As the global startup ecosystems continue to develop, an increasing number of entrepreneurs are trying to build the next unicorn company. Consequentially, the demand for business expertise has grown such that investors are no longer sought for just funding, but mentorship as well.
Accelerators play an important role in this ecosystem. Accelerators have come up with systematic programmes to provide mentorship for qualified startups over an intense fixed time period, educating founders with the knowledge to advance their company to its next life stage. This reduces the time spent by founders to develop their minimum viable product (MVP), go-to-market (GTM) strategy and to scale, saving months to even years of fixed costs.
With poor cash flow being one of the top reasons for startup failures, accelerators guide founders to achieve these milestones to increase chances of securing further funding as the business aims to grow. The increase in investment generally spills over to non-accelerated startups as investors will usually pay more attention to such developing spaces.
As accelerators are service providers, the importance of goal alignment cannot be over-emphasised. Choosing the right accelerator is imperative in making the company a success beyond the programme and the terms of payment can make or break a business. Identifying the revenue stream of an accelerator is the first step to understand its goals. Accelerators may also use multiple business models to increase its revenue.
Accelerator Business Models
1. Acquisition / IPO
Similar to most support players in the startup ecosystem, many accelerators seek compensation from startups through equity. An equity stake for accelerators also aligns their interests to do their best in supporting their startups to do well.
Finally, when a startup builds a good track record or proves itself to have a major competitive advantage, it could either go through an initial public offering (IPO) or be acquired by another company. This would provide the accelerators with an exit for their investment, usually multiple times the costs they spent on the startup.
As most founders need cash at the early stages, equity may seem like a cheaper option. But equity is extremely valuable in later stages of the business, especially for successful companies, not just as a reward to the entrepreneur but to raise more cash. Having such shareholders may also increase the pressure to go for an IPO even when the time is not right.
2. Corporate Sponsorship
Some accelerators form partnerships with corporations that seek to be at the forefront of innovation in their industry. These corporations will pay an agreed amount to the accelerator while the accelerator aims to find suitable startups for the corporation to acquire. While these accelerators appear to be more specialised in the industry, startups may be limited to meeting corporate criteria rather than addressing the market needs due to the strong influence from the sponsors. This is something that founders must be wary of if they are considering such an accelerator.
3. Real Estate
Most accelerators provide an onsite co-working space for their startups to do their work during the programme. This provides founders a physical platform to share their ideas and help one another as they journey through different problems. This space can be charged to startups at a per desk rate, giving these accelerators a similar business model to co-working spaces, sweetened with a slew of programmes and mentorships to accelerate the startups.
4. Consultancy Services
To cater for startups with positive cash flows, there are accelerators who choose not to take equity but charge a price for founders to work with them. This can be more attractive for owners who see their business being highly valued in the future and want to keep their equity. It also provides a lower risk for the accelerator as it will receive the payment upfront rather than waiting for many years down the road when the company may not provide them a profitable exit.
Founders solely seeking expert help can also consider consultancy firms. It does not require tedious applications and a fixed time set aside for a long programme.
5. Government Grants
Having seen the success of Silicon Valley, many countries around the world have been trying to create something similar to draw large amounts of investment into the country. By allocating land space for buildings, reducing taxes for startups, easing immigration policies for entrepreneurs, governments are fighting for startups to base their operations in their countries.
Seeing the draw of accelerators and the benefits they bring to the startups, and the investment scene in the region, some governments have also allocated grants for accelerators. This is another source of income for accelerators in these countries, which can be stable and lucrative.
However, as the interests generally do not align with the performance of startups, founders must do proper research on the accelerator’s background and programme before joining. A poor programme would result in precious time wasted and cash burnt on items such as staff salary which may result in insolvency for a young company.
Before choosing the accelerated route, a founder must first formulate a strategy to propel the business forward so that they can choose the best accelerator, if any at all, to help them execute that strategy. The accelerator programme should be a part of that strategy, rather than the strategy itself to grow. The founder can then decide the optimal timing to join such programme to ensure the business is ready and the costs incurred are optimised.
Accelerators are beneficial but not essential to business growth. They are simply tools that can be used by founders who need them to grow faster. While they can bring great benefits, they also demand huge costs including time which is exceptionally important to startups. Founders must weigh the payoffs they expect against the price they have to pay, regardless of the form.
About BlackStorm Consulting
BlackStorm Consulting is a boutique growth consultancy firm that specialises in corporate strategy, profit management and investment management. We mainly serve clients in four sectors: FinTech, Gaming, Technology, Media and Telecommunications (TMT), and manufacturing.
Our clients and connections are internationally present and range from small and medium sized businesses, MNCs, to government agencies.