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The Business of Accelerators

Vijay Anand
6th Apr 2013
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JumpHurdles

Accelerators are in the business of creating startups - or atleast taking the first bet. It’s a startup for startups; which means, everything they talk about as risk in venture capital, gets nicely bundled up and gets put on the head of what is the accelerator.Types of Accelerators

Going back to the basics, depending on which accelerator you are involved with, there are two or three key milestones that they would provide value:

  • Spit polish your pitch in a matter of weeks and put you in front of a lot of investors and hope one of you become a hit. (Usually this model also involves accelerating a lot of companies in one go)
  • Have an alumni or a brand that can give you early traction, and mentors who can give you an overview. (working with a startup to dig deep will take a few weeks usually)
  • The hands-on accelerators will work with a handful of startups, but will dig deep. Have a few dedicated personnel whose job would be to help you eliminate market risk (have a product, but there is no market) and also help with Go-To-Market strategy, setting up a board, advisory etc. That’s really the deep dive model and most accelerators won’t touch that route, even with a ten foot pole.

Depending on what level of support you are getting, the duration of the programme will vary, but you get an idea. All of them, in some way will put some money in, quite honestly that would be the easiest (valuation of the company is the lowest and shares are cheaper comparatively - it makes sense to do it).

That’s the Pledge, if you can call it.

Accelerator v/s VC

The accelerator model, no matter how sexy it sounds is a very very complicated and fragile model. It throws the firm on the side of the entrepreneur than the VC. The VC on the other hand gets a rather hefty (or sizeable) management fees of the funds they manage (usually 1-2% of what they manage divided over 7-10years). And the managed fund sizes are usually in three digit millions, so that usually covers for operations.

Accelerators on the other hand, even if they have a fund, owing to the nature of making small bets, the fund size would be small and the management fee, so to speak, usually covers the legality in managing the fund, nothing more. Yes there is a hefty legal fee involved in auditors, lawyers and stuff when you manage a fund.

The accelerator also bear the cost of infrastructure (if its provided), the man power, operational costs, and travel where they go around meeting companies. All of this comes from a very very thin shoe string budget in most cases.

That'd be the turn.

How They Make Money

Now, are they making a sacrifice and killing themselves over a cause? Not at all. But however, the upswing for an accelerator is in those small amounts of equity that they are taking in. If you are a banker and can do a little bit of excel sheet math, you will realize that the approximate 10% that is taken (out of which usually 70 - 80% belongs to whoever brought in the capital also called LPs), is very small and if the venture goes through two rounds of funding or so, will quickly become a 1-2% play. (which is the "carry" that the accelerator makes – very similar to how a VC fund makes its money)

Which means, in order for the accelerator to say make a million in a company (and it usually takes about 3-4 years to think about any reasonable exit, in most cases way more) the company has to be valued, literally, at a billion. And what are the chances of building a billion dollar company? Well, the US has 20 companies that are listed and 40 companies that are privately held – which are the only billion dollar companies in the last 20 years. Close to 30,000 companies get funded in the US per year, so you can see the odds.

The Love Story

What you get is a fantastic community. You work shoulder to shoulder with entrepreneurs and push them to be their best, because quite literally you make money only when they do. Some accelerators - if they are short termed, will go the mass model way (put 30 - 40 companies in a batch), raise the valuation by 1x or 2x and want to dump it on someone else and go to the next batch. They make less money, but over volume, they make more.

Not sure, if that is a model that is exciting for us, personally. I'd rather be associated with one or two companies that stand out, and perhaps stand the test of time - solving real problems.

Honestly though, if anyone were to ask me if starting an accelerator was a good idea – I said, it’s not. Its hard work, but if you love working with entrepreneurs, this is the best place to be. It’s a lot of community building, lot of hard work, with not much money to hire talent - a lot of lonely hours, but along the way you also have the possibility of building a few amazing companies.

Now, that's the Prestige.

PS: Most accelerators (like startups) won’t make it.

About the author:

Vijay Anand is the founder at The Startup Centre, a lean startup accelerator and strongly believes in the model of a 'hands-on accelerator'. Vijay can be reached @vijayanands.

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