If you follow the entrepreneurial space, chances are you’re familiar with accelerators such as Y Combinator, 500 Startups, Tech Stars, and many other notable programs. Many modern aspiring entrepreneurs view accelerators as the key to success for their project.
While these entities can provide a boost to your business, as with most financing rounds it’s important to fully understand the terms of any arrangement before submitting your applications.
Before continuing it’s important to note that the terms incubators and accelerators are not interchangeable. Although the differences are beyond the scope of this article, incubators can be thought of as being geared towards companies who are looking to grow over an extended period of time. In most cases incubators are geared towards scientific projects which require an extensive amount of capital and development before something can be created.
How Accelerators Work
Accelerators are attractive to entrepreneurs due to the fact they focus on helping participants crank out a minimal viable product typically within three to six months. Money alone isn’t what makes the best accelerators desirable. Rather, it’s all about networking.
To gain admission to an accelerator, you’ll typically need to have a team for your company. This requirement is due to the fact that it’s impossible for a single founder to effectively handle every aspect of running a startup. You also need to have a solid application. Although exact acceptance rates vary between accelerators, the acceptance rate at the top ones is typically 1% or lower.
With the previous point in mind, if you’re looking to break into entrepreneurship, getting into an accelerator shouldn’t be your only planned strategy to build your business.
During an accelerator session, participants are immersed in their businesses. Between the ongoing mentoring sessions, peer support and tight deadlines (typically an accelerator session is three to six months) companies go from having nothing at all to having an investment-ready prototype in a fraction of the time it would take to build the company independently.
Participants in accelerators benefit from having access to top mentors who can provide advice and insights to ensure the companies have an advantage over the competition. Additionally, most accelerators conclude with a “demo day” where angel investors and venture capitalists invest in the newly formed companies.
Quality Assistance Comes with a Premium Price
Although accelerators can help you build your company rapidly, this convenience comes at a significant premium. When you work with an accelerator, you can expect to automatically hand over 6 to 10 percent of your venture to the incubator upon admission. Afterwards, if you decide to pursue further funding rounds, future investors will take an additional cut from your business.
Although an accelerator allows you to network with quality professionals and build up your network, many early stage investors tend to avoid accelerator participants because they need to protect their interests from dilution. Keep in mind that the demo days of most accelerators are attended by venture capitalists and angel investors, so an accelerator won’t completely break your chances of securing further capital. It just means that you’ll need to target a different type of investor.
Ultimately, when it comes the entrepreneurial side of your business, an accelerator will take a higher cut of your company at a lower valuation due to the fact they are investing when the company has barely anything developed.
The Importance of Smart Money
As they say in the private equity world, “smart money is better than dumb money.” As I mentioned earlier in this article, when choosing someone to invest in your company, you shouldn’t just take an offer because they’re giving you the most money for the lowest amount of equity. Whenever you get an offer from an investor or even acceptance into an accelerator, you should ask yourself: “What value does this party bring to the table which I can’t achieve with my current team?”
Contrary to popular belief, venture capital funds and angel investments are relatively easy to secure if you have a solid pitch. The biggest benefit an accelerator or an investor can bring to the table should be experience and expertise to help your company grow. The trick is that you just have to know how to make your project attractive to investors.
Choosing Between the Two
As you might imagine, the decision to go at it alone or apply to an accelerator is not the same for everyone. For some entrepreneurs, the structured environment of an accelerator can help provide the discipline they need to propel them to success. On the other hand, if you already have a network and you’re comfortable navigating the entrepreneurial world yourself, then you might be better off without an accelerator.