The difference between a successful or unsuccessful startup can mean a multi-billion-dollar unicorn valuation or mountains of unpaid debts for the founding team. Anyone nurturing a startup should take great care to use data-based best practices to become a top startup accelerator.
Since the gold standard of the seed accelerator and venture capital investment world seem to be about a 10 percent success rate, it’s worth asking whether a seed accelerator is worth the time for a new startup. If yes, it’s worth investigating which best practices lead to the most optimal results.
Thankfully, researchers at UNC Kenan-Flagler and the University of Washington have done precisely that and published their findings in two papers. To help accelerators put their best foot forward and ensure their programs are implementing processes that offer the best chance to succeed for the startups that they nurture, we’ve summarized their high-level findings from the research papers “Do Accelerators Work? If So, How?” and “The Role of Accelerator Designs in Mitigating Bounded Rationality in New Ventures” below, along with adding a few other tips for success.
Are Seed Accelerators a Value Add for Startups?
Anecdotally, hearing that startups like Airbnb, Dropbox, Stripe, Instacart, and others have gone through seed accelerators and achieved unicorn status leads us to want to believe it was the accelerator itself that led to their success. However, we should want much more than anecdotal evidence with the founders’ futures and the startup ecosystems’ reputations on the line.
Additionally, with so many incubators and accelerators in the market today, what differentiates a good from a great or terrible one? Not every accelerator has produced a unicorn, but some have helped to launch multiple.
Why?
At a high level, the “Do Accelerators Work” study linked above found that seed accelerator graduates of the top accelerator programs raised 171 percent more funding than similar startups who had not gone through accelerators.
Another study found that one-third of startups that raised Series A funding were also graduates of accelerator programs. While these numbers indicate fundraising rather than customer-based revenue, we know that the two are often inextricably linked in this business.
Startups that have participated in an accelerator also tend to have more traffic to their website, higher employee counts, and a higher chance of surviving the first few years of their startup’s operation.
Digging more deeply into these academic papers, the authors conducted a quantitative analysis of four cohorts of companies that went through accelerator programs, in addition to interviewing 70 accelerator participants, directors, and mentors from eight different US-based accelerators to find out what factors could differentiate unicorn-creating accelerators from others.
Below are their takeaways and additional tips for building an accelerator program that prepares its startups for success.
3 Key Data-based Takeaways
1. Front-load mentor meetings
A large part of the value for startups in participating in an accelerator comes from access to and meetings with mentors. Since the time scarcity factor is a crucial aspect of accelerators (discovered by accident, according to Y-Combinator founder Sam Altman), the researchers found that accelerators planned those mentor meetings in one of two ways.
Either the accelerator front-loaded the mentor meetings, leading to the founders spending more time meeting than coding during the first few weeks of the accelerator, or they spaced them out to provide a well-balanced schedule of meetings vs actually working on the product.
Common sense would dictate that the even-balanced approach would work better, as the very purpose of the accelerator experience is to build the next unicorn startup, but common sense would be wrong.
The researchers found that the founders from startups with their mentor meetings bunched together took more away from those meetings and could implement more of the knowledge they gained. This is because common themes would often emerge across all of those meetings, and through close repetition of those themes, the founders were more likely to pick up and put those themes to use when building their startups.
2. Foster transparency within the cohort
A common fear among first-time startup founders is that someone will hear and steal their idea. Once a founder has lived through the entire startup process and realizes how difficult it is to build, fund, and launch a startup, those fears are typically put to rest.
Still, due to those fears and a desire to protect their proprietary knowledge, data, or technology, many accelerators allow their cohorts to work separately and in secrecy to protect what they are working on. In cohorts filled with budding entrepreneurs who already have the drive to start their own companies, it’s not hard to see why they do it this way.
However, the researchers found that accelerators that chose the opposite track produced better-performing and more competitive startups. Transparency is created by scheduling regular check-ins and product demos with peers that the entire cohort participates in.
The researchers found that by sharing their progress, new ventures may learn from each other and mitigate bounded rationality – the process by which startup founders identify potential opportunities and determine how best to take advantage of them.
3. A common, rigorous schedule is the best
The researchers also found two basic methods by which accelerators set up their programming for cohorts. Some institute a rigorous, one size fits all “mini-MBA” (the researchers’ phrase), while others allow founders to tailor their schedule according to the unique needs of their startup or niche.
While it would seem that every startup is different and has unique needs as opposed to others, the researchers found that a common schedule forces founders to spend more time focusing on elements of their business plan and opportunity that they may have if allowed to tailor schedules according to their own perceived needs.
As the point of an accelerator is to teach founders how to “accelerate” their startup in a way that they haven’t been able to do on their own, it does make sense that they aren’t likely to understand where their focus needs to be.
Other Tips & Findings
The above researchers aren’t the only ones who have looked into best practices for seed accelerators. Others have established best practices that have not been adopted industry-wide throughout the accelerator ecosystem. Let’s go through some more of those learnings below.
Educational aspects are important, but time is of the essence
The time scarcity inherent in accelerators helps to add a level of stress and requirement to founders that can enhance the process and drive returns. As the old saying goes, “if it weren’t for the last minute, nothing would ever get done.”
Because there is the factor of scarce time, every moment during an accelerator program is essentially “the last minute.” As accelerator programs are designed to teach founders, however, that creates an issue for the program: what are the most important lessons that should be implemented into the schedule?
Susan Lee Cohen of the UNC Kenan Flagler business school published a dissertation called How to accelerate learning: entrepreneurial ventures participating in accelerator programs that dove into this question specifically and help ascertain how accelerators could include all necessary programs within the allotted time.
The various accelerator programs teach some level of business fundamentals (at least 97 percent of them do), which is important as tech-educated founders aren’t likely to have many of those skills in their wheelhouse. The differentiator between high and low-performing accelerators is how much time they dedicate to which skills.
A study of 15 Village Capital programs by the Global Accelerator Learning Initiative (GALI) titled What’s Working in Startup Acceleration found that low-performing programs spend more time on business fundamentals that can be outsourced to business service providers than high-performing programs do.
Low-performing programs tended to spend 18 percent of their time on finance, while high-performing programs only spent 11 percent. Low-performing programs spent 15 percent of their time on business plan management, with the high performers only opting for 9 percent.
Conversely, high-performing programs spent 24 percent of their time networking, while low-performing programs only spent 18 percent. The high performers spent 20 percent of their time on presentation and communication skills, while the low only spent 11 percent.
If what the startups themselves care about matters to your accelerator, this whitepaper by Impact Accelerator found that the most requested subjects by founders were user experience, digital marketing, and SEO optimization.
Choose an area of focus
If you are looking to either build or improve an existing accelerator, perhaps one of the best pieces of advice would be to choose a specific area of focus from which to draw your founder cohorts. Well-established accelerators like Y-Combinator and TechStars have the name recognition to pull investors and experts from across the spectrum, but that’s far more difficult without their star status.
As with the startups themselves, choosing a single target market within which to launch your MVP and attract customers is typically far more beneficial. Likewise, suppose your accelerator can choose a specific area of focus. In that case, you can dedicate all of your efforts towards finding investors, mentors, experts, specialists, and universities who either have an interest or subject matter expertise within those fields.
Many of the current articles and literature guiding founders on how to find the best accelerators give them this advice, so you should use that to your advantage. If the potential candidates are being guided towards an accelerator that focuses on their specific niche, it would be wise for accelerator partners to plant their flag in a niche to lure the top-tier founders to their accelerator.
Closing
There are over 200 accelerator programs in the US alone, with far more globally in an ever-expanding field. Places like Chile and Dallas are getting in on the action to bring innovation and jobs to their locales, meaning the field will continue to widen.
Despite the growing interest and emergence of new accelerators, the results can be varied. Many of the most well-known accelerators in the world have around a 10 percent success rate for an exit from their investments. In contrast, lesser-known accelerators have 20-50 percent exit rates, and some large accelerators have less than a 10 percent success rate.
Just as varied as the success rates for accelerators are their programming decisions. There are different program lengths, business models, amounts of funding provided, classes taught, and programming methodologies. Thankfully, researchers have taken the time to find data-based best practices, and the savvy accelerator leadership teams would be wise to heed what they have found.
A well-run and results-oriented accelerator can create a virtuous cycle of success. By nurturing startups and providing them with the tools, knowledge, and network to succeed, they go on to successful funding rounds and large customer bases. With those startups on their resume, the accelerator garners attention and increases top-tier founders who want to leverage their successes.
A savvy accelerator team will teach their cohorts to rely on data-based evidence rather than anecdotal whenever possible. As we have the data-based evidence for best practices within accelerator programming, we would be wise to take our advice.
