Why Give a Damn:

Hundreds of startup accelerators are taking major equity stakes in their participating companies and not delivering. We need a change in the accountability structure.

The author of this post, Daniel Epstein, has founded and run several accelerators, and has setup partnerships with 100+ other startup accelerators around the world.

It seems the world is falling in love with the startup accelerator and incubator model. When running the Unreasonable Institute, in any given week, I’d have roughly a dozen international calls with individuals who wanted to launch an accelerator in their own countries and communities. For the current team at the Institute, I know this is still a weekly occurrence. According to fellow Boulderite David Cohen (head of Techstars), “they’ve become so popular that about one accelerator a day launches these days.”

They’ve become so popular that about one accelerator a day launches these days.

Many people claim that we are in a “startup-accelerator bubble”. Although some people think this is a bad thing, I’d like to push back. I think it is incredible to see an entrepreneurial renaissance sweep the globe and I believe community-driven models (like accelerators) are going to be key in this international uprising of startups. That said, I strongly believe the business model behind the common accelerator is not entrepreneur friendly and it falls short of holding the program managers accountable. This is a real issue. I strongly urge the startup world to start scrutinizing the traditional model.

    So What Is The Traditional Accelerator Business Model?
    Largely inspired by the likes of Techstars and Y-Combinator, the traditional business model for an accelerator promises access to world-class mentors, invaluable skill training, a network of support, and ultimately the chance to pitch a room packed with dozens, if not hundreds, of investors. For these outputs, no matter the outcomes of the program, the accelerator typically takes a 7% equity-stake in all the companies that participate in the program. (Important note: I know that many accelerators, including the Unreasonable Institute, do not charge in equity… but I believe these models are the exception to the rule)

Unfortunately, although the outputs of nearly all accelerators sound promising, many programs are not living up to the expectations they set and the lofty visions they paint for their entrepreneurs (i.e. the outcomes are not so lavish). I had the privilege of speaking on a panel with Aziz Gilani of DFJ Mercury, who recently published a study highlighting how most accelerators are failing miserably called, “Startup Accelerator Fail: Most Graduates Go Nowhere.”

Startup accelerators continue to grow in popularity…. but there is a dirty little secret.  Tweet This Quote

According to Aziz, “Startup accelerators continue to grow in popularity…. but there is a dirty little secret: a lot of accelerators are just spinning their wheels.” The study found that the majority of accelerators are not delivering on their promises to align entrepreneurs with financing and to set them up for successful liquidity events (their two most common metrics for success). However, and this is where I have a bone to pick, they are still charging companies 7% equity on average.

So how do we solve this problem? I think we need to give entrepreneurs that participate in accelerators a guarantee. If an entrepreneur isn’t satisfied with his or her experience in an accelerator program, s/he should not have to give any equity or pay any fee for participating in the program. Afterall, if the program didn’t deliver, why should the entrepreneur have to?

I’ve run this by a number of people and from the position of someone running an accelerator, they all thought this was crazy. After all, the founder of the program could lose money even after running a program. Truth be told, they are right. But I personally believe requiring an investment of 7% (sometimes as much as 20%) equity just for participating in a program is not just crazy… Without a guarantee, it’s robbery.

Today, I’m happy to write that I’m finally getting the chance to go to market with this “crazy” philosophy. We recently launched a new global accelerator program called Unreasonable at Sea and we are holding ourselves accountable to the companies we work with. Like most accelerators, we are asking the qualifying startups for an equity stake in return for their participation in the program. However, and you’ll see this on our pricing page, we are giving them a guarantee:

    “If, after we have reached the halfway point of the program, we have not met your expectations, you will have the option of opting-out of giving us equity… We won’t charge you a penny if you don’t believe the experience was exceptional… We believe we should be held to the highest standard possible by those we are serving (i.e. the entrepreneurs).

Four Reasons Why I Like This Guarantee:

i. I don’t want equity in a company that doesn’t think I’ve earned it…
If we ever had a company participate in one of our accelerators and they ultimately didn’t think the experience was worth it, the last thing I would want is to have an equity stake in their company (after all, we would have gotten off on the wrong foot =).

    Note: I have an unspoken concern here. I imagine there are hundreds if not thousands of startups that have gone through accelerator programs and weren’t satisfied, or perhaps were even frustrated… Unfortunately though, we don’t hear their voices because it is taboo / not business-savvy to speak ill of your shareholders (i.e. the accelerator programs they participated in).

ii. We protect ourselves against someone taking advantage of the guarantee…
You will notice that in our guarantee, it says “halfway point”. I originally wanted to guarantee the companies that they could participate in the full Unreasonable at Sea program and at the very end, if they weren’t satisfied, they could opt-out of giving us any equity. The issue here is that although I trust the entrepreneurs to do the right thing, there’s no guarantee that their shareholders wouldn’t pressure them into saying the program wasn’t worth it (even if it was). So, by requiring that they have to make the decision halfway through the program means that if they proceed past the halfway point, their equity automatically triggers and they can’t later say it wasn’t worth it.

iii. If they don’t see value in the program, they leave half-way through…
This is a good thing! I don’t imagine there’s a program in the world that wants unsatisfied participants. Truth is, if they don’t see value in the accelerator after participating for over a month, I’d strongly encourage them to leave and this gives them a good way out without any negative repercussions (i.e. they have no pressure to stay).

iv. It’s a new metric of effectiveness…
Let’s use Unreasonable at Sea as a case study. Halfway through the program, if all 11 of our portfolio companies continue to sail with us, that’s a very strong indicator that they believe we are adding significant value to their organizations and the impact they are having on the world. If, on the other hand, a number of our portfolio companies leave… well, we will have been held publicly accountable (and I think we should be).

In conclusion, I strongly recommend and encourage a new class of accelerators that holds themselves accountable and gives their portfolio companies a simple guarantee: if halfway through your program they want to leave, they can do so without owing your accelerator program a point of equity or a penny in compensation. This will quickly separate accelerators that are making a dent on a startup’s growth, and those that quite simply… are not.

I strongly recommend and encourage a new class of accelerators that holds themselves accountable and gives their portfolio companies a simple guarantee  Tweet This Quote

Update: We ran with this accountability model on the [email protected] voyage this past spring and I wanted to followup with the results. Amazingly, all the companies who were on the ship before we reached the halfway point in Myanmar, continued to sail with us post Myanmar.* In short, they all committed to the program and our equity agreements were triggered. I think this is the clearest indicator of value to the startups you are working with and although it was nerve racking, I wouldn’t trade it for the world and I encourage other accelerators to do the same. Here’s a TechCrunch Interview we did just after the halfway point that talks about this model of accountability.

*disclaimer: 8 of the 11 companies were on the ship. One stepped off to raise a $30M USD series B (#tobedoneinperson), the second to fulfill a massive contract with Nike and the World Cup, and the 3rd to take care of their team back home.

This article is being re-featured today as a special “Throwback Thursday” post. We loved it so much, we wanted to make sure all of our new readers had a chance to read Daniel’s article, (and share in the conversation).

About the author

Daniel Epstein

Daniel Epstein

Daniel has an obsession. He believes to his core in the potential of entrepreneurship to solve the greatest challenges of this century and he has dedicated his life accordingly. Today, he is the founder of the Unreasonable Group, of the Unreasonable Institute and a number of other "Unreasonable" companies.

  • Teju Ravilochan

    Daniel, I certainly thought that this was an interesting idea when you first shared it. But you also shared that you wouldn’t continue to use this model for Unreasonable moving forward because it affected how bought in ventures were to the program. Can you say more about this?

    The principle of it certainly sounds appealing. Although I will say that Unreasonable Institute has not used this model as we don’t take equity in our ventures. This is a question that I am really interested in exploring as we are keen to experiment with our business model over the next few years.

    The reason that we don’t take equity in our ventures is that the ventures we work with are motivated by a desire to help people lift themselves out of poverty, to provide education or clean drinking water to people around the world. And unlike for mainstream tech ventures, there isn’t yet the density of companies on the other end waiting to buy them. There are some notable exceptions, especially in cleantech and with technology-based ventures (where may be some overlap). Additionally, many of our entrepreneurs don’t DESIRE an exit from their business. They see what they are doing as their life’s work and they are committed to solving a problem. For these two reasons, we haven’t been as motivated to take equity in our ventures (though we are opening to being wrong here).

    I’m very interested, as you’ve discussed in your past blog post on quasi-equity structures, in things like revenue share. I really admire Village Capital for the work that they have done to help their entrepreneurs actually secure customers and make sales, which provides clear and demonstrable value to them. Instead of hosting “Investor Days” events, they host “Customer Fora”, a demo event for prospective customers (this works best for B2B businesses). At Unreasonable Institute, we’re very interested in exploring revenue-share agreement, but we find that entrepreneurs are wary of it (understandably). There are some organizations that have managed to pull it off though, and we are beginning to work with our lawyers and entrepreneurs to come up with terms that would be friendly and viable for structures like revenue share. I know you explored revenue share with Unreasonable @ Sea companies as well, Daniel. Care to share your learnings there?

  • jbrycewilson

    Solid throwback article. And I love the blurb at the end that has the results of the experiment with UNREASONABLE at Sea. What I like about this idea is it ties the accelerator further into a company. While I think accelerators by nature are already more connected than an incubator, this takes it a step further. While a lot of entrepreneurs in startup settings are accepting of a heightened level of risk, some may be withholding at a threshold that the system you explain may break through. It will be cool to see if it continues to spark not only a growth in potential companies in accelerators, but also their success.

  • Nicolas Demeilliers

    Thanks for sharing your experience Daniel. And thanks also to Teju for the comment.

    Charging equity or having revenue-sharing agreements have in the end the same cause: you believe in the company you accepted in your program and want to benefit from your collective success. If entrepreneurs apply to your program it is because they believe you can bring them great added value. So why not charging them? The issue is that if you had to charge the real value of your services, that would probably be too expensive for early stage ventures and accelerators would not be able to survive or grow (unless they receive external funding or have designed a specific revenue model like you guys at Unreasonable).

    I believe in success based revenue such as charging equity and revenue sharing. If you do great work (this includes selecting the businesses with the greatest potential) and provide them with superb services, then you should benefit from your work if the company is successful. An interesting mechanism is to provide seed-funding right from the start in exchange for equity and/or share of revenues. That really guarantees that the accelerator will closely work with the entrepreneurs and give them the best service they can. In fact, the accelerator market is increasingly more competitive to attract the best entrepreneurs and in some countries accelerators have to provide seed-funding.

    Daniel, Teju – Thanks again for inspiring us all and setting the bar high for accelerators. All the best

  • natebbeard

    It seems like your suggesting accelerators use basic customer satisfaction models commonly exemplified in business by companies like Zappos and Amazon. This contract Unreasonable at Sea has with its customers seems to employ that philosophy effectively as well. Thanks for not only expressing this problem, but also providing a tangible solution and example, Daniel!
    The 7% equity calls for continual support of the entrepreneur’s efforts in the long run . After all, I believe most startups fail around the two to three year mark? I heard of one exceptional long term investment with Techstars happened when one of the mentors actually joined the team the day before they graduated. That speaks to what accelerators should try and focus on: creating long lasting substantial relationships between people trying to change the world. How have you seen the most successful accelerators keep supporting startups two to three years after they graduate?

  • cameruca4

    I absolutely agree with the premise of this article. I think at some point accelerators run the risk of becoming more interested in the 7% equity then the success of the startup, especially if they don’t get along with the founders, don’t necessarily believe in the product/idea, etc… I think your solution is simple and an easy way to ensure that both the startup and the accelerator are working together to grow the company. In the end by forcing the accelerator to work harder on each startups success to earn their 7% equity share, only further guarantees that their investment will be a good one. Thanks for the great throwback thursday post.

  • Isaac Sawatzky

    This is a great explanation and demonstration of taking a positive outlook and making a plan from a potentially negative fact that many accelerators aren’t doing what they promise and they are still taking people’s money. You and the folks of unreasonable at sea clearly have the infallibly positive attitude of a social entrepreneur. I think that the half-way idea just works as well. My only question would be what if these accelerators were to stoop even lower and just front load their events so that companies want to stay involved then they end up not delivering just the same. This maybe be irrelevant but I think that people do things for money in certain circumstances.. Now that I think about this mindset that i’ve taken is not infallibly positive.

  • Caitlin Donohue

    Thank you for this article!! What a great point. Before you shared your idea about giving people the option to opt out half way through, I though about a different “half” idea. That idea is for accelerator programs to give back have the money to companies if said companies are not satisfied with the program. I think your idea is great! Why not be the first to start your idea? Lead by example. If this is successful, competitors will realize this and possibly start (or at least think about starting) to change their ways to help the company more. Your idea seems to be a safe idea to protect the company as well as you guys running the accelerator program. How many companies are or will be participating this at first?

  • duongh1

    I agree that we need some structures in order to control and monitor start-up accelerators. We need a structure that makes people to take responsibilities for their own failures. Only then, overly aggressive start-up business decisions can be put under control.

  • Steven Bichler

    I agree that we need to have control over certain parts of a start up in order for it to do well because the start up in your envision. In my case selling health promotion is part of my start up and the part I love is “If they don’t see value in the program, they leave half-way through…” This is because if people done think you have good value in your health program they will leave for one of the other millions of options they have. So make sure you control your ideas and not someone that will use you.

  • Brandon

    Thanks for the article!!! i agree with your points about this article like the idea about “if they don’t value the company then they should quit half way through it” so true because if the are not going to become a better person towards that company it would help out the company.

  • amykahl8

    What I would really like to see is businesses concerned with bettering the world or America like the unreasonables, instead of just being concerned with making a huge profit. What some people don’t realize is that we have to take care of people and our environment before it’s too late, because once it is, there won’t be any businesses making profits. What’s the main goal of most businesses today, would you say?

  • Tammy Hartmann

    Daniel, thank you for sharing the article. I certainly agree with your comment, “If they don’t see value in the program, they leave half-way through…” This gives an opportunity to somebody who need structure and limits to learn self-control and to make responsible choices on their own.

  • Tim Rutkowski

    I completely agree with you Brandon. The value of the program and the individual are two of the most important aspects of growth and development from within the company.

  • Nathan

    Thanks! I think that most people get involved with companies just to make a lot of money. It would be fantastic to get people that want to start a company to better the World. People need to want to help people rather than just help themselves. Our environment is influenced so much on what we do, so people need to try and fix it. How can we pass this message on to other people?

  • JeremyWahl

    i agree and tend to think a lot of people choose a career just for the money and they dont like what they are actually doing. when you dont like what you are doing, work just drags on. they always say when you like what you are doing, you never work a day in your life. as a previous nursing student and visiting hospitals to talk to nurses, you could tell which nurses were truly there to help people and nurses who were there for the money.

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  • dwyerms07

    Great article and had a lot of good point. So many people strive to make as much money as possible and not take a job that they would enjoy. I believe this is happening because today society looks at success as how much money you make and not on the positive impact a person makes on a community or a group of people.

  • dwyerms07

    I agree with you that there needs to be more people who don’t just strive to make money but to better our world. I feel that majority of people will not participate in this because they just strive to make money and don’t care about things that do not affect them personally.

  • dwyerms07

    i could not agree with you more. Having people in a company that only strive to make money would have a negative impact on that company