Startup Accelerator Business Model: The A to Z Guide
Startup accelerators have become one of the top options for entrepreneurs to fund their startups. Like any business funding strategy, a startup accelerator programme will be a perfect opportunity for some businesses but not for others.
You certainly know that there are several different startup business models to explore, all with their unique fundamental differences. In recent years, one business model that many entrepreneurs and business owners fancy the most is a startup accelerator.
So, it is vital that you fully understand the startup accelerator business model before making a move. Please note that these seed accelerators are not a great fit for every startup out there. There are pros and cons to it, and each needs to be addressed.
With that said, let’s explore the fundamentals of a startup accelerator business model, understand how they function, and get done with the basics.
- Startup Accelerator Definition
In plain English, a startup accelerator is a hybrid business model that focuses on the development of early-stage startups by offering financial aid, education, and mentorship to owners and employees for a defined time period. Simply put, startup accelerators ‘accelerate’ the growth of a startup by offering necessary resources. In exchange for taking care of the finances, startup accelerators take equity in the business.
The concept of a startup accelerator was first generated back in 2005 by a company called Y Combinator that specialized in funding businesses during their seed stages. Their goal was simple – to provide enough capital for new businesses, enabling them to get started and advance their operations.
However, not all seed accelerators business models work the same way. There are some seed accelerators that are non-profit and funded by big companies and investors.
- What Startup Accelerators Do?
To understand the startup accelerator business model, it is vital to understand what they do and how they work. Broadly speaking, they help businesses build and define their initial products and services, secure resources, and identify promising customer segments. More specifically, these accelerator programs run for a specific time period, lasting about 3-6 months, and help a range of startups from diverse industries with the new venture process. They provide:
- A small amount of seed capital
- Working space
- Lots of networking opportunities
- Mentors and peer ventures
The mentors can be anyone from a successful entrepreneur, a corporate executive, an angel investor, venture capitalist, or a program graduate.
On the final day, the program ends with a grand event, where entrepreneurs pitch to a large audience of qualified investors.
Now, you might think that don’t angel investors and incubators do the same thing? Well, accelerators are certainly similar to angel investors and incubators. But they differ in several ways.
The most significant difference is the limited duration of accelerator programs as compared to the continuous nature of angel investments and incubators. This little difference leads to many other differences.
- Outlining the Startup Accelerator Business Model
Seed accelerators are cohort-based, mentorship-driven, fixed-term, and are finished in graduation. These are the basics that make startup accelerators different from incubators and angel investors. Accelerator programs give useful resources to new ventures at all stages of development. Most importantly, they focus on pre-revenue. In order to qualify as a startup accelerator, your business model needs to meet a number of criteria. With that said, the startup accelerator business model has the following characteristics:
- It is a cohort of startups
- It is a selection process
- It is an educational program that transfers acquired knowledge
- It includes a group of advisors to support the new venture
- It is a fixed-term business program
A seed accelerators business model mainly comprises of 6 processes:
- Apply and Get Accepted
- Get Funded
- Demo Day
- Apply and Get Accepted:
The startup applies to get into the accelerator program. While the applications are many, the operator only selects 1-3% of applicants. During this process, you will interact with the aspiring startups and let them know more about your business and the details. Please note that the startups are under no obligation to accept and join your program until or unless they have signed the paperwork that says otherwise. If the startups don’t like what you have to offer, they can choose not to accept your offer.
- Get Funded:
Once the contract is signed and everybody is in agreeing terms, you will offer seed money to the startup in exchange for equity in the company. The seed money can range between $10,000 and $120,000 or even more, depending on the potential of the business.
Once the funds are sanctioned, you will put the startups in a 3-6 months long process with co-working space provided.
This is an intensive time for the startups. As a startup accelerator operator, it is your responsibility to provide the startups with seminars, workshops, and mentorship opportunities. Although it covers a plethora of events relevant to starting a business, practicing pitching and the legal side are more emphasized.
As startups accelerate, you will provide them with plenty of opportunities to network with potential investors, their peers, and other industry professionals and support providers. These connections are valuable for startups considering their future fundraising needs.
- Demo Day
There is a sort of graduation ceremony where each startup in the accelerator presents and pitches in front of a large audience, mostly investors and venture capitalists.
- How do Startup Accelerators Work?
Accelerators provide two types of knowledge where mentors pass the tacit knowledge from what they have learned over the years and the acquired knowledge is transferred through training sessions, workshops, and other structured education. Startup accelerators offer acquired and tacit knowledge through the combination of structured education and mentors. It has efficiency for the transferring of the value it creates by forming a group of startups.
The accelerator chooses the best startups from a large number of applicants and brings those startups together in such a way that corporations, investors, and others can meet them. It also chooses and brings a group of mentors who give knowledge, advice, and new contacts to startups for development. The accelerator provides a diverse network with a wide range of experience and knowledge.
This group works as a class at a university that allows delivering one lesson to a group of startups at once instead of delivering lessons to individuals multiple times. It focuses on participants who form an ecosystem around the accelerator and provide an opportunity for them to meet a group of startups at once instead of finding and meeting them all individually.
It is provided to overcome the lack of knowledge and networks of startups. Accelerators are mainly funded by corporations, government agencies, or investors to identify and support new innovations. The startups make returns in the form of investment returns, economic development, and new technologies.
- Are startup accelerators worth it?
With its ever-growing importance in startup communities across the globe, it’s easy to see why the startup accelerator business model is often perceived as the predominant way for scaling and securing funding from investors. While some programs actually provide limited funding or guarantee it in exchange for an equity stake, it’s important to note they aren’t suited for every startup.
The thing is – they are not mandatory for building and growing a successful business. While not every program works in the same way, the high-pressure environment is one constant you’ll find in every accelerator. Arguably, not everyone is equipped both emotionally and cognitively to thrive under such conditions, which is a must in this case.
There are plenty of alternatives where you can reap largely the same benefits without devoting yourself to the exhaustive pace of an accelerator. That being said, the truth is these programs have literally transformed promising businesses like Airbnb, Stripe, Dropbox, Udemy and many others into global companies. Plus, the value of accelerators is reflected by the fact that all parties involved (investors, startups, end users, even the economy) benefit from the intensive learning regime.
Once more, I’ll reiterate: learning-by-doing is critical to scalability, and accelerators make a point to speed up that process by stuffing years’ worth of learning into a few months. As such, they are great opportunities to quickly grow early on but also to attract other investors.