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Startup accelerators are more than sugar daddies

By Jeremy Hintz / September 23, 2014


Startup accelerators are more than sugar daddies
Starting your own business can be tough. There are many obstacles to overcome between founding a startup and striking it rich. One obvious hurdle apparent to anyone who has thought about founding a startup is not having adequate funding. Another hurdle that any honest first-time entrepreneur will admit to is not having a clue. Enter startup accelerators.

Ins and outs of an accelerator

A startup accelerator is an intensive program designed to kick-start a new business and take it from amateur hour to the big leagues. Accelerator programs typically last anywhere from 3-6 months and provide companies going through the program with several mentors, work space, an invaluable network of other successful entrepreneurs, and a highly visible platform from which to solicit funding. This platform generally takes the form of a “demo-day” where the startups’ products are put on display and founders pitch to hundreds of venture capital firms at once. Accelerator programs are highly competitive, with admissions numbers for the top-tier hovering around 1-3%.

No, they’re not the same as incubators

One common mistake people make when talking about accelerators is equating them to incubators. While there are several similarities, incubators and accelerators offer startups pretty different approaches to getting their ideas and products off the ground. Founders should choose one or the other based on what they’re looking to walk away with. Incubators are generally a better fit if you are hoping to keep complete control over your venture, but want guidance here and there from a network of other entrepreneurs. Incubators typically take little to no equity and don’t always have a specific goal for their companies, but rather look to provide assistance where it is needed.

Accelerators, on the other hand, look to prepare you for a specific milestone, often Series A or early seed funding. Accelerators generally take a bit more equity (3-10%), and have a more structured process in place that dictates what a startup must accomplish during its time before it “graduates” from the program. Accelerators are seen, as the name might imply, to quickly ramp your business up to the point where you can receive higher valuations and receive more funding in a relatively short amount of time.

Too good to be true?

It may seem absurd at first glance that there are so many programs that claim to take companies from relative no-name to superstar darlings in VC circles in a mere quarter. Conventional wisdom (and maybe common sense) would suggest it takes longer than a quarter to increase the value of a company to the extent these programs claim, but as we have seen time and again, the advent of cloud and mobile technologies has turned conventional wisdom (and yes, sometimes common sense) on its head.

The reality is, tech companies that leverage these new technologies can become very valuable in a short amount of time. Consider Reddit, Heroku, Dropbox, Airbnb, and SendGrid, just to name a few. All are graduates of accelerator programs, none of which are over a decade old. All of these companies have built, raised funds, and grown their businesses at a very rapid pace.

Many people point to the high valuations and rapid growth as signs of a bubble. While it’s true that each accelerator program has its share of failed startups and overhyped wannabes, the cream of the crop is hard to argue with in terms of the customer-base, growth, revenue, and many other metrics that you would look for in non-tech companies. If you pay attention to the tech scene at large, you’ve likely at least heard of many of the top accelerator programs. Let’s take a second to dive into some of the larger accelerators at an entrepreneur’s disposal.

Y Combinator

Y Combinator is arguably the most prestigious and sought-after accelerator program for startups. As of Summer 2014, YC altered its terms to include set numbers for the number of shares and amount of money exchanged during the program. YC takes 7% in exchange for $120,000 of seed money. Founder Paul Graham proclaims that the expected growth rate of companies while enrolled in YC is 5-7% a week for the duration of the 3-month process.

There are two classes of companies accepted each calendar year, and YC’s demo days are widely viewed as two of the top events in tech. Some notable portfolio companies include Dropbox, Disqus, Heroku, Airbnb, reddit, and Scribd. As of May 2014, Quora also announced they would be going through the program, which would make them by far the largest company to do so.

Techstars

Techstars is arguably 1B to YC’s 1A. Techstars has multiple boot-camp locations: New York, Seattle, Austin, Chicago, San Antonio, Boston, Boulder, and London. Techstars has a mere 1% acceptance rate, most likely because of the fantastic mentor network, which includes Foursquare CEO Dennis Crowley, tumblr founder David Karp, and many more. Techstars offers $118,000 for a 7-10% cut of the companies in its program.

On top of that, a cohort of many well-known VCs gives each company $100,000 that will convert into equity when the company reaches their Series A round. Techstars’ demo days are huge, well-attended events, both by VCs and by the tech community and media. Some notable portfolio companies for Techstars include SendGrid, Orbotix, OnSwipe, and FullContact.

500 Startups

500 Startups is a slightly less structured accelerator program. Participants receive a net of $75,000 for a 7% stake in the company. In exchange, portfolio companies receive advice and mentorship, an “MBA on steroids” curriculum, and more. Some of the big-name mentors available to 500 classes are Hunter Walk, Sriram Krishnan, Jenny Gove, Maneesh Arora, and their startup alumni list includes MightyText, Fitocracy, and Lend Square.

Beyond the above well-known accelerator programs, there are tons of opportunities for early-stage startups to get off the ground. Large companies like Samsung and even Disney also have their own accelerator programs.

Taking your startup from nothing to something has never been easy, which is why over 90% of entrepreneurial ventures fail, but accelerators offer a big help to the companies that are fortunate enough to be accepted. With the right mix of mentorship, connections, and capital, startups lucky enough to get into an accelerator program have a much better shot at making it big.

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