Electing the right incubator/accelerator and raising capital Richard Pivnicka and Anil Kale
Incubators and accelerators are a popular way for early stage companies and entrepreneurs to create a minimum viable product (MVP) and position the company for fundraising. The National Business Incubator Association estimates there are 7000 incubators globally; at the time of this writing, AngelList was tracking over 3000 accelerators (though just over 60 were actively accepting applications).
The boom in incubators/accelerators means that entrepreneurs can be particular when choosing where to apply and where to attend. In our opinion, selecting an incubator or accelerator is not too different from selecting the right university for your desired major. For most, going to a top-tier university in the program of your choice is the desired path, if you can get accepted. But acceptance rates at top-tier accelerators are even worse than those at top-tier universities: top rated Y Combinator receives thousands of applications and has a 3% acceptance rate while another popular accelerator, TechStars, accepts less than 1% of the 700-1500 companies which apply to their program each year. In contrast, some accept almost all applications because their primary business, like a for-profit university, is “renting chairs”.
So, entrepreneurs need to pragmatically determine their “safety schools” and optimize their applications across several factors:
- Program Type (incubator or accelerator)
- Program Style (onsite or virtual) and Location if onsite (local or in Silicon Valley)
- Sector and Functional Expertise (of team, mentors, partners and investors)
- Business Services (included or discounted)
- Curriculum Content, Acceptance Rate and Criteria
- Class Demographics, Alumni Network and Events
- Seed Capital available and Equity Stake taken
- Fundraising/Exit Success
While the terms “incubator” and “accelerator” are used interchangeably, there are differences. Accelerators tend to have a more structured program and tend to be much more focused on helping program participants raise capital upon graduation.
While not possible for everyone, we believe that attending an on-site program in Silicon Valley is worth the effort because of the “off-campus” access to experienced mentors, angels and VC’s and networking opportunities that are unique to Silicon Valley.
FindTheBest.com has a useful buying guide and comparison tool based on information from CrunchBase but has information related to only 12 incubators and accelerators in Silicon Valley. A more exhaustive list based on AngelList can be found here.
Many accelerators provide $25-$100k seed capital for a 5-8% equity stake. However, as reported on TechCrunch just 27% of companies in CrunchBase that were funded by an incubator or accelerator were able to secure outside funding within a year of graduation and we think funding is far less when taking into account all startups looking for funding. The most prestigious programs do much better – almost 90% of companies graduating out of YCombinator and TechStars are still operating or have been acquired – which implies that startups in other accelerators are seeing limited success in raising capital post-graduation.
Investors are looking for companies with a competitive advantage that can create or disrupt large markets, but more importantly, companies that can execute and scale. To maximize your chances of raising capital, an accelerator should
- help you clearly articulate the market opportunity, your customer value proposition and sustainable competitive advantage, and path to grow sales within your target segments
- guide you on how to position your MVP to capitalize on industry and technology trends being actively funded
- assist you in securing proof points that establish demand and commercial viability/scalability of your product.
Entrepreneurs should look closely at the expertise of the team and mentors, and the quality of the alumni network and events when choosing their target accelerators. Unfortunately, the alumni network is somewhat hard to identify by browsing an accelerators’ web site – make sure to ask for the current alumni batch and their demographics along with some fundraising/exit success metrics when interviewing with the accelerator.
About the authors
Richard Pivnicka is an accountant, lawyer with an MBA in Finance, inventor, angel investor and Honorary Consul General of the Czech Republic.
Anil Kale advises executives and boards of startups and Fortune 500 companies on how to achieve breakthrough growth through incubation, strategic investments and programmatic expansion.