Accelerators seem to want a lot of equity for little funding – is it worth applying?
Thursday, May 3, 2012/
I’m thinking about applying for a start-up accelerator program, but it seems like a lot of equity for not much funding. How can I be sure that the program will be worth it?
Start-up accelerator programs are designed for one principal purpose: to incubate start-up businesses so that a successful product can be launched into the market, creating wealth for both the business founders and investors.
The programs usually provide mentorship, access to investors, office space, legal, hosting, marketing and other services for a period of months.
A characteristic of most start-up accelerator programs is providing seed capital to the start-up in return for equity. In general, most programs provide capital of $15-25,000 in return for 5%-10% equity.
These two programs, run principally by Paul Graham and David Cohen respectively, are the start-up equivalent of obtaining a university degree from Harvard or Stanford.
These are the principal reasons why you would consider exchanging equity in your business for funding:
1. Exclusivity and Opportunity
Y Combinator and TechStars receive thousands of applications each year from the best and brightest in the tech world.
Eighty companies a year emerge from Y Combinator and 40 a year from TechStars: to even be considered, let alone “graduate”, you will be part of a select few.
At the conclusion of the program, a “graduation ceremony” or demonstration day is held, whereby you can pitch your business before a seasoned crowd of venture capital investors in the hope of obtaining further funding.
The high reputation of the graduates from these start-up accelerators has led venture capital firms scrambling to do deals.
At the 2012 Y Combinator Demo Day, Yuri Milner and SV Angel offered all start-ups funding of a $US150,000 convertible note investment.
2. Learning and Focus
Most entrants into the Y Combinator and TechStars programs are young (20-30 year-olds), first-time business founders focused on technology, principally in Web 2.0 and social media.
The program is usually over three to four months full-time, with regular weekly meetings.
The participants’ business ideas are critically evaluated by a diverse group of mentors, such as other successful entrepreneurs, investors and technology experts.
Importantly, the ideas and feedback is tailored to your individual business, taking account of the founders’ skills and personalities.
This produces in the founders a strong team, with a proven ability to adapt and evolve ideas so as to be commercially successful in the market.
The start-up incubator, as an initial equity investor, has a vested interest in ensuring that a business launches a successful product and goes forward to the next round of funding, usually at higher valuations.
3. Networking and Branding
Start-ups that emerged from accelerator programs have a stronger network of fellow entrepreneurs, mentors and investors.
Stakeholders see graduating from such programs as a measure of success. It creates visibility that is critical to your future business success.
The issue as to the equity taken by an accelerator program in return for capital is really a minor consideration.
Instead, I would suggest focusing on the program itself. Decide whether this accelerator enables your business to overcome hurdles that you may have spent months trying to solve yourself.
Determine if the intense focus on your business, the desire by all stakeholders in the success of the founders and selectiveness of the program, means that your business has a significantly increased chance of success in the marketplace.
Doing that for your start-up is just smart business.