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Accelerators and incubators are now ingrained parts of the startup ecosystem. During the time period 2008 to 2014, the accelerator business model exploded across the startup scene, exhibiting 50 percent YoY growth.
Recently, however, the number of accelerators available to early-stage company founders has levelled off. The reality is that these business models are hard to make work economically. We have seen a number of programs come and go over the last few years. A shakeout of sorts.
As part of this shakeout, however, we have seen some gold standard brands emerge, including Y Combinator and TechStars. The other major recent trend is an increased focus on specific sectors. There has been a shift away from more generalized programs which focus across industries towards accelerators and incubators that focus on an individual sector, such as automotive, retail, or financial services. Some of these programs are independent, and some are sponsored in whole or in part by a larger corporation as part of a broader innovation strategy.
The terms accelerator and incubator are often used interchangeably. However, there are some important distinctions. Generally, accelerators partner with existing companies (usually very early stage) for a defined time frame (typically a few months) in a cohort-based manner. Incubators, on the other hand, usually seek to build up ideas into companies, partnering with entrepreneurs for a longer time period over a relatively undefined timeframe.
It’s important that you get access to a diverse set of people and viewpoints. People from different gender and ethnic backgrounds, and also people with varying industry experiences.
Founders seek out these programs in order to “stack the deck” for their companies or ideas. In essence, they are looking to gain access to financing, a proven process, and a high-powered network that will give them unfair advantages in their markets relative to competitors. The right accelerator or incubator can materially change the prospects of success for a founding team. The ability to raise follow-on financing is only one metric of success (more on this topic later), but there is study after study that points to graduates of top accelerators raising many multiples of capital more than founders who don’t go through accelerators.
Early-stage companies and ideas are fragile, and partnering with the wrong accelerator can be destructive. Just like you would do extensive due diligence on a potential investor or executive coming into your company, founders need to be thorough about selecting an accelerator or incubator partner.
The best resource is to talk to other founders who have gone through the program you are looking at. Aside from that, talk to other people in your ecosystem – VCs, service providers, mentors, other CEOs – to get a balanced view that you can use to make your decision.
Your first decision should be around whether you need a partner program at all. There have been some very disruptive unicorn companies such as AirBnB, DropBox and Heroku who came out of accelerator programs. Importantly, of course, many other successful founders decided to go it alone without the aid of these programs. Founders need to carefully weigh the pros and cons of going through an accelerator or incubator process. As you talk to people to make your decision, here are some factors to keep in mind.
Like anything else in business, the success of an accelerator or incubator program hinges on the people who are involved. Preferably you want the managing directors of the program to be entrepreneurs themselves or, alternatively, to have had a lot of exposure to entrepreneurs like yourself. There is really no substitute for direct operating experience and having “been there, done that.”
Outside of the managing directors, it’s important for you to get a view on the mentors that will be available to you. Do these mentors have extensive experience helping companies at your stage? Do at least some of them have direct experience in the industry and/or business model you are in? Will you truly get their time and attention, or are they simply headshots and names on the accelerator’s website? Dig in on all these questions.
It’s important that you get access to a diverse set of people and viewpoints. People from different gender and ethnic backgrounds, and also people with varying industry experiences. Diversity breeds performance — access it and demand it wherever and whenever you can.
Finally, get a good read on the other companies and founders that will be in the program with you. What companies have gone through the program before? Who else is being considered for admission into your cohort? Will you have access to a good peer group as you go through the program? Will you have access to a powerful alumni group of companies and founders once you graduate?
After the people factor, you next want to focus on a program’s results. The two most tracked metrics are “follow-on financing raised,” and “exits.”
Follow-on financing generally refers to the total money raised by a program’s portfolio companies after they complete the program. This can be a misleading number so it is important to dig deeper. While the total money raised is good to know, it’s essentially a vanity metric as it is aggregated and spans multiple rounds into the future of a company. What you really want to know is what percentage of companies who go through the program immediately raise a follow-on financing round, how much, on what terms, and from whom. This way you can understand what the true prospects are for your company to do the same.
Exits are another measure of the success of a program. Again, it is dangerous just to take the aggregate exit dollar value and look at it in isolation. Try to understand exactly when their portfolio companies were acquired, by who, and why. Also, understand what role the accelerator or incubator played in getting the company to the ultimate exit. Attribution is important so you can understand the true value-add of the program you are evaluating.
As you interview past founders and others, look for other evidence of results that may not show up in the hard numbers. What percentage of the founders you talked to actually got to true product-market fit? How many customers did past portfolio companies get as a result of the program’s network? How many key hires were introduced by the managing directors or mentors?
Terms and other factors
These programs generally seek to own equity in your company for the money and assistance they provide you. It’s important that you are very comfortable with what you are giving up relative to what you are getting. Dilution can be very expensive, of course.
Many of these programs require that you and your founding team are physically present in their facilities.
For accelerators, it is rare that you will see programs that ask for more than 10 percent of your company in exchange for admission. Anything more than this, and you need to be skeptical. Incubators, on the other hand, will usually look to own much more. This is because they are typically providing much more hands-on value, spread out across a smaller portfolio of companies, and for over a longer time period.
The amount of financing provided by these programs varies widely. Accelerators tend to give in the $50,000 to $150,00 range. Incubator data is harder to quantify, but usually goes well above this investment. On top of cash, these programs will also provide other non-cash resources such as founding team members, hands-on advice daily, facilities, and accommodation in some cases.
Regardless of the equity price of admission or amount financing, make sure there is a great a chance that the value you will get will more than cover the dilution you will experience.
Other considerations include factors such as location and culture. Many of these programs require that you and your founding team are physically present in their facilities in order to receive maximum benefit. If you need to relocate your team, this can be an expensive and disruptive exercise. Consider your ability to move your company, even temporarily, very carefully. Finally, also make sure you consider the culture and working conditions of the program. Is there are a culture that matches your own desires and aspirations for you and your company? Does the program breed collaboration and performance?
Accelerators and incubators can be an incredible value-add to early stage founders. Consider some of the above factors, and you will be well-positioned to understand whether these programs can be helpful to your entrepreneurial journey.
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Photo by Annie Spratt