March 25, 2020

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by: Jonathan Hung

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Categories: Investing

Is A Startup Accelerator Right For You?

Startup accelerators are one of the best ways for new businesses to build their exciting new ideas. For many big-name tech companies, being in a startup accelerator was the first step in a long journey towards an initial public offering (IPO). Airbnb, Stripe, DoorDash, and Dropbox all started as an idea in a startup accelerator. These fixed-term programs help budding entrepreneurs get started with all the tools and resources they need to make their ideas shine.

If you are an entrepreneur that is in the startup space, you may be wondering if a startup accelerator is right for you. To answer that question, we need to analyze the details of what a startup accelerator does, the application process, and some of the benefits of going this route. Let’s take a look at each of those aspects.

Table of Contents

  1. What Is A Startup Accelerator?
  2. What Are The Benefits And Downside?
  3. I Have A Startup. How Can I Get Accepted?
  4. How Much Will Your Startup Pay To Join?
  5. What Is The Success Rate Of Startup Accelerators?
  6. Is A Startup Accelerator Right For You?

What Is A Startup Accelerator?

Most budding tech entrepreneurs have heard the term before. They know that some of the hottest software companies around have started in one of these accelerators. However, they may not be familiar with what these organizations do.

Accelerators are independent companies that typically accept prospective companies into a cohort. For these growing companies, startup accelerators provide “some combination of education, capital, co-working space, product-development support and access to a strong support network.” They often have mentors, networking opportunities, and other valuable financial and non-financial resources that help get startups off the ground.

The reason these accelerators work on the cohort model is that everyone should progress towards a demo day. On that day, venture capitalists will come, look at the product that you have built, and will decide whether or not to fund you. Think of it as a semester in school. You work towards a project for three months or so, and then your teachers grade it. In this case, though, instead of receiving grades, your business can have investors.

To illustrate with an example, suppose you and a co-founder have an idea for XYZ App. You apply to one of these accelerators. They like your idea enough to accept you into the program, and you agree to the terms. The accelerator provides you with some benefits, like money, space to work, and so on. It also offers plentiful opportunities to meet with and learn from other founders who have built successful startups. It also helps you navigate legal complexities like incorporation and equity terms. You and your co-founder spend the next three months or so feverishly writing XYZ App, learning about successful startups, and meeting people in the industry. It’s an immersive experience!

At the end of those three months, you demo XYZ App to many venture capitalists. One of them likes your idea and provides you with the money necessary to take your plan to the next level. Using the skills you’ve learned, your business has a much higher chance of succeeding and raising funding compared with going at it alone.

There are 170 or so startup accelerators in the United States, each doing hundreds of deals usually. If your business doesn’t get accepted into one organization, it’s not the end of the world. You can always apply for others to see if they will let you into their program.

What Are The Benefits And Downside?

Like most business decisions, using a startup accelerator has benefits and downsides. On the whole, there tend to be more benefits for most startups than drawbacks.

Benefit: Lots Of Perks

Being in a startup accelerator has many significant perks. You’ll gain access to mentors and insights that you would never have otherwise gotten. Some accelerators will provide you with seed capital. Others will provide proper working space. Your idea and vision will find immense support from a community of people who are eager to see you succeed. These perks alone are difficult to obtain through other channels and have propelled many entrepreneurs to achieve more than they ever thought possible.

Downside: You’ll Probably Give Up Money Or Equity

Joining one of these programs is not free. It costs real money to administer and run these cohorts. As such, most of these companies will expect a share of your company in return. This share could be 5-10% as a SAFE agreement, or it could be money upfront. Since there are so many different accelerators, each has its unique way of doing things. However, you should expect to pay something to join.

Benefit: Fixed Vision And Clear Goals

Instead of focusing on running your business and trying to track down investors, you can, instead, have a singular goal of getting your product ready for the final demo day. It’s a great way to have a clear path as to what you need to achieve.

Downside: Challenging To Get Into And Stay In The Program

Since only 3.8% of applications are accepted, on average, to these programs, it’s notoriously difficult to become part of one of these accelerators. Therefore, if you want to get in, you will likely need to dedicate some time and resources to ensure you have a top-quality application that stands out. It can also be challenging for some people to stay in these accelerators because, usually, they require people to be there physically. If you apply to an accelerator in San Francisco, for example, then you should expect to be there, at least from the start to the end of the demo day. Founders with families, aging parents, or other obligations may find it challenging to relocate.

Benefit: Demo Day!

One of the top benefits of having your startup join one of these accelerators is the demo day. This day comes at the end of the cohort. Venture capitalists all come in one place to look at your idea. If you pitch them correctly and have solid numbers, you might get a substantial investment in your business. If you don’t join one of these programs, then you’ll have to find investors on your own, which can be a substantial amount of work in and of itself.

I Have A Startup. How Can I Get Accepted?

If you have a startup or an idea that you’re looking to take to the next level and a startup accelerator sounds like it is right for you (what you’ll learn in one of these programs is invaluable), then the next step is to apply and be accepted.

Getting into the top accelerators in the country is not easy. One report suggested that as few as 3.8% of all applications to accelerators are accepted. For every 20 startups that apply, only one receives an acceptance letter. Much like universities, there are more “prestigious” accelerators, and those organizations have an acceptance rate of around 1%. It’s more competitive to join one of their cohorts than it is to get into most Ivy League schools!

There are a few ways you can help ensure you are the one that the accelerator picks.

Have A Big Idea

You’re going to want to tackle a well-defined, big market with your startup. If you can say that you’re looking to disrupt a $1 trillion industry, that makes for a much better case than saying you’ll provide some software that five people in the world will want. Your idea should have massive market potential, both in the number of users and the amount of revenue your business can make.

Have A Solid Team

The vast majority of people accepted into these programs have at least one co-founder. Most startup accelerators will not refuse your application if you are the sole person in your business, but you will face significant headwinds to being accepted.

Nail Your Interview

Each of these organizations will require an interview before they accept your startup. You’re going to need to nail that interview to get into the cohort. Make sure you know all your numbers, your goals, and your ideas. You’re going to need to discuss all of that in your interview.

How Much Will Your Startup Pay To Join?

There isn’t one answer to that since each startup accelerator sets its pricing. Usually, you can expect to give up 5-10% of the company. These are typically in the form of SAFE notes (simple agreements for future equity). At your startup’s first funding round, these SAFE contracts convert to 5-10% of your business (whatever you agreed upon) in the form of preferred shares.

Be aware that some organizations also charge fees for joining, which typically reduce the seed capital they provide. So an accelerator might provide $150,000 in seed money but charge a $25,000 payment to administer the program. Naturally, this means that startups only receive $125,000 in cash after the accelerator deducts the fee.

Of course, each startup accelerator is different, but the biggest ones ask for a 5-10% share in the company.

It’s worth noting that the company’s current valuation usually doesn’t factor into these investments or percentages. Even if your startup is worth $1 million already, most of these companies will provide a fixed investment in exchange for a predetermined equity percentage. However, lots of companies still go through the program for the valuable advice, guidance, and support they provide.

What Is The Success Rate Of Startup Accelerators?

Given all the potential benefits that startup accelerators have to offer, one would assume that the success rate of companies that go through this process would be much higher than those left on their own.

For the most part, these companies do have a better success rate than the average small business owner. Recall that 20% of all businesses fail in their first year. 50% fail by their fifth year, and 70% fail within ten years. When starting a small business, statistically-speaking, you’re more likely to fail than not.

With startup accelerators, though, the picture is much different. TechStars, one of the more prominent accelerators, reports that 85.8% of its companies are either active or acquired at the time of this writing. Y Combinator, another prestigious accelerator, has companies that went through their program that are worth a combined $155 billion.

Getting into one of the top accelerators is not a guarantee of business success. Still, when compared with the number of small businesses that fail, it’s clear that accelerators help quite a bit since corporate alumni are at such high valuations and are still around many years later, on average.

Is A Startup Accelerator Right For You?

If you’re still wondering if a startup accelerator is right for you, the answer is, yes, probably. That’s assuming, of course, that you can get into one since the acceptance rate is so low!

Startup accelerators are one of the fastest ways to grow and scale your business. Companies that exit these programs have a much easier time finding funding than those who go at it alone. While the thought of giving up 5-10% of your business’ equity might be scary, the benefits that you receive from these accelerators is probably worth it in the long run.

If your goal is to make it big – huge, in fact – in tech, then you need to consider joining a startup accelerator. Their expertise and connections will prove to be invaluable as your business continues to scale. The benefits outweigh the positives, on the whole, because these organizations are so beneficial for the startups.

The “hardest” part of joining a startup accelerator is that many of the top ones have such low acceptance rates. Some of them have acceptance rates in the low 1% range. Others have higher acceptance rates, but then, usually, the data on their success rate isn’t as readily available. There are some things you can do to give your application a better chance of success, like having a team and having a big idea, but those have no guarantees of being able to secure a spot in the cohort.

If you’re looking to build a startup, and you need guidance or assistance, startup accelerators are likely the way to go. You’ll learn how to develop and grow your business, both in terms of customers and funding, in ways you never thought possible before. If that sounds appealing, then a startup accelerator is right for you!