When Joining a Startup Accelerator Program is a Bad Idea
The one thing startup accelerators don’t ensure is success of your startup. But, they surely help you with resources, access to funding and most importantly – mentoring.
DropBox, AirBnB and Quora – all these companies went through a startup accelerator program. Looking at such success stories, more and more startups are looking for access to these programs, especially the big ones like 500 Startups, Y Combinator and Tech Stars, whether they build their software in-house or hire a custom software development company.
But applying for an accelerator program is a major decision for any startup; and there are some distinct pros and cons. Of course, you’ve got to have built a product and it helps if you’ve ventured in the market to get traction or product market fit for it.
Essentially, startup accelerators are known for providing rapid funding, mentorship, and free resources for startups. They might seem all the rage right now, but the truth is, they are not meant for everyone.
Here are 4 specific scenarios when joining a startup accelerator program can turn out to be a bad decision for your startup.
#1 When you are not ready to dilute equity or don’t want a co-founder
Most startup accelerators provide seed money in exchange for equity in your startup.
As an entrepreneur, you may worry about this clause. What if an accelerator takes too much equity and it becomes difficult for you to raise another round from angel investors and venture capital firms later? This image below from brandalyzer illustrates an ideal equity dilution situation:
There are no established norms in the startup investment industry, but on an average 5 to 7% of your startup equity will be diluted if you opt for an accelerator program.
For example, the top most accelerator program, Y Combinator has a standard deal. It takes about 7% equity for approx. $100-120K of funding.
Another known accelerator, 500 Startups invest $125k in exchange for 5%.
Techstars takes 7-10% equity in your company in return for $118,000 seed investment, intensive mentorship, and networking.
Other accelerator programs also take 0 to 5% for $0 + mentorship, or 5 to 20% for $10-25K of investment. The percentage of equity and amount of investment varies significantly by geography and industry.
However, there are few accelerators programs that don’t take any equity in the startups. But then, most of those programs are looking to promote local business growth rather than generating financial returns.
#2 When you don’t want to relocate
Not in all the cases, but attending an accelerator program might require you to relocate.
Agu De Marco, founder of Wideo, moved to Silicon Valley from Argentina when he was accepted to 500 Startups accelerator program.
Efrem Weiss, the CEO of YouGift, a social-media site for gift giving also relocated his startup team from his office space in New York City to upstate New York to join a three-month accelerator program. Sadly, Efrem didn’t like the program and moved back in just two weeks.
Zoli Honig of Chalkable got a direct offer to join the accelerator program from the founder of 500 Startups, Dave McClure. But, the condition was relocation. At first, he was sceptical on the decision to relocate with a wife and a kid but he later he took the offer.
Some accelerators give early-stage startups a choice to not move, but then there are other kind of issues attached with it. Here’s a snapshot of FAQ section from Y Combinator which explains why it is better to relocate:
Relocation requirement of startup accelerators is great from a business standpoint. In some cases, you might have to relocate for the duration of the program, in other cases you might need to move your whole business setup, in case they provide a common workspace for your business.
But for entrepreneurs who are seasoned professionals or have families to support, can’t simply quit their job for 12 weeks or so to participate in an 3 month program.
So, if you are someone who considers relocation expensive and time-consuming, then take another look at your decision of joining a startup accelerator.
#3 If you think startup accelerators will get your sure-shot success
It’s no secret that startups fail, and they fail in large numbers.
But if you think the startup accelerators will get you sure shot access to capital, mentors, and talent, you probably don’t know enough about accelerators. According to WSJ, 45% of startup accelerators have yet to produce a single entrepreneur who successfully raised venture funding after the process.
“Too many entrepreneurs think if they get into an incubator they have accomplished something. They haven’t. It’s a false sense of confidence. Call it incubator inflation.” – Mark Cuban said in a 2014 Triangle Business Journal interview.
Today, there are around 234 seed accelerators & groups worldwide. This means fierce competition and different standards of quality.
It’s important for inexperienced entrepreneurs to learn the ins and outs of the game. Yas Motoyama, director of research and policy at Kauffman, says, “If there’s some kind of new, emerging successful thing, people try to jump on that. There’s no convincing research yet as to the effectiveness of accelerators. Y Combinator and TechStars seem to be outliers. They are totally different players, unlike the vast majority of accelerators.”
In an interview, Ex-TechStars NYC managing director David Tisch, said,
“The majority of business accelerators are not good for companies and will fail. There are too many of them. The idea of applying to just any accelerator is totally silly. A company should do homework and figure out which one is right for them.”
But if you are depending totally on the accelerators for your startup success, that might be a bad idea. Even the crème de la crème of the accelerators have a percentage of failed companies.
Here’s the data from TechStars, which shows the complete list of companies that they’ve ever funded and their current status:
#4 When you just want to focus on your business
Mikko Järvenpää, CEO at Infogram, wrote a book called ‘Speed up your startup’. In his book, he discussed the results of a survey that he did with 151 founders of startups who went through startup accelerators. One of observations from his survey was the mismatch between what startup accelerators offer and what startup founders expect.
“One thing that struck me in the survey: startups feel that startup accelerators sometimes think that a few workshops on specific topics are sufficient – about design, say – whereas they would prefer to have a top designer on hand during the program rather than a lecture by one. There seems to be a mismatch.”
An accelerator can become both hectic and distracting for an entrepreneur. The most gruelling part about participating in an accelerator program is balancing the schedule – meetings, classes and pitch practices – with mentors (and their hectic lives), all while trying to build and/or run a company.
Steven Lachance who went through a startup accelerator for his ridesharing platform, Liverides, shortly shuttered his startup because all the budget was spent on developing the platform with little users to show for it, before the cash ran out. The Quebec city-based entrepreneur, Steven recalled how several mentors pulled him in different directions as to how he should lead the business. He felt with so many ‘experts’ coaching and encouraging founders, it can often lead to what ‘mentor backlash’.
Jordan Fliegel is the founder and CEO of CoachUp and went through two incubators/accelerators in the same year in Boston. In one of his post, he said, “While some events were useful, there were events I wish I could have skipped so I could have focused on building my business instead. Some things you might not want or need for your business.”
To leverage an accelerator’s network to rapidly accelerate your business you will need to devote your time and effort for a lot of related meetings, event with mentors and investors. You will even spend time and crack your brain in filtering the best advice from 10 (or more) different mentors.
The mentoring times and demo day preparations in any startup accelerator program takes a lot of the founder’s time. This means less time to code and less time to connect with your potential customer. Then there are some unavoidable sessions you might need to attend, even if they are not relevant to you.
For example, during each cycle Y Combinator hosts a dinner once a week and invite some eminent person from the startup world to speak. These dinners usually last half a day because people start to show up for dinners around 6 pm. One of the founder from Y Combinator said,
So, if you are not ready for a super intense, fast-paced environment and think you’re not ready to juggle between the founder’s and the learner’s role, startup accelerators are not for you.
The major benefit of the accelerator program is building a network of people and an opportunity to raise funds. But your priorities will define whether you need a startup accelerator program or not. For instance, if you are confident about your networking and fundraising skills, then probably an accelerator program isn’t required. Otherwise, it is an option you can explore.
Sit down and list out the objectives for joining a startup accelerator in a crystal clear manner. Take all the feedback that comes your way – the good, the bad and the ugly. Synthesize and process it. Combine, filter it and then decide.
If you are still in two minds, we recommend you watch this video: