RFI). Ryerson University consolidated RFI into the DMZ in the spring of last year.
RFI made investments into seed-stage companies that participated in its accelerator, which is no longer operating. The fund has been fully deployed, with DMZ tasked with caretaking its portfolio companies.
Snobar discussed with BetaKit the potential to launch a venture fund to invest in cohort companies, but stated the DMZ is not actively working to do so at this time. It would, however, be under the DMZ Ventures entity that a new venture fund would be launched, Snobar told BetaKit.
“Down the road, the venture arm builds another fund, we could probably do follow-on funding as well, and it gives us a position with [cohort companies] post-DMZ,” said Snobar. “And once they leave, we’re still kind of continuing to support them.”
“Incredibly valuable” or “incredibly hard” (or both)
Multiple DMZ alumni that BetaKit spoke with under condition of anonymity expressed concerns with the DMZ’s programming and revenue model pivot, ranging from the high cost of equity for in-kind services, and the current deficiency in connections to VCs. Some expressed a hope that the DMZ would raise a fund to make investments alongside the equity take.
Speaking with BetaKit, Snobar emphasized that while the DMZ is looking to take up to 2.5 percent equity, the terms may be negotiable on a case-by-case basis. He also emphasized that, if and when the DMZ launches a venture fund, it would consider investing in current cohort companies retroactively.
“The facts are that most accelerators continue to fail in delivering meaningful value to startups.”
“The facts are that most accelerators continue to fail in delivering meaningful value to startups,” said Marcus Daniels, founding partner and CEO of Highline Beta, a venture studio and VC fund that also offers accelerator programs.
“It’s incredibly hard to run a top accelerator program, especially in Canada, where one takes equity for in-kind services for many reasons,” Daniels added. He cited Canadian access to global programs that will write cheques, such as Y Combinator or Techstars, as well as the possibility for startups to access similar programming from other organizations without giving up any equity.
“It feels like most ‘equity for in-kind services’ programs are stuck in the past and not intuned with the needs of Canadian founders,” Daniels said. “I’ve seen founders with significant regret who take those deals as they often question the value exchange afterwards.”
Still, others that spoke with BetaKit expressed excitement about the news, and DMZ’s potential to be more impactful moving forward. Alexander Jivov, co-founder and CEO of DMZ-alumni Hopeful, called the decision to streamline DMZ’s programming “strategically” well placed. Citing a shift in the Canadian tech ecosystem that has left many early-stage companies lacking institutional support (a pain point only exacerbated by the pandemic), Jivov called the DMZ’s new focus “incredibly valuable.”
As one of the top-ranked university-linked innovation programs globally, with an alumni base that includes Borrowell, #paid, 500px, Fiix, Sampler, and Sensibill, the DMZ might have the pedigree to navigate the incredible difficulty of its new format to provide incredible value.
For his part, Snobar told BetaKit that he’s “pretty optimistic this is going to be the best evolution or the best change that the DMZ has ever seen since inception.”
“The best part of it [is] that we start to take the model that we’ve created, in particular with the incubator and the Sandbox, and we started to expand that out,” Snobar said. “That will continue being a priority, focusing on the bigger picture and focusing on Canada. But again, without having to compete with any particular other existing incubator [or] accelerator.”
As reported by The Logic last year, the innovation organization has sought federal government funding to expand into rural Ontario communities and cities across Canada. In May, the DMZ partnered with The Town of Innisfil to launch a virtual startup incubator-accelerator program. Snobar told BetaKit the DMZ is currently focused on Ontario, notably places like Niagara, Brampton, and Innisfil, and the decision to streamline its programming does not affect those plans.
UPDATE 22/01/2021: This article previously incorrectly stated the DMZ was looking to expand services to Oakville. It has been updated to note that Niagara, Brampton, and Innisfil are the towns DMZ is considering.
Feature image source DMZ via Facebook