The Startup Accelerator Wars [INFOGRAPHIC]
By Daniel Zeevi
Are you an entrepreneur or small business owner? On September 23, 2013 a new law in the U.S. allowed, for the first time in 80 years, startups to tell the world they are raising money whether through their blogs, email and social campaigns. The process, officially known as general solicitation, is an official declaration to the public that you are trying to raise funds for an organization. Though startups can let the public know they are raising money, they are only allowed to strike deals with private and accredited investors. In order for a company to “go public” and actually sell shares to the everyday investor on an open stock exchange like the Nasdaq, it would first have to file for an Initial Public Offering (IPO), which comes with significant overhead costs and typically only occurs when companies need more than 500 private investors (requiring it to go public by law) or want to accelerate their financing.
No matter how you go about it, though, one of the keys to starting a successful new business is to have the funds necessary to cover the costs of your development, maintenance and potential staff each month. The new business paradigm of trying to borrow enough money from a bank or your friends and family to get started is nearly impossible in current economic conditions. For this reason savvy entrepreneurs are now either bootstrapping their companies or looking towards crowdsourcing and startup accelerators as viable options to raise capital. These can be great avenues for speeding up development while gaining exposure in the process. While new accelerators are popping up each day to suit an even wider spectrum of entrepreneurs well beyond the reach of Silicon Valley, competition is fierce. In fact, did you know only about 1% of startups actually get into top accelerators?
The key to getting your foot in the door is compiling a captivating pitch and application, brainstorming a viable product idea, creating a sound market strategy and, most importantly, assembling a strong team. “Communicating a sense of your team and why you’re capable of being successful is much more important than communicating the details of your product,” says Robert Leshner, the co-founder and CEO of SafeShepherd. “Your product or idea is likely to evolve, but the team is a constant.”
Accelerators typically help early-stage projects with high growth potential that are en route to sometimes even larger Series A financing. Startup accelerators look to prep you and get your idea in front of interested venture capitalist firms and angel investors during and after the program. Normally each accelerator hosts a demo day at the end of its program to showcase the new startups to the press and investors. If your company needs more financing to maintain operations or expand after the program, that demo day can be critical, and finding the right accelerator to get you to that point even more so.
So what criteria should you consider when comparing the vast array of accelerator opportunities?
When looking towards an accelerator, the investment amount is always a big factor and varies greatly between firms. The offers vary anywhere from $20K to $100K in funding in exchange for 2% to 10% in equity. Also, the amount of money handed to the startup up front versus in a convertible debt note also varies. A convertible debt note for $100K, for example, is something a startup can trade in for those funds by giving up additional equity in the company later or paying back the loan so to speak at a later time. This can be a favorable option for both the startups and investors since you are essentially holding off on any evaluation at such an early stage while allowing a company to keep itself afloat. A fair price in equity to make good on its convertible debt can be determined later. Also, if a startup on a convertible debt note goes bankrupt, the investors are likely to merely write off the note as a loss, further limiting the financial risk to new business owners.
Funding is a key metric for startups evaluating accelerator opportunities, but it’s not the only perk they should consider. “Entrepreneurs need to recognize that even 75% of venture-backed firms fail completely,” says Yael Hochberg, an assistant professor at Northwestern’s Kellogg School of Management. “I think sometimes that’s lost on them, and it’s true even at the top programs.”
According to Jim Jen, the director of AlphaLab here in Pittsburgh, this distraction can be atypical so they look to minimize discussion of financing during the first half of the program. “If they don’t have the product and some early market traction, they’re not going to get very far in the funding anyway,” he says, “so the best thing they can do to work on their funding is work on the product.”
Besides cold hard cash, accelerators offer startups plenty of other perks for joining including free travel, legal counseling, banking, job listings, web hosting and more. Oftentimes these gifts far outweigh even the most handsome sum of upfront funding. There are lots of great events and competitions for startups to attend across the globe, too, like the Web Summit in Dublin or TechCrunch Disrupt. The cost of transporting your team to and from these summits can be costly, so the free miles offered by certain accelerators will add up quickly when it comes to networking. Startups should factor these options into any accelerator decision.
One thing even the most inventive entrepreneurs are often ill prepared for is legal and accounting issues, so it’s crucial to perform a legal audit of your business before attempting to launch a product to users. Accelerators can also provide avenues for startups to obtain low-cost patents and legal advice for the best ways to protect their intellectual property. Now, just because your company has recourse to patent an idea doesn’t mean you should try to do so without considering other ramifications like the ability to protect it in court from patent trolls or infringing companies as well as its potential use replicated in other technologies.
Accelerators can also promote jobs for you on social media and job boards on f6s and AngelList, where you can find a lot of quality entrepreneurs and engineers ready to become co-founders or employees of your company (if you can sell them on your vision). Lastly, but maybe most importantly for an online business dealing with big data, is free Web hosting. Most respectable accelerators offer some variety of free hosting packages between your favorite cloud providers like Amazon, Rackspace, Google App Engine, Softlayer and Microsoft’s Windows Azure. These free perks can provide a huge boost to your business. The best package I’ve seen offered by an accelerator so far comes from Techstars, which includes all the perks mentioned above and lists the value to startups at a whopping $265,000, more than double its funding of $118,000! This probably plays into why 80% of Techstars-backed companies go on to raise additional venture capital or a significant angel funding round, according to Forbes.
Now, even more important than any money received is guidance from experts who have gone through the very same trials and tribulations that you are about to go through and already have the much needed wisdom and contacts in the areas you need the most help in. Accelerators are a hot commodity these days and you can find some of the brightest tech gurus, designers, marketing experts and product evangelists there. Think of getting one-on-one’s at the Founder’s Institute with Michael Arrington, the creator of TechCrunch, a blog you should dream your startup will be featured in at some point. Or what if you could pitch the king of the pitch deck himself, Dave McClure of 500 Startups, and get critical feedback before pitching even more inspired investors? Now picture this: your startup was part of a Y Combinator class and you could pick the brain of Alexis Ohanian, expert marketing strategist and co-founder of Reddit, while sitting on a bus promoting internet entrepreneurship? Or what if you could shoot the breeze about building a business with Dick Costolo, CEO of Twitter and Techstars mentor? When forming your company, you need people who passionately care about your idea, mentors who’ve been in your shoes and aren’t afraid to shoot holes in your strategy to help you bulletproof your business plan. You need a deep level of understanding and commitment in your mentor relationship for this type of growth to occur. So it’s important to figure out which mentors would be most helpful to you on your business needs. It’s also important that the accelerator you choose will make the right mentors, mentors committed to meeting with startups and not just seeking publicity, available to you. A great mentor can give you a wealth of information and contacts that would take you a career to realize on your own. Not to mention, these mentors are often investors themselves, so if you are paired with the right ones it could lead to direct investment in your company as they become familiar with your business.
A key success factor for any business is its environment, which includes both the people the business surrounds itself with as well as where the business is located. Similar to Foursquare, you should be thinking in terms of location. Where do you want your business to be? According to a report by Startup Genome, the best places to brew innovation in the world right now are Silicon Valley, Tel Aviv, Los Angeles, Seattle and New York.
In order for you to start a successful company, you need to build a company culture, which is where many startups fail to thrive. If you look at some of the greatest companies ever like Facebook, Google and Twitter, they have built ecosystems and hacking cultures around their company sites and APIs to empower communities and developers to use their systems. For you to even attempt something like this, you need to be around other like-minded people that can challenge and inspire you, whether that be on your team remotely or in the shared space provided by an accelerator.
Not all accelerators provide office or incubator space, but many do, like AlphaLab here in Pittsburgh and the Capital Factory in Austin. An incubator is different from an accelerator in that it is a co-working space available at affordable rates for entrepreneurs and small business owners whereas startups often get that space for free during an accelerator program. This isn’t always a given, though, where even the most successful accelerator, the Y Combinator (with a portfolio that includes Reddit, Dropbox, Scribd, Disqus and many more companies you know), actually doesn’t hand out any office space (yet they do ensure enough funding to handle that on your own if needed). See, being able to mix with other startup entrepreneurs, engineers, designers and experienced mentors during your daily activities can lead to an amazing cross pollination of even more great ideas. Another reason having a home for your startup is huge is to make your company more attractive to serious job candidates and interns while giving potential customers and clients a brick and mortar location where they can walk in and do business with you. This is an advantage that too many internet-based companies overlook when staying with a 100% remote team even though that seems like the best option for operating expenses or convenience. Crafting the company culture you really want for your business starts with finding the right environment to flourish in with brilliant people at your side.
5. Audience and Focus
In order for you to make the proper connections, seek funding and successfully launch your business through an accelerator, it’s also important to ensure that the accelerator aligns with your market and has an audience to help you hype that up. Is the accelerator focused on mobile technology or health, for example? How long is the time commitment for the program and what does the curriculum look like? Knowing the accelerator’s areas of focus can help you determine which would be best to apply to and what results you can expect from each one. You can also check out accelerators’ portfolios on their websites or AngelList profiles to see which companies they’ve invested in and review past outcomes. Have any of their startups raised additional rounds of financing? What about successful exits or acquisitions in your sector? Part of the goal of an accelerator is to give you opportunities to pitch different venture capital firms and angel investors throughout the program where companies can land over 10 times the initial seed funding at the end of the program. Talk about an acceleration!
Are you thinking about applying to an accelerator? First, make sure an accelerator is right for you. Some of the biggest startups out there are actually bootstrapped, where the founders were able to maintain operations without the help of a single investor dime. If your company is going to be successful, often times this starts at the core with its founders and a few thousand dollars here and there along with even some good advice isn’t really going to make a difference. Also, by selling a portion of your company at an early stage you could be giving away a significant stake of your startup at a pretty low evaluation if things do work out. On the other hand, many accelerators can help you jump-start your business if you’re lucky enough to get into a good one. Competition is tight, though, where you could be competing with thousands of other companies to get into just a couple of slots offered by each accelerator program.
The quality of funding and mentors should be a concern for you, too. Try to verify if an accelerator can bring real investors to the table by looking at the success of past companies. “With the top programs, everybody in the VC community will be looking at you,” Hochberg says. “But with some of these newer accelerators, especially regional ones or those in nontraditional verticals, you need to be sure that serious VC shops from outside your area take the program seriously and see its alumni as serious possibilities for funding.”
Look for further assurance by visiting the accelerators’ offices and conducing thorough research. Talk with the investors and with previous participants of the programs to gauge what the experience there would really be like. Making sure an accelerator is the right fit for your given industry and vision is paramount. “If you’re a healthcare startup, it doesn’t matter if they’re the best consumer internet VCs on the planet and the mentors are all consumer internet gurus; if you’re doing healthcare, that’s not the right fit for you,” Hochberg says.
Once you find the right accelerator, it’s important to have a clear vision of your business and to make your applications concise. Investors are looking at a lot of applications, so even if you have a great idea and/or cool product demo, it’s essential that you stand out with a solid business plan, revenue model and team to boot, and then deliver a standout pitch!
And remember: always be ready to pitch.