Startup accelerators continue to grow in popularity. There are now more than 200 around the world attracting twice as many applicants as they did just two years ago. But there’s a dirty little secret: A lot of accelerators are just spinning their wheels.
Last year, Aziz Gilani, a director at Houston venture capital firm DFJ Mercury, ran a study of 29 North American accelerators for the Kauffman Fellows Program. He found that 45% of them produced not a single graduate who went on to raise venture funding.
Not Enough Exits to Evaluate
But wait, it gets worse. The original goal of Gilani’s study was to evaluate accelerators based on the number of exits achieved by their graduates. That aim proved to be “delusional,” he says. “There were not enough exits to evaluate. The only two accelerators that had any meaningful exits were Y Combinator and TechStars.”
But wait, it gets worse. Hoping to find some standard by which to judge accelerators, Gilani added a third criterion, VC perceptions. His team assembled a panel of 10 VCs and asked them a series of questions. Have you heard of this accelerator? Would you invest in a startup from its program? Again, he came up empty. “A good chunk of accelerators did not register on any of the criteria,” Gilani says.
So he added more criteria, including the amount of equity an accelerator takes and the size of its alumni network. Finally he had enough data to come up with a ranking. At the top: TechStars, Y Combinator and Excelerate Labs. (Disclosure: Gilani’s firm is an investor in TechStars and Excelerate.)
An Accelerator Quality Gap
“Rather than say there are too many programs, I would say there is a quality gap,” Gilani says. “Some accelerators are run by experienced entrepreneurs who have deep ties to funding sources and have sold companies before. And those programs have done very well.”
Here’s how accelerators typically work. They run 12-week programs to get startups quickly from concept to product. They offer seed money and mentoring in exchange for equity, normally about 7%. Programs culminate in a demo day, during which graduates pitch their startups to investors.
“Experienced entrepreneurs who can get funding on their own have to question whether it’s worth giving up 7% equity to join one of these programs,” Gilani says. “If you’ve never done a startup before, I think a top program is a no-brainer. If you can get in, you should do it.” (TechStars and Y Combinator typically sift through some 1,500 applications for a handful of spots each session.)
Three Questions for the Second Tier
But what about a second-tier or third-tier accelerator? “When you’re a young startup and you don’t have a lot of cash, you have one currency, your equity,” Gilani says. “So treat an accelerator like any other service provider. Be rigorous in your diligence. Or make the decision not to join one.”
Ask three questions of your accelerator:
- Will it help you get follow-on funding?
- Will it help you form partnerships with other companies or accelerate your growth?
- Does it have proven mentors who will help you get traction?
If the answers are no, it’s probably best to steer your startup in another direction.
Gilani expects the accelerator trend to move toward industry-focused programs - an accelerator for the cloud, for example, or energy - and he says smart startups will gravitate to accelerators with expertise in their target field.
Avoid those accelerators that have been established recently with a “spray and pray” strategy to graduate a lot of startups and hope one of them hits it big. The best accelerators know their business takes more careful nurturing.
“You could say this has been a gold rush with no gold,” Gilani says. “It takes years for companies to get traction and get an exit, so if you’re trying to optimize for making money now you’ll make some pretty terrible decisions. I would be very wary of any accelerator that thinks it will make money in the short term.”
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