When choosing to invest in a startup, you may see highlights on the campaign page like “backed by TechStars” or “graduated from Y Combinator Spring cohort”. But what are these companies and cohorts, and why are they significant? In this blog, we will break down what startup accelerators are, the opportunities and challenges they can provide, and how to make the most of participating in an accelerator program.
What is an Accelerator?
An accelerator supports an early-stage startup through education, mentorship, and financing, typically in exchange for monetary compensation or for equity or securities convertible to equity. Often highly selective programs, accelerators can be a great resource for startups looking to gain more experience and insight into growing their business. Each cohort, or group of participants, is involved with the accelerator for a fixed period of time, typically a spring or fall “semester” or a few months. Well-designed rapid and immersive education programs aim to be faced-paced, intensive, and to concentrate years of education into each cohort period. However, each accelerator generally only allows a limited number of participants which can make well-known or specialized programs highly-sought after experiences.
Susan G. Cohen and Yael V. Hochberg highlighted four distinctive factors which make accelerators unique to other education programs in their 2014 paper, Accelerating Startups: The Seed Accelerator Phenomenon. These factors are:
- Fixed-term length
- Cohort- (or group-) based
- Mentorship driven
- Culminates with a “Demo Day” pitch event
This unique format differentiates accelerators from other programs like incubators but are not exclusive to just accelerators. Many other programs that support startups have similar features, but the combination of all four generally makes the program an accelerator.
History of Accelerators
The first seed accelerator program was hosted in 2005 by Y Combinator in Boston, Massachusetts. As the concept of accelerators took off, TechStars launched their own seed accelerator in Boulder, Colorado. As the forerunners of startup accelerators, both programs have heavily evolved over the years and are often considered premier program accelerators, globally. This growth was only the beginning, as early-stage capital and venture investing broadened in 2008, taking accelerators with it. In fact, the number of U.S.-based accelerators grew 50% each year between 2008 and 2014. Now, there are over 200 startup accelerator programs in the United States. Various accelerators have a focus on varying industries or growth stages, meaning a niche industry can still find an accelerator that can provide value to the company.
Benefits of Participating in an Accelerator
The biggest benefit generally associated with accelerator participation is investor access. Accelerators typically have access to a group of already interested investors, and cohort participants get the opportunity to speak to investors and pitch their business at the culminative demo day at the end of each cohort. And many investors specifically seek out accelerator participants to provide funding to, which is why many companies highlight the accelerator they were a part of on their campaign page. While a demo day may not culminate in an investment, this level of investor access is often considered a key advantage of accelerator participation.
Another benefit of participating in an accelerator is the level of comprehensive support each founder receives. Noting that this support should be expected to vary from program to program, mentorship, support, and connections from other founders can make the entrepreneurial journey seem less lonely. Their experiences, direction, and knowledge can be extremely valuable to early-stage founders. The opportunity for skill development is also an added benefit of accelerator participation, as entrepreneurs typically receive feedback on their pitch, business plan, and projected financials.
Risks of Participating in an Accelerator
The biggest risk of participating in an accelerator is that not all accelerators are created equally. Not every accelerator will have the same cachet as TechStars or Y Combinator, and there are additional variations within industries and growth stages. Some accelerators do not have as strong relationships with potential investors. Some accelerators do not have as many resources and education materials as others may have. The contrast between different accelerators is stark, so it is important to make an educated decision on if you should participate in an accelerator, and even more so, which one?
Additionally, while accelerators can provide valuable education and connections, they can also serve as a distraction from your day-to-day business operations. Accelerators are intensive programs with workloads and time commitments comparable to a semester in college. The constant courses, social engagements, and meetings can distract from vital business operations that keep the company running. And because accelerators are geared towards raising capital and funding activities, if your business is not in a position to raise capital, the time commitment can be greater than the benefits received from the program. The time commitment associated with accelerator participation can be seen as a potential risk, but the information and experience obtained can be seen as potential benefits as well.
The relationship between an accelerator and a startup is not balanced. Accelerators typically offer something of value to startups who may have limited resources, experience, or both. Accordingly, costs and contractual obligations should be fully understood when considering participation in an accelerator. Participation in an accelerator usually involves compensation in the form of outright equity ownership or the issuance of a security convertible to equity, often at a discount, upon completion of the next equity financing round. Further, equity granted to an accelerator typically includes an anti-dilution provision. Specifically, if a startup issues additional equity, it must proportionately issue additional equity to the accelerator in order to maintain the accelerator’s ownership percentage. Many anti-dilution rights terminate upon the successful completion of the subsequent equity financing round, but they can dilute founder equity in the interim. Some accelerator contracts include the right to participate in future equity rounds at a predetermined percentage and/or discount, which can interfere with the expectations of a strategic investor or create an outsized ownership stake. Finally, an accelerator contract may include other ongoing provisions, such as rights to financial and ownership information or approval rights with respect to future financing rounds.
Popular Accelerator Programs
With an understanding of the potential benefits and risks of participating in an accelerator program, the next step is to decide which accelerator programs to apply for, and which to participate in upon acceptance. Here are some of the popular accelerator programs for startups.
Headquartered in Mountain View, California, and founded in 2005 as the first seed accelerator, Y Combinator runs two 3-month funding cycles each year, broken down into their “Spring” and “Fall” Cohorts. As one of the most well-known accelerators, Y Combinator has an average acceptance rate of 1.5% – 2% with over 10,000 companies applying for each cohort. Accelerator participants can expect social events, “office hours” style one-on-one mentorship and support, and a $500,000 investment in the company on specified terms. Since inception, Y Combinator has funding over 4,000 different companies, and has worked with 7,000 different founders, offering a broad scope and network of alumni, mentors, and investors.
Founded in 2006 and headquartered in Boulder, Colorado, TechStars offers global, 3-month long accelerator programs that span industries from Ag-Tech and Fin-Tech, and corporate partners like Comcast or Equinor. The highly selective program has an average acceptance rate of 1% – 2% across all verticals and typically admits around 300 total participants across their accelerators with an average of 10 participants per vertical. Accelerator participants can expect intensive curriculum around product/market fit, product development, execution, and growing the company’s network. In addition to workshops, one-on-one style office hours with mentors, and pitch practice for the culminative Demo Day at the end of each cohort participants can expect a $120,000 investment in the company in exchange for 6% common stock. Many of these activities are curated to fit the needs of each founder and company, meaning no two companies will have the same experience at TechStars. Since inception, TechStars has invested in over 2,500 companies with a combined market cap of over $220.1B.
Founded in 2010 and headquartered in Silicon Valley, 500 Startups is a global accelerator specifically focused on technology and tech companies. Run for 4 months twice a year with 25-35 participants in each cohort, 500 Startups has an average acceptance rate of less than 3%. 500 Startups is one of the first major accelerators to accept applications on a rolling basis instead of opening applications once or twice a year. The four-month long accelerator program boasts $150,000 investment in each cohort participant for a 6% stake, provides hands-on education and support, and a network of over 1,000 founders and over 200 mentors. 500 Startups has funded over 2,400 companies as of February 2020.
Plug and Play
Headquartered in Silicon Valley and founded in 2006, Plug and Play hosts multiple startup accelerators each year that covers industries from brand and retail, food and beverage, health, travel and hospitality, real estate, and energy. With an average acceptance rate of around 2%, the program accepts around 20 participants per cohort per vertical and runs over 60 industry-focused programs. Plug and Play’s network of over 400 major corporate partners is culled to match the startups’ needs, cultivating a white-glove experience. The 10-week program provides an in-house Venture Capitalist, a world-class team of mentors and corporate partners, and an international reach. After graduation, Plug and Play has the opportunity to invest $25,000 to $500,000 to become a stakeholder in one of their cohort members, but investments are not guaranteed to all participants.
Alchemist Accelerator was founded in 2012 and is headquartered in San Francisco, California. Industry agnostic, this program focuses on enterprise B2B or B2B2C companies with dedicated program “tracks” to assist in sourcing industry renowned mentors and coaches. The longest accelerator on this list, Alchemist runs one six-month program a year and accepts a maximum of 25 participants per cohort. Alchemist’s network spans over 3,000 faculty and mentors and over 5,500 venture investors. The exclusive program is designed by experienced enterprise entrepreneurs and offers $25,000 in funding in exchange for a 5% average ask of equity. Participants can expect regional conferences, a culminative demo day, group gatherings, and Feedback Summits focused on market traction and fundraising.
SOSV Ventures runs accelerator programs in San Francisco, California, New York, New York, China, and Taiwan. With programs spanning hard tech, life sciences, information technology, mobile solutions, and blockchain technology, SOSV invests in 150 companies each year through their 5 programs.
- HAX – Hard Tech, Industry 4.0, Enterprise Solutions, Robotics, Consumer Devices. Hosted in San Francisco, California and Shenzhen, China.
- IndieBio – Life Sciences. Hosted in San Francisco, California and New York, New York
- ChinaAccelerator – Information Technology entering China, expanding across SE Asia, and dominating globally. Hosted in Shanghai, China
- MOX – mobile app startup development and mobilie solutions. Hosted in Taipei, Taiwan.
- dlab – decentralization and Blockchain technology. Hosted in New York, New York.
The 3-6 month programs have less than a 5% acceptance rate and provide participants access to SOSV’s network of over 1,000 mentors, globally. Since inception, SOSV Ventures’ programs have graduated over 2,000 founders and introduced them to sector-specific corporate partners.
Founded in 2008 and headquartered in New York, New York, Dreamit Ventures focuses on startups that have either revenue or a pilot and are ready to scale. Dreamit focuses on three verticals: Healthtech, Securetech, and Urbantech. Each industry vertical has its own set of advisors but participates in the same activities with its’ advisors. Customer Sprints and Investor Sprints are the key activities that unite the verticals. The Customer Sprint helps each company build their pipeline, identify potential partnerships, and enhance their industry network. Investor Sprints allow the companies to receive rapid market feedback from top U.S. venture capital firms. The 14-week program is intensive, and Dreamit accepts applications on a rolling basis. However, typically only one to two companies are accepted per vertical per month. Dreamit has worked with over 320 companies across its 3 verticals.
Selecting the Right Accelerator
The above list includes well-known accelerators, but it is by no means comprehensive. With so many accelerators to choose from and selective acceptance rates, how can a company make a decision on which accelerators to apply to? Each accelerator has its own specialty – whether industry, company stage, or founder characteristics. It is important to evaluate which accelerators are geared towards similar companies to you. Additionally, the mentor network of each accelerator differs, and connecting with a specific mentor or advisor may not be guaranteed at each accelerator. Many accelerators will list specific characteristics they look for in applicants, and so it is wise to be aware of these characteristics before making the decision on which accelerators to apply to.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.