“I was a skeptic. My hope was that if it taught me something about how to raise money, that would be good enough,” says Bergman, co-founder and CEO of Choremonster, which has developed an app to reward kids for helping out around the house.
Roughly one year and $775,000 in funding later, Bergman is still reaping rewards, financial and otherwise, from his three-month stint with the Cincinnati accelerator. “I’ve had conversations with investors that have turned into capital, I’ve made invaluable networking connections and I’ve learned a lot about how I want to manage my company,” he says. “Our business wouldn’t exist today without The Brandery.”
Startup accelerator programs are popping up every day, available to a wider range of entrepreneurs than ever before. They’re no longer limited to Silicon Valley, and they’re no longer just for tech companies; there are industry-focused programs centered on fashion, food and socially conscious endeavors as well.
While most accelerators provide tangibles such as funding, mentorship and access to potential investors, they’re not a golden ticket to success. A positive experience depends on setting realistic expectations and understanding what these programs can and can’t do.
Cash and Counsel
For many startups, the initial draw to an accelerator is the potential for securing capital to refine their concept or get their business up and running. Companies can expect to receive some funding to get started or gain traction, but the amount of the stipend varies, as does the amount of equity the accelerator receives in return. Yael Hochberg, assistant professor of finance at Northwestern University’s Kellogg School of Management, estimates a range of 5 to 8 percent equity in return for a $15,000 to $40,000 stipend, with the median offer around 5 percent equity for a $20,000 stipend.
The money is certainly a boost, but the real draw for startups is the exposure–to knowledge, experts and funding–accelerators can provide. One of the marquee benefits is access to mentors who can offer experienced insight and advice in a concentrated amount of time.
“For every aspect of building the company we wanted to build, there was a specialist on hand to help us through and learn very quickly what otherwise would have taken a long time to learn,” says Robert Leshner, co-founder and CEO of San Francisco-based internet-privacy protection service SafeShepherd. His team joined Mountain View, Calif.-based accelerator 500 Startups in October 2011. “When we needed to learn about something like SEO, there was a mentor who was incredibly knowledgeable about SEO,” he explains.
Both Leshner and Bergman say they were surprised to find that just as valuable as the mentor connections were the relationships they developed with their program peers. “Being able to speak with so many people about their experiences and bounce ideas off them is invaluable,” Leshner says. “So is having this incredible network built for you of friends that you can trust.”
Despite all the support, entrepreneurs still need to think for themselves. One common misconception of accelerator programs is that the advisors will give participants all the answers they need to succeed. Accelerators do provide access to informed opinions and data, but participants need to process them wisely.
“Part of the learning process is how to handle conflicting feedback from the many advisors and mentors, and trying to understand what’s relevant to make their own decisions,” says Jim Jen, director of Pittsburgh startup accelerator AlphaLab.
Ultimately it’s that receptiveness to feedback that’s key to getting the most out of the accelerator experience. To glean the full benefits of the program, entrepreneurs need to check their egos at the door. “It’s a prestigious thing to be accepted into an accelerator, but the reality is you still haven’t done anything yet,” Choremonster’s Bergman says. “If you come in thinking you’re already a success, you’ll miss out on learning a lot of valuable things.”
The accelerator perk that gets the most headlines is access to financing information and investors. “A huge benefit for us was going through the process and understanding what raising money looks like, and all of the details of building a business with investment,” Bergman says.
The potential to connect with investors–often hundreds of them–at an accelerator Demo Day is a huge draw, albeit one that can lead to pitfalls for participants. Northwestern University’s Hochberg says many have the mistaken perception that walking through one of these programs guarantees funding at the end. “Entrepreneurs need to recognize that even 75 percent of venture-backed firms fail completely,” she says. “I think sometimes that’s lost on them, and it’s true even at the top programs.”
Focusing too much on financing was a pitfall for Leshner and his group during their time at 500 Startups. “There’s a lot of investor interest for companies in the top accelerators, and that became a distraction for our team and took a lot of time away from building our company,” he says. “We finally realized we should be focusing on our product instead of the money.”
That’s not atypical, according to Jen, whose AlphaLab minimizes discussion of financing for the first half of its program. He says such talk can lead startups to put the cart before the horse. “If they don’t have the product and some early market traction, they’re not going to get very far in the funding anyway,” he says, “so the best thing they can do to work on their funding is work on the product.”
When it comes to accelerator programs, a strong team is everything
With acceptance rates to some of the country’s top-tier accelerators hovering around 1 percent, a standout application is integral to getting one’s foot in the door. Of course pitching the product and the market it serves is important, but insiders agree that portraying a strong business team is even more crucial.
“In addition to your product, you’re also being judged on your team,” says Yael Hochberg, assistant professor of finance at Northwestern University’s Kellogg School of Management. “Your idea or product can change quite a bit as you go through the program, in terms of the business model or even what exactly you’ll be producing, so there’s also a lot of evaluation of the team and whether there’s a sense that you fit together well, understand the challenges ahead of you and will be able to be successful entrepreneurs.”
Jim Jen, director of Pittsburgh startup accelerator AlphaLab, says the capabilities of the team need to come out during the application process. “A lot of it is convincing them that as a team you have the passion, the commitment and the drive to make this company happen no matter what,” he says. “Then you need to show you have the capabilities to execute on what you want to do.”
The same is true at the end of the program, on Demo Day. “Communicating a sense of your team and why you’re capable of being successful is much more important than communicating the details of your product,” says Robert Leshner, co-founder and CEO of SafeShepherd. “Your product or idea is likely to evolve, but the team is a constant.”
How do you know if a program is legit and right for you?
Accelerator? Incubator? Shared working space? The past few years have seen an explosion of programs claiming to help startups grow. But not all are created equal.
Jim Jen of accelerator AlphaLab defines a true accelerator as a time-specific, mentorship-driven program designed to provide startups with critical resources to help them make rapid progress on product and customer development. “There are a lot of incubators and shared working spaces that are incorporating a lot of the elements of accelerators, but it’s a smaller universe that applies to the definition of a true accelerator, and even a smaller number that have been around and have a proven track record,” he says.
Northwestern University’s Yael Hochberg is another expert who has concerns about the legitimacy of some accelerators. She fears that not all programs, particularly the newer ones, can deliver on their promises of offering high-quality mentorship, network introductions and exposure to the capital community.
“To help founders, you have to be very good at screening so that you’re only taking in groups that really have a chance of succeeding. And I’m not convinced that all of the accelerators out there are equipped to do that,” Hochberg says. In addition, she points out, there are only a finite number of great mentors to go around.
Quality funding sources are also of concern. It’s important to verify that an accelerator can bring valid investors to the table. “With the top programs, everybody in the VC community will be looking at you,” Hochberg says. “But with some of these newer accelerators, especially regional ones or those in nontraditional verticals, you need to be sure that serious VC shops from outside your area take the program seriously and see its alumni as serious possibilities for funding.”
For assurance about any of these issues, due diligence is key.
Applicants should conduct thorough research online and talk to past participants to verify exactly who is involved in the program, what kinds of connections they have and how many of the accelerator’s alumni have received funding and at what stage.
Making sure an accelerator is a good fit for your particular business is also important. “If you’re a healthcare startup, it doesn’t matter if they’re the best consumer internet VCs on the planet and the mentors are all consumer internet gurus; if you’re doing healthcare, that’s not the right fit for you,” Hochberg says.
With the pool of accelerators expanding daily, doing the research and making decisions can be tricky, but it is crucial to choosing the program that will benefit your business the most. “Equity is an extremely precious thing to be handing away,” Hochberg points out. “You need to make sure that you’re handing it away to an organization that will truly be able to help you.”