Launching an accelerator program could bring exciting opportunities to your Entrepreneurial Support Organization (ESO) and the local startup ecosystem, but there are some important factors you should consider first. Many of us who have spent years in the startup world either as business incubation professionals or entrepreneurs ourselves are intimately familiar with the metaphor of “building a plane while you are flying it,” but there are very good reasons why this approach shouldn’t be taken when you develop an accelerator. If done incorrectly, the implications of running a mediocre program could range from losing a few thousand dollars of your organization’s money to wasting the time of multiple entrepreneurs and giving them false hope. This is valuable time that they should be using to raise capital and build their products, instead of attending irrelevant events and meeting with “mentors” who aren’t really a fit for their stage or industry sector.
To start from the beginning, the true purpose of an accelerator program is to solve a problem in a startup community. Most often, the problem for which accelerator programs are designed to solve is early-stage companies’ lack of capital and connections to investors. Another common big problem, finding product-market-fit, could be solved before joining an accelerator by leveraging government grants, startup competitions, pro-bono mentors, and doing lots of customer discovery interviews.
Startup accelerators shouldn’t be the ones “starting a fire,” but rather the ones who add fuel to a fire that is already burning. They should prepare a startup to receive a meaningful investment by coaching entrepreneurs on how to raise capital, not ruminate on the basics of starting a business. Despite this reality, there has been a proliferation of “accelerator” programs regurgitating the same content over and over again. Talking about the Business Model Canvas and the SMART goal setting approach is all helpful, and has been the norm for years, but if a startup founder has to attend multiple programs to reach their funding milestones, and they are required to listen to the same content, accelerator programs could turn into a real waste of time and resources.
Laser Focus
Some of the most successful accelerators have specialized in a particular area to combat these pitfalls. If you are building a medical device startup, you would be much better off joining a healthcare-specific program versus participating in the generalist accelerator’s large cohort of companies ranging from ed- and ag-tech ventures to SaaS developers. ESOs with specific expertise and networks can leverage these assets as a competitive advantage that allows them to attract strong applicants from the region and beyond.
By positioning your program as expert in a particular area, you are also sending a signal to angel investors and venture capitalists (VCs) that a company in your portfolio is working on an interesting solution. The startup’s admission and participation in your program acts as a veritable stamp of approval that could significantly pique the interest of an investor and reduce the time it takes them to pull out their checkbook.
Deal Flow & Introductions
Think about the primary role of an accelerator as an institution that helps startups look less risky in the eyes of investors. Accelerators are an essential step on the venture success ladder for many high-growth companies. Without these types of programs, ascending a startup from a garage or a dorm room to the doors of angel investors and eventually VCs becomes a lot harder. Therefore, what’s the point of having an accelerator program if you have weak or no relationships with investors willing to talk to the companies you support? If you don’t understand what potential investors in your accelerator’s focus sector or location are looking for, you might want to build these connections first before doing anything else.
Another area where you might want to focus is on developing relationships with larger businesses and their corporate innovation departments. Nowadays, many corporations are seeking external stakeholders for business needs ranging from M&A to sales, and partnerships. ESOs are in a great position to leverage their existing connections, get a better understanding of the local business leaders’ needs, and potentially help them meet those needs by putting them in touch with innovative startups.
Capital & Terms
Last but not least, ask yourself if the accelerator program you are about to launch is going to provide startups with sufficient capital to help them reach their next important milestone and investment terms that don’t scare away other investors. If not, you might want to seriously reconsider your plans. $25,000 was considered a typical check five or six years ago, but is much less so in the year 2022. Today, it is not unheard of for a startup with nothing more than a very basic prototype to raise money at a $8- to $10 million valuation cap. Depending on the investment instrument you might be using in such a case, this could result in a situation in which the accelerator receives less than half of a percent of the startup’s equity at a qualified financing event, despite being one of their first investors.
To protect themselves, many accelerators are increasing the amounts they invest, as well as the in-kind support they provide, but demand more equity from the entrepreneurs in exchange. Unfortunately, this is an area in which some accelerator operators could take advantage of the inexperienced founders they work with and get a desired equity stake using unfriendly investment instruments and terms that significantly dilute the founding team and make the opportunity less attractive for later stage investors.
Before you launch a program and determine how much you plan to invest or what in-kind services you want to deliver, think about the accelerator’s mission and strategy. Are you looking to help the community and be super founder-friendly or are you building this program so you can get a specific return on investment. Finding a balanced approach is sometimes very difficult.
Conclusion
Don’t start an accelerator program for the sake of saying you have one. Be very strategic about it and think about the next steps on the venture ladder – the angel investors and the VCs. Once you know what they need and are looking for, work backwards until you arrive at a solution that adds value to your entire local startup ecosystem. The startups in your program will appreciate you for taking this approach.
This article was first published by InBIA on April 19, 2022