From $100k to $1 Million: Should You Join an Accelerator?

There are over 8,000 accelerators around the world. Most of them fail. Before you decide to join one, you should try to understand why they fail, so that you do not end up failing with them.

The first business accelerator in the U.S. opened in 1959 and is still operating. In the last five years, we have seen a renaissance in the accelerator business. Pioneered by YCombinator, Silicon Valley’s flagship accelerator led by Paul Graham, accelerators have come back with a vengeance. YCombinator has seen some significant successes, including Airbnb, Dropbox, and Heroku. It has fueled a bit of an accelerator bubble, in fact. Accelerators are now a global phenomenon, and there isn’t a major city in the world where an accelerator isn’t cropping up.

For accelerators to live up to their full economic potential, they need to overcome two pitfalls: they need to provide real value, not just office space, and they need to measure success in more than just outside funding.

Adding Real Value

During the dot-com era, every law and accounting firm decided they were going to become accelerators. Many of those efforts failed. Charles D’Agostino, executive director of the Louisiana Business & Technology Center at Louisiana State University, offers some analysis: “Accelerators do work, but they must be more than a real estate entity offering executive suite services. Effective accelerators provide business counseling and management assistance to their client firms. The value-added business services differentiate them from an office suite.”

Indeed, as I investigated why accelerators fail, I was astounded to find that many accelerators assume that cheap real estate, co-working spaces, used furniture, plus a phone and Internet connection equate with business incubation. Jim Flowers, president of the Virginia Business Incubation Association, says, “They mistake cheap floor space for meaningful program content.”

Well, it isn’t. Neither are discounted legal services, accounting, or other kinds of commodity services.

Two things determine whether a business can get off the ground successfully and sustainably: a validated market opportunity with customers willing to pay for a product or a service; and a product or service that addresses such an opportunity. The only accelerators I consider “real” are the ones that help entrepreneurs achieve these two goals.

Adds D’Agostino, “Accelerators must evaluate the management capability of the entrepreneurs and assist in finding management for these companies. Especially when the entrepreneur is a technologist lacking business skills, it is critical that the accelerator assists the owner in finding managers that have the skills necessary to manage a successful entity and take it to the next level.”

My take is that technologists can, actually, be taught these skills. Hiring managers may often be expensive, but high IQ engineers have historically been very good at picking up business skills with the right mentoring. So getting to the next level is well within their capacity, and the role an accelerator ought to play is to guide them in that process.

The only “next level” worth getting to for a start-up is a validated business idea that has the endorsement of reference customers, and a product that caters to their needs. The rest — an office, legal documents, QuickBook files — don’t build valuation or business value. The benchmark accelerators should be measuring themselves against is simply their success in helping clients validate businesses, gain reference customers, and complete at least a minimum viable product.

Success is More Than Funding

Most accelerators use funding as a success metric, which is a somewhat flawed criterion. Over 99% of companies should operate as organically grown, self-sustaining businesses — bootstrapped, without external financing. For them the goal is to achieve customer validation, not financing. Yet if the accelerator uses financing as its success metric, it will try to force inexperienced entrepreneurs into an unnecessary financing round. And more often than not, they will fail.

Of course, where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is an important service. Equally important is to provide education on what is and isn’t fundable.

My primary conclusion is that accelerators need to be decoupled from financing. While they need to continue to act as a bridge to capital, predicating their success on getting businesses funded will keep them focused on trying to find the less than 1% of start-ups that are fundable. In other words, coming to the rescue of victory!

So, should you join an accelerator?

Since you have already achieved $100k in revenue, and are looking to get to $1M, you already have validation. You are now looking for two things: First, how to grow your revenue, and second, advice on should you raise money.

If you join an accelerator, you need to verify that it has core competency in both areas of your key concerns.

Photo credit:  Canadian Film Centre/Flickr.com.

This segment is a part in the series : From $100k to $1 Million