September 6, 2011
For the last month I had three people independently ask me for advice on selecting (Web2.0) Accelerators. Two of them were student entrepreneurs contemplating their first venture. All where attracted by the Accelerators promise to kick-start their business but a bit confused by the choices between different Accelerator programs. Students, inventors or entrepreneurs in similar circumstances might find the following guidelines useful:
The first and foremost checkpoint is the mandate of the accelerator. You want a structure and culture that is exclusively devoted to profit. Ethical, moral and legal – but focused on turning some money into more money. That’s going to be the mandate of your own venture and promise to your shareholders. An accelerator with a different mandate will have misaligned interest to you right from the start.
Common accelerator mandates to avoid, in my opinion, are
- VC deal flow (limits your future and biases your decision making into the wrong direction – focus on building a great business, not convenience for VCs)
- Media attention (an accelerator looking for ego PR will turn you into a PR monkey – this is what happens if you spend all your time being a conference darling without building a viable business)
- Job creation (government funded accelerators often have this political mandate but jobs are really an incidental result of start-ups – focus on building value, not employment)
- Community involvement (conference hopping is only good for your ego, building a successful company is the best way to help your community)
Avoid all of these and find somebody who wants to build strong companies for monetary gain. That’s the only reason to run a venture-funded start-up in the first place.
Explore the core economics of the accelerator. Consider where the financial payout for the operators and mentors will come from. For example, consider the basic Web2.0 accelerator clone: A paid operator, less than 10 companies per cohort and a 5-10% stake per company. Let’s say that the operators cumulatively receive a 1% stake per company (personally – check those numbers before joining). At an expected next phase valuation of $2-4M per company (if all goes well), their upside potential is less than $500k (around $200k mid-point).
Compare this to their base compensation package. If both are in the same ballpark then they will have a fundamental alignment problem. If the base is paid by a VC or government then their actions will be biased towards those parties (and thus occasionally out of alignment with their cohort companies). It’s unavoidable unless they don’t understand economics (in which case you definitely shouldn’t join).
The operator(s) of the accelerator will effectively be a very active Chairman of the Board and possibly your CEO. You are paying the bulk of your equity premium for their guidance, so you should evaluate them just as carefully as any other co-founder or senior leader. Ask for background and lots of references in past companies or investments. Focus on operational skill and integrity. Consultancy you can get for a lot cheaper than a 5-10% equity stake.
As a rule of thumb, look for somebody to whom you would gladly entrust your business for a year if you had to take a long vacation. If possible, somebody to whom you would give your business tomorrow if only they were available. This is a high bar but for a highly influential early stake in your venture it should be pretty high.
Avoid the entrepreneurial title trap. Unlike corporate careers, entrepreneurs can basically manufacture any title they want. At a conference earlier this year I saw a speaker line-up that promised all varieties of “successful entrepreneurs”. Even superficial digging on Google quickly confirmed that the “successful acquisition” of the first was a $10k purchase of their software; the “exit to a Fortune 500” of the next was a fire-sale acquisition of assets/team for ~$1M after having burned through ~$10M in investment; and the “expert in entrepreneurship” had become so via social media self-declaration without ever building any kind of company in the first place. Run.Like.Hell!
The sole measure of successful entrepreneurship is the past creation of either profitable stable businesses or high-return exits. Even that doesn’t by any means translate into automatic success in the next venture – but it’s the least you should expect from an accelerator operator.
Use a similar benchmark to evaluate mentors. Mentors cover a broader range of functions so there is a lot of value in having non-operators as well. You are looking for a mix of successful entrepreneurs, market experts and secondary skills relevant to your particular business model (e.g. connections to possible acquirers, media expertise if you need PR in your business core, etc.).
Beyond qualification, make sure that you understand mentor motivation and time commitment for the accelerator. They should have a direct financial stake in your venture (via the accelerator stake). That stake should be meaningful enough so that they in effect become *your* advisors and not just guys who are doing the operator a favour. It would never occur to any entrepreneur to have their advisory board members paid by their VC, so make sure that you aren’t doing exactly that in your accelerator.
It’s ok to establish contact with potential future investors, fellow CEOs in the sponsor’s portfolio and so forth. But keep in mind that these people have inherently misaligned goals relative to your own. Ask your future accelerator to explain the difference, categorise mentors by their motivation and then interaction with them at a level consistent with these categories.
Bluntly put, the financial commitment of most accelerator programs is trivial. Any decent valuation estimate needs to first assess the non-financial investment. Try to reduce the components to comparable independent contributions: office space (comparable rent), consultant-like mentors (hourly market rate), board-like mentors (comparable equity stake for full BoD members), and so forth. The comparison in the intangible areas will be harder (e.g. media exposure). Ask the accelerator for past example and try to correlate it to a meaningful metric in your field (e.g. what was the average number of TechCrunch articles per cohort company in your last 3 batches? – how much would it cost to get that from a PR firm).
It’s worth breaking these items down on a sheet of paper and asking the accelerator about their own perspective on their valuation per item. Remember that bundling is a tool invented by companies to mask effective price increases, not to make things cheaper for consumers.
Once you have your effective valuation, compare it to alternative scenarios. Angel valuations for early stage companies in your city are often fairly well bracketed. Also compare to other accelerators (e.g. Y-Combinator and Techstars take 3-10% for ~$20k plus significant intangible value). Compare your accelerator of choice to those deals and decide if their offer is worth it (most regional accelerators will have much smaller value-adds than these two power-houses, so their stake should be proportionally smaller unless your business/team is also comparably lower in value).
All of this sounds like a lot of work, right? In both of my discussions the first response was: “Hey, it’s only 5% so isn’t it always worth it?”. That’s the wrong perspective. Like a co-founder, early executive or lead investor, the impact of joining an accelerator goes way beyond the (small) equity stake. Earlier influencers decide or strongly bias the direction of your company. That gives accelerators the power to truly accelerate your business. It also, implicitly, creates the risk of destroying it. So take your time for careful due diligence and make your choice wisely.