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.”
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.”
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.
Update: We ran with this accountability model on the Unreasonable@Sea 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.