As soon as your company’s name becomes listed in a directory like Crunchbase or Pitchbook, don’t be surprised if your email inbox becomes filled with exhortations to apply to an accelerator or incubator. Even if you don’t receive these missives, you will no doubt stumble upon articles about how this or that large company got its start with two or three bright young people pivoting from one idea to the next in a famous accelerator program like Y-Combinator, TechStars or 500 Startups.
Should you consider joining one of these programs yourself? Here’s what to consider.
Some networks work
One of the most significant benefits you can receive from an accelerator program is access to its network. Many young companies are initially judged based on whether more established companies are using their technology or product. Incubators and accelerators that have been around for many years and have ended up producing a number of large and ongoing companies may be better suited to help your company get its first toehold with some brand-name clients.
Do not just take it for granted that the name-dropping by accelerator promoters will result in sales for you. Ask how many of their prior participants ended up landing paying reference customers from alumni or partners of the program. Every accelerator will have one success story to tell you; however, that might not be representative. Pick a cross-section of 10 or 20 companies that have been through their program and ask specifically how many clients each one landed as a result of participation.
Beware survivorship bias
Every accelerator and incubator focuses on touting their success stories. It’s possible that many of these companies would have been successful regardless of whether they joined the accelerator program or not. In order to get a true understanding of the benefit of the proposed program, you need to look at how many companies overall participated in the program and the outcome for each of them, not just the token high flyers. Is there truly a disproportionate rate of success when you examine the entire portfolio?
What is the cost?
Many of the incubators and accelerators will seek a piece of your company, perhaps in exchange for a small amount of cash or just the right to participate in the program. Some incubators and accelerators may also charge an upfront fee. In the early days of your company, your cash is scarce, and you may be trying to hold onto your equity until it hits a higher price. So how should you evaluate the cost of these opportunities?
If the incubator or accelerator is offering to invest, consider the pre-money valuation and the amount of capital to be provided. Is it enough to allow you to run for a while and hit key milestones? If not, you need to be careful about setting a valuation precedent for subsequent investors. On the other hand, if there is a track record of companies receiving a step up in valuation upon exiting the accelerator, there is less cause for concern. If the rest of your diligence indicates that the accelerator can add a lot of value, then selling a small piece of your company for a somewhat lower price may be more than offset by key introductions made by the accelerator program.
Is there such thing as a free lunch?
Many accelerator and incubator programs are entirely free and can provide office space, mentoring and even free lunches. Why would someone set up such program? Typically, it’s because a large company is sponsoring it and is scouting for future partners and innovative ideas. In the legal tech field, there is the LEXIS-NEXIS Legaltech Accelerator. In the enterprise-software world, there are accelerators operated by Salesforce and SAP. The Plug and Play Accelerator works with a number of large industry players to develop accelerator programs focused on particular verticals. For startups where the founder is affiliated with a particular academic institution, there are often accelerators to support students and alumni, such as StartX from Stanford and Skybridge from Berkeley.
All of these fee-free programs are worth investigating because they often provide similar mentoring benefits and a valuable network of prospected advisors and partners without any upfront fee to be paid by you. Often they organize a demo day that will help your organization get publicity and meet members of the broader community who could be subsequent investors, customers or distribution partners. Think about which large companies play in spaces adjacent to your business and start investigating whether they have accelerator program. Call the alma mater of your founders and inquire there as well.
Many programs promise discounts on a variety of services that could be of use to your company. Before you get too excited, you need to investigate whether those discounts are cumulative with other ones you received or are subject to some other type of minimum purchase. Also be wary of discounts for a service whose price will escalate dramatically afterwards and whose switching costs are high. It may not be worthwhile using an expensive service for free if it takes you a long time to set up and you need to spend many more hours disentangling yourself from it when the price increases.
Often times, each accelerator offers similar discounts on similar services as the other accelerators. These discounts tend not to be cumulative, and you could discover that the discount promised you by a particular accelerator is illusory because you already used it at a prior accelerator or through some other channel.
Reputation matters … sometimes
If you are following the market, such as B2B, where customers may be wary of a new, unproven entrant, membership in an incubator or accelerator may give your new company a reputation boost if the accelerator or sponsor is known in the industry. Think of the accelerator as a miniature “stamp of approval.” Such a stamp is only useful if those you’re trying to impress are familiar with it and it has a high-quality connotation to it.
For some types of products and services, such as B2C offerings, your prospective customers may be individual consumers who are more focused on the details of your offering than your pedigree. In such situations, coming out of incubator or accelerator may do little for you in terms of reputation. However, even in the B2C setting, it is often important to establish relationships with other businesses who can help you distribute, market or otherwise promote your product or service. Those intermediary businesses may be more likely to give you the benefit of the doubt if they know that an accelerator or incubator that you’re associated with has a good track record and high-quality companies.
Time is of the essence
When you’re starting your business, you’re almost always under-resourced. Your scarcest commodity is probably your time. How much time commitment does the incubator or accelerator require? Are you going to have to take classes about topics you already know about, perhaps better than the instructor? Do their mentors have deep industry or subject-matter expertise that exceeds your own? If you cannot answer the aforementioned questions affirmatively, tread carefully. Odds are high that your time might be better spent building your business than hearing advice from a fly-by mentor with insufficient perspective and not much stake in the outcome.
In the end, you need to base your decision on the near-term needs of your company. Are you most in need of reputation boost? Or introductions to prospective clients? What is the true track record of the accelerator in delivering that to all of its participants — not just the high flyers who survived? If you need to raise more capital, get a study of how graduates of that program have fared in the fundraising market. You probably know your business needs better than anyone. Only settle for programs that meet your actual business needs, not those that proffer a long list of features that are not in your top one or two near-term objectives.
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Original source: Entrepreneur