The first time I was introduced to the world of startups was back when I was a baby, during the dot com bubble, via my father — a startup CEO at the time. But I didn’t know anything back then, and — quite frankly — don’t remember much from that chapter of my life. It was only later, through conversations with my father, that I learnt anything about startups in general. they were wonderful stories, but they were simply that — stories.
It wasn’t until May of 2016 that I made my first, proper foray into the world of startups. It was through a job for a Korean government startup incubator in Silicon Valley. Confusing, I know. I was just as confused when I first came across the job. What was even more confusing was my job description — I was to aid with the process of sourcing and screening candidates from the US and Canada to bring over to Korea.
During this process, I met my future boss, who offered me a chance to jump into the world of startup acceleration. I, obviously, jumped at the chance. But, simultaneously, I had so many questions — many of which still have not been answered. Specifically, 2 questions still remain — what is startup acceleration, and why is it necessary?
Startup Accelerators — What Are They?
I think it’s worth while to take a look at the Wikipedia entry for Startup Accelerator before we begin. When you take a read over the rather short entry, two things stand out rather immediately: startup accelerators both invest, and accelerate growth.
Now the first part is self explanatory. Accelerators like Y-Combinator and 500 Startups have their own funds via which they provide seed investments to successful applicants at the start of their accelerator programs. This is the main method startup accelerators make money — they’re really just glorified pre-seed stage VC firms.
My short but intense experience in the world of startup acceleration supports this claim. We didn’t have any other revenue streams, save for the returns from previous investments that manifest in exits via IPOs or M&As. Once in a while, you get the stock buyback, or a fundraising round with a buyout clause, but the aforementioned two were the main ways we made money. And, from what I can gather through my contacts and the public information, that’s the main way most startup accelerators make money.
There are exceptions to this rule. I’ve seen certain “accelerators” take equity for education and real estate, whereas others take capital for the aforementioned, while still providing an investment. But those are rare, and far in between. And, if you do happen to come across one, my recommendation is to turn around and walk away.
Just as an FYI, the standard Silicon Valley valuation for an accelerator seems to be a SAFE/C-Note agreement for 100,000 USD for 6% equity, while valuations grow worse as you move away from the valley. The only exception may be China, which has interesting valuations which deserves its own entry.
But I digress.
So the first part is simple enough. What about the “accelerate” aspect? Surely this is what defines an accelerator. Well, that’s the thing. It is the main value proposition of startup accelerators, and yet, simultaneously, it’s the most ambiguous aspect to this whole business.
According to Susan Cohen, accelerators “help ventures define and build their initial products, identify […] customer segments, and secure resources” all within a time frame of about 3 months. This is largely what “accelerate growth” refers to — condensing the process by giving a time constraint. This is what, ostensibly, makes accelerators so valuable to an entrepreneur.
Except, other institutions can provide the same services, without the constraint of time. Angel investors, and startup incubators are the examples given by Susan Cohen, but there are many more, including friends and family, to even governments and former entrepreneurs. Some of these examples even invest, much like accelerators, sometimes at better terms and valuations as well.
Moreover, the term “growth” is rather ambiguous. A software company can claim MAU metrics as growth, but if that’s their main claim to growth in a post Series A state, the business may not be really growing. A seed stage company with revenue growth may look great, but MAU metrics may have more long term ramifications at this stage. Moreover, each metric requires very different skillsets to grow, which doesn’t help when startup accelerators tend to admit startups in a plethora of industries.
Usually seed stage accelerators tend to ignore any revenue and profit traction, except when the company is one that has a product in stores already (mostly companies that have gone through crowdfunding, or have local distributor partners). Based on my experience, we tended to focus more on DAU metrics for software companies, while focusing on the quality and quantity of business meetings for the others (namely B2B companies).
We’ve also had the interesting case where a company wasn’t even through with development of their alpha product, so their growth was measured by development progress, along with the refinement of their business plan, which is definitely something that’s difficult to quantify.
Throughout all this, the role of the startup accelerator is this: we were supposed to help startups source leads, organize litmus tests, and generate traction. I’ve even had to, on one occasion, organize a play test session for a mobile gaming startup. Bare in mind, different accelerators will go to different lengths to help businesses.
There are horror stories abound, including an accelerator that’s known to focus all its efforts on pitch coaching sessions in preparation for its demo day, or even accelerators that only support those companies that fit in with the vision of a key LP in their fund.
So, in essence, startup accelerators are seed funds that offer education programs, business support, and networks that startups can leverage to grow their business, all while the time constraint of 3 months providing incentive for founders to focus their efforts in this regard.
Startup Accelerators — Are They Necessary?
As mentioned before, there are a host of other institutions that offer similar value propositions to the startup accelerator. Why, then, should I choose a startup accelerator?
When I was working in a startup accelerator, I had a difficult time believing in the value proposition of the enterprise for this very reason. This was only reinforced when I subsequently went on to join a startup, and attended an accelerator program for myself. It was rather apparent from the other side what startups required from a startup accelerator, and it was clear that the current value proposition of the startup accelerator was not in line with these expectations. This wasn’t only me, either. Everyone I’ve talked with, who have gone through acceleration programs themselves, had the same pain points.
Startups expect accelerators to have an investor network from which they can access further funding. If they can’t, at the very least, they expect to be able to lean on the brand pedigree of the accelerator to reach out to investors outside their network.
In a word: fundraising.
There are a few things that I’ve learnt in my time working on both sides of the fence, but the one thing that was in common in both camps was the need for follow-on investments and runway extensions. In fact, the accelerators that we widely consider to be among the best are the ones with the most extensive track record for follow-on investments.
And, the most prestigious accelerators can often gather the most funds.
Because, frankly, it’s rare to see startups that don’t pivot once or twice. Quite often, we’ve seen startups pivot into something once unimaginable for the founding team. If one idea proves to be unprofitable, or far too competitive, pivoting is often the best course of action.
When I was working at an accelerator, we invested into a fintech company that was going after the Coinstar market. Except, it was operating in Korea, one of the least cash dependent societies in the world. Months after my departure, the company pivoted into a different service within the fintech field.
My point is, pivoting is far more common than anyone would like to admit. But it’s all dependent on the runway available.
When startups apply for accelerators, they’re usually looking at fundraising opportunities. Sure, there are businesses that are in the idea stage, some are past that, but need market verification. But the vast majority of companies applying to accelerators are past that. They’re now looking for capital to enable their plans.
This also applies to accelerators. When they’re picking and choosing their investments, they look at numerous things, including fit with the firm’s mission, the industry, and the proposal/product. But, most importantly, there’s traction. The purpose of the fund is to generate and actualize returns on investments. The best way to do both is to identify startups that are already showing signs of growth, and adding fuel to that ship. It’s a simple way for investors to identify possible quick exits (albeit, the veracity to this claim is dubious at best).
This is why corporate VCs and accelerators are on the rise. Because they have the capital to inject into their portfolio without seeking outside help. Moreover, their mission and focus are simple to identify, and their “exit” is often more integration into the larger firm, which takes pressure off startups to grow exponentially to billion dollar companies.
Keep in mind, however, that these are all relative. Corporate accelerators are still very motivated by identifying stars on the rise, just their greater motivation is slightly different from traditional accelerators.
I mentioned earlier about how startups want to lean on the accelerator’s brand to fundraise. This is the key value that startups weigh when choosing an accelerator — will this accelerator open doors for me in fundraising and business? It’s a matter of fundraising, and extending the runway, but this time, it’s less about increasing the option pool, and more about lowering the barrier to entry.
If you know anything about anything, you know that the main role for your alma mater is to buy a brand for your career. People have expectations for people from certain schools. People have experience working with alumni from certain institutions. People associate certain schools with certain qualities. This is because, whether they know it or not, they expect the college to have done a certain level of due diligence on its students through their 4 year curriculum.
The same goes for accelerators. They’re the de facto gate keepers to VC investors, acting as a sort of seal of approval that VCs then go looking for. If your accelerator can’t provide the necessary investor network itself, the least it should be able to do is offer up a brand that other investors can trust.
So are accelerators necessary for startups? No. Despite recent trends in the startup world, there are plenty of viable options available to founders if they search hard enough.
That being said, the dawn of the accelerator has fundamentally changed the game somewhat. Whereas angel investors typically helped with companies ford the pre-seed stage, accelerators have largely taken that role, with angel investors being promoted to something akin to institutional seed investors. Governments and incubators are, increasingly supporting more individuals pre-incorporation, rather than pre-seed stage startups. Plus, more and more founders are moving away from asking friends and family for capital.
In the midst of all this, the accelerator has cemented its position as a sort of rite of passage for startups looking to raise capital.
So, while it’s not necessary to go through an accelerator, it’s becoming more and more difficult to avoid such institutions all together.
How to Choose an Accelerator
While there is no simple formula for ranking accelerators (much like most things in life in general), there are some tips that are worth heeding.
First, check the portfolio. If there are startup names you know, that’s a start. If there are startup exits, that’s even better. The bigger the exit, the larger the potential alumni/investor network you can leverage off of to fundraise for your own startup. It’s even better if those exits are within your industry, because that builds pedigree.
Second, check the partners. Check to see their work history. Anything that conveys to you that they have a network of investors, that’s what you should be looking for. While it may be worth searching for possible links to strategic partners and clients, if you’re applying for an accelerator, you’re probably not at that stage. Not yet. You need investors, first and foremost. That’s the focus here.
Third, check the average investment size following the accelerator. This should be readily available on sources like Crunchbase, with investment amounts and dates. This should be a indication as to how easy it is to convince investors both within the accelerator’s network, and outside. However, it’s a rule of thumb at best, so take this with a word of caution.
It’s About the Journey
Whatever accelerator you do end up choosing, just remember that accelerators are companies too. They have their own interests, which may not align with yours entirely. If you’re contemplating whether to attend an accelerator, or take an alternative, just remember — it’s about the journey, not the end.