Financing a Startup Company Series: Accelerators
This post is part of our Financing a Startup Company Series and focuses on accelerators.
Accelerators, such as Y Combinator and TechStars, differ from other sources of early capital: a startup and its founding team move to the accelerator’s location and participate, with other startups, in roughly a three month rigorous program of business development. As part of the program they provide significant mentoring and education, as well as cheap office space and business services. As such, they are well suited to help relatively inexperienced entrepreneurs build their network, hone their pitch skills, develop their product or service, and find their first customers. If a startup successfully completes the program, it can gain valuable access to the accelerator’s network of angels and VCs for the next round of funding.
Accelerators often invest around $25,000 and take a 5-12% equity stake. Some will participate in later rounds, others do not.
Before enrolling in an accelerator, get to know each of the incubators: there are a lot of them and they differ greatly. It is very important to research the program’s strengths and weaknesses. Finding the right fit is very important as a lot of the value provided by an accelerator is bringing together complimentary businesses (and entrepreneurs) into a class, its network of advisors, and its connections in the VC world. Just as there are tiers of universities and universities that are good in one area but not another, there are tiers of accelerators and accelerators that are better in certain industries.
When considering entering an accelerator, read the terms of the deal carefully! Although many try to create “company friendly” term sheets, some accelerators seek ongoing control rights over the company, even after it leaves the program. Be sure that you understand, and are comfortable with, each of the terms before signing.
Finally, often times the money itself is not an attractive economic proposition. It is usually cheaper (in terms of the amount of equity that must be given up) to get cash elsewhere. Founders should think carefully about whether the other aspects of the accelerator experience (mentoring, publicity, education, etc.) make an accelerator a worthwhile undertaking.