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How to choose a startup accelerator

Startmate applications have just closed for another year. You got your application in, right?

Or perhaps you submitted to muru-D a few weeks ago. Then again, maybe you’re thinking of applying for iLab Germinate‘s summer program or SURFAccelerator‘s second intake.  What about the big-name US accelerators like Y Combinator and 500 Startups? How do you decide? Or do you just hedge your bets and apply to all of them? Are you sure getting into one of these things will, you know, actually accelerate your business?

For the moment, let’s assume you’ve drunk the Kool-Aid and you’re convinced your company would benefit from a good accelerator program. Now you need to decide what “good” means in the context of you and your startup. The intention of this article is not to rate the various accelerators, but to help you decide where to apply, or if you should be so lucky, which offer to accept.

What criteria should you be using to make your choice? Ideally, you’d want to look at the quality of outcomes for the companies that have “graduated” from each of the accelerators. Unfortunately, most Aussie accelerators haven’t been around long enough to make a judgement on that basis. Even Startmate, Australia’s best known and longest established accelerator, has seen only four cohorts pass through its program. While there have been some exits (like Grabble) and significant seed and Series A investments (ScriptRock, BugCrowd and NinjaBlocks to name a few), these latter Startmate companies are still at the beginning of their journey.

Given it’s too early in the history of Australian startup accelerators to point to massive successes, we’ll need to use other metrics to determine the “worth” of an accelerator. Here are a few you might consider.

Mentors and extended network

When accelerators and early stage investors assess the potential of a young company, the biggest factor is the founding team. You should be evaluating the accelerator in a similar way. Who’s running it? Who are the mentors? What are their credentials. If many of the mentors don’t have startup experience, are they highly regarded in their respective industries and will their experience be relevant for your business?

Equally as important is who the mentors can connect you with when the time comes. Do they have the capacity to put you in front of top angel investors and seed funds (most of whom are in the US) when they think you’re ready? Giving you warm introductions to good investors is a primary function of the mentors, so they need to be capable of making these connections for you.

On a more personal level, how engaged are the mentors? Have many of them invested their own money in the accelerator, thereby giving them real skin in the game and aligning their interests with yours? How often do they participate as angels in follow-on rounds?

You should be able to get answers for these questions from people who run the accelerator, from accelerator alumni (see below), or online. Good accelerators are as diligent in curating their mentors as they are in selecting the companies that come through. At some accelerators, if you’re invited to be a mentor one year, it does not automatically follow that you’ll be invited the next year. Quality and engagement trump quantity here.

Outcomes for the fallen

Many, if not most, companies that get into an accelerator don’t come out the other side in one piece, or begin to fall apart soon thereafter. This is the reality of startups.

It’s useful, then, to look at what happens to the founders of the companies that die. In fact, the quality of outcomes for failed founders is probably a good indicator of the performance of the accelerator against the other criteria here.

Do failed founders find roles within other startups in their cohort, either as late cofounders or early employees? The latter requires that a large enough proportion of a cohort’s startups obtain angel or seed funding such that they can actually begin to take on employees. That at least a few of the startups in each batch are beginning to grow their teams is a great sign, and they will be eager to snap up founders from failed teams if it’s a good fit.

If the accelerator’s mentor network is strong and high quality, word should get out pretty quick when things don’t work out for one of the teams. Here in Australia, if your company fails during  or after the accelerator program, you should be getting called by the founders of some of the more mature, well-funded Australian startups fairly soon; sometimes the mentors themselves are after smart people to join them on current or future adventures.

The point is, in startup land, shit happens. In fact, shit happens more often than not. So the quality of outcomes for the founders whose companies hit a wall during or after the program should be a major consideration.

Ask yourself, even if your startup ends up, well, not really starting up, will you personally be in a better position than you were before? The answer should be “yes”. If it’s not, you’re looking at the wrong accelerator.

Think about that, make a call, then put it out of your mind because any accelerator worth its salt will be looking for founders who will do everything and anything to pull their company through the mud out into greener pastures.

Early Indicators

In the absence of unicorns such as Airbnb and Dropbox to point to, we need to find some earlier indicators of an accelerator’s performance. A good, obvious one is the proportion of companies that receive follow-on funding and the calibre of investors making those investments.

A much weaker, but still valid indicator, is whether graduates of the accelerator you’re considering end up in Y Combinator, 500 Startups or Techstars if that is something they want to do. (Ever wondered what dilution sounds like?)

Additionally, what proportion of previous cohorts’ startups are still alive and kicking? And which of them is growing like a tech startup rather than a small-to-medium enterprise?

Specialist and Corporate Accelerators

Corporations are coming to the accelerator party in ever growing numbers. Buoyed by the real and perceived successes of the accelerator model, large businesses are starting their own accelerators or getting behind industry-specific accelerators in a big way.

For some startups, it may be worth considering these options. San Francisco’s Rock Health, for example, is fast becoming the accelerator of choice for health-based startups. Citrix Accelerator in Santa Clara has a great reputation for helping enterprise startups, while Warner Bros Media Camp offers some solid opportunities for anyone looking for strong media connections.

Here in Australia, AWI Ventures is hoping to be the accelerator of choice for finance technology startups. Muru-D, of course, is backed by Telstra, giving its startups access to one of the largest companies in Australia, for what that’s worth.

Common sense says that corporate accelerators should be able to position their startups for acquisition by the mothership, though it’s not entirely clear that startups graduating from corporate accelerators have any particular advantage in practice.

Paying for Ramen and Dhal-Bhat

The money given to startups by accelerators is really not much more than a stipend for feeding the founders cheaply, paying rent and paying the lawyers. The rest gets used on marketing experiments and maybe paying for hosting (although many accelerators have deals with the likes of Amazon and Microsoft, which means you may not need to pay for compute and storage for at least a little while).

The amount of money is not the main consideration when weighing up accelerators, but we’re of the opinion there should be some money given to the startup in return for equity (see below). You have to be focussed on building your company and pretty much nothing else for the foreseeable future, so not having to take on consulting gigs or delivering pizzas just to feed yourselves is important.

Naturally, the amount given will differ depending on where the accelerator is based. San Francisco is a pretty expensive place to live, mainly due to rent, so you can expect accelerators based there to invest more in their startups compared to, say, Brisbane-based accelerators. The more important thing to consider are the terms of investment…

Deal Terms

In a nutshell, the deal terms define how much of your company the accelerator will take in return for their investment (which is the money, yes, but also the overall value the program provides).

The better known accelerators around the world have converged at around 7%, a percentage seen consistently even when the investment amounts differ. Y Combinator, for instance, still takes 7% even though it is now investing more than it used to. 500 Startups also takes 7% for a $75K investment (Ok, so it’s a $100K less the $25K program fee). Techstars takes 6%. Startmate takes 7.5% for $50K and muru-D takes 6% for $40K. You get the picture.

If the accelerator you’re considering is taking 7% equity (or more!) then they should be delivering as much value as the more established players. Use the criteria above to figure out whether that’s true.

The terms should be dead simple, or at least on-life-support simple given that dead simple is a stretch for any kind of legal document. For one thing, make sure the money is yours to do with what you will. The last thing you need when you’re trying to run an upstart business at 100 miles an hour is to require sign-off from someone outside your company. Hopefully this issue has become less common as competition between accelerators has ramped up and founders get more educated about what’s acceptable and what’s not. Nevertheless, you’d do well to double-check.

The investment terms for an accelerator should also typically be standard (i.e., the same for all companies it accepts into the program). If the accelerator’s stake in your company is to be a negotiation with you, they’re not making your life simple. You’re an early stage startup with a few lines of code and maybe a user or two, and the other applicants will be in more-or-less the same situation. Basically, at this early stage, there’s nothing to negotiate and the terms ought to be standard.

Ideally, the terms for your accelerator should be publicly accessible for anyone to download and read. If basic information like the accelerator’s equity stake is not easy to find, you need to ask why.

Take a look at 500 Startups’ KISS term sheet, YC’s Safe document or Startmate’s financing documents for examples of simple term sheets.

Ask an alumnus

What do the alumni say about the accelerator? Seriously, go ask them what they thought of the program, and even your nitty gritty questions about the program’s operations.

If you can’t get a straight answer about, say, mentor engagement from the people who run the accelerator, you’ll get one out of the alumni. Ask them which mentors helped the most and what they brought to the startups. Importantly, find out how the accelerator worked with companies through rough patches (there are always rough patches; actually, it’s pretty much all rough, with a few good patches in between).

Some accelerators ask their alumni for endorsements to put on their website and elsewhere. These are fine, but don’t rely on them. Ask an alumnus in private to get the real story.

Other Considerations

There are obviously many paths to building a successful company, but the main focus in your startup’s early stages should be building something that makes a small group of people really, really happy.

Your accelerator should be helping you figure out what to build and for whom, and they should be encouraging and helping you to find out why that small set of customers is excited about your product. Once you’ve figured out why your initial customers keep using your product, the focus switches to finding more customers who’ll use your product for the same reasons as the initial group, and optimising the methods by which you acquire these new users. Understanding, then growth. The latter is what you need to be a startup, but you can’t reliably do the latter until you’ve done the former.

These two phases should be the meat of what you’re doing during the accelerator program, and providing guidance on this stuff should be the bread-and-butter of the people who run the program. Most accelerators out there at least give the outward appearance of understanding this stuff, so it’s just a question of whether they walk the talk.

Finally, the accelerator should be in it for the long haul, just like you (that goes for later stage investors, too). They should want you to eventually get really big, not to sell out at the first offer of a few million dollars.

Conclusion

You want to get your company off to a good start. If you’re considering applying to an accelerator or accepting an offer from one, make sure you do your homework. It should be obvious that not all accelerators are equal, and some are still yet to demonstrate what value they provide in return for the equity they take.

Our final tip is to choose an accelerator whose managers and mentors have a sense of humour, because you’ll probably (definitely) need one.

Remember, an unsuccessful application to an accelerator is not the end of the world. If you give up on your idea just because you didn’t get in, well, the accelerator made the right decision, didn’t they? Zuckerberg didn’t need an accelerator; maybe you don’t either.

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