In 2005 an American investor and entrepreneur called Paul Graham created what is now known as the first business accelerator program, Y Combinator. He had decided to invest small amounts of money into a cohort of startups/entrepreneurs focused on the tech industry. This cohort was supported as a group to further develop their ideas and businesses. Paul Graham’s aim was to create a more efficient form of investing by following the same terms and offering the same support throughout the different startups in the cohort.
Ever since then, the concept of a business accelerator was spread all over the world. First from the US to Europe, and from Europe it became a global phenomenon.
Universities and colleges have only recently started to delve into the study of accelerators. Therefore, there are not many large data sets nor studies available on the subject. This makes it harder to assess exactly how successful these programs are and also brings difficulties in finding a single definition or meaning.
Although there are some uncertainties regarding accelerators, the enormous growth and expansion of these entities is a well-established fact.
One aspect that every business accelerator has in common is that they are programs with the intention of accelerating the development of an idea or startup. Moreover, the programs usually have a fixed timeline, lasting around three months in most cases. However, there are programs that last longer, in some cases up to twelve months.
The program should provide a combination of mentoring, networking, education and funds.
What are the key characteristics of a Business Accelerator?
For a business to qualify as a business accelerator, it should at least adhere to the following characteristics:
- A program characterized by having a fixed timeline, start and end date
- Work with a cohort of startups or entrepreneurs
- Offer a group of mentors with expertise in different industries to support the startups.
- Mentoring to share tacit knowledge
- An education program to transfer acquire knowledge
- A selection process for the cohort to ensure the startups taken in are the ones with the most potential.
If a business entity does not have these features, it should, in most cases, not be defined as a business accelerator. Although these businesses could still offer “accelerator-like programs” and aim for and achieve similar results.
These criteria are important because a business accelerator is seen as a business that can create efficiencies for all parties involved, which is one of the main reasons they are seen as useful.
What differentiates Business Accelerators from other forms of Startup support/funding?
If done properly, a business accelerator should bring together different groups of stakeholders within their program, and arrange interactions between these stakeholders in an efficient manner.
This can be done by starting off with an extensive selection process to create a cohort that only includes the very best of startups/entrepreneurs in their respective classes. The selection process and interviews need to be done by respected individuals to ensure a high perceived quality and reputation. This is especially important as the perceived quality of the cohort brings a lot of value for the accelerator in the way of being able to attract more quality mentors and investors.
One of the other key aspects of an accelerator is the presence of mentors. The mentors could be considered the most valuable part of the program because they are able to share tacit knowledge with the startups. The sharing of tacit knowledge is what differentiates accelerators from investors who only provide funds.
The mentors find value in the cohort, while the cohorts find value in the mentors. Both find value in the accelerator which is the entity that brings them together.
The manner in which a business accelerator gathers startups and then manages engagements with the startups during a short program with a fixed timeline could be compared to a university bringing together students into classes. The mentors can engage with all the different startups at once, so new information and knowledge can be shared more efficiently.
Furthermore, the investors, corporates, and others can get introduced to the entire cohort at once, which saves a lot of time and effort otherwise spent on arranging separate meetings.
In case a startup accelerator is also sponsored or in partnership with a corporate or government agency, the efficiency rises even more because of the ability to connect more different stakeholders within the startup ecosystem.
The mentors operating within a network in an accelerator need to have diverse backgrounds. This is essential because the information and expertise they bring in needs to cover many different areas and industries. Having mentors with similar backgrounds would lead to a lot of redundant and similar knowledge.
The entrepreneurs need access to information and knowledge that they do not yet possess. Furthermore, different mentors need to bring different knowledge and information to the table.
The mentors having different backgrounds is also important for the sharing of networks. If most of the mentors work at the same company, they will likely have overlapping networks, which decreases the value of the individual mentor. On the other hand, if the mentors have diverse backgrounds, the networks available to startups will be much broader, thus creating much more value for the accelerator program.
The real value in an accelerator program comes from the ‘social capital’ it can offer. The social capital is of value to all the stakeholders involved in an accelerator program.
The social capital is also of importance to the mentors. The mentors get introduced to other mentors and people they did not connect with yet before. The following could be considered as the most valuable benefits for the mentors:
- Gaining access to new information and knowledge through startups
- Expansion of personal networks through new mentors, sponsors, investors, and others.
- Self-promotion, the mentors get promoted at events, articles and startup websites when mentorship proves to be successful.
What is the Business Model of a Startup Accelerator?
The business model of a private accelerator can be summarized as the following:
1- Raising private capital from angel investors and/or venture capital firms. The fund commonly has limits regarding its lifespan and purpose. The intention of the fund is to support a startup cohort in a single year or a couple of years. In some instances, the capital comes from the government, foundations or grants instead of private investors. Most accelerators also have sponsors who can provide things like accounting and cloud/web services in return for publicity.
2- Go through a selection process for startups and pick the very best for accelerator program admission. Cohort size could range anywhere from 5 to 40 startups depending on the accelerator. Upon admission to the program, provide funds for the startups in exchange for equity in the startup. The amount of equity a startup needs to provide in exchange for funding usually ranges between 5% and 10%.
3- Let the startups go through a program that commonly lasts about 3 to 4 months. The program includes mentors, coaching, research, development, training, and networking.
4- Organize a pitch day where the startups will be pitching their businesses to potential investors and others within the startup ecosystem. Private presentations for investors can also be organized. Provide advice to the startups on how to attract and process investments.
5- After the pitches, some startups will have managed to raise more capital, others will fail and go out of business. In some cases, follow-on investments will be provided for the best performing startups, in conjunction with outside investors.
6- Ultimately, some of the startups are bought by larger firms, go through an initial public offering (IPO), get recapitalized or reach liquidity for the shareholders in some other way. The accelerator liquidates the shares and pays back all the respective investors their initial investment amount plus a certain amount of profit. Some profit will be reserved for the management of the accelerator.
What are the benefits of an Accelerator program?
For startups, accelerator programs have a variety of benefits that are hard to find anywhere else.
- Validation of your product and evaluate whether the market is of a suitable size
- Receiving advice on how Venture Capitalists pick businesses to invest in
- Get extensive support from mentors, experts, and corporates
- Rapidly advance the learning and growth process through activities provided by the program
- Gain access to angel investors, VC’s, and family offices
- Make use of the accelerator’s media and networking channels to access potential customers
- Further develop entrepreneurial skills to successfully run a startup
- Mitigate the risks involved in running a startup by receiving support from mentors and gaining capital from accelerator fundraising
- Get an expert outsider’s perspective of your business through strategic mentoring sessions.
- Accelerate company growth via marketing and sales advice from experts and peers
- Boost motivation and morale by being introduced to entrepreneurs with similar states of mind
- Receive further support after the accelerator program from the mentors and by joining alumni groups
A startup accelerator is a fixed-term, cohort-based program for startups, offering seed investments, mentorship, networking opportunities and education in return for equity in a startup. The program concludes with a demo day where the startups pitch their businesses to attract potential investors and increase awareness.