The startups ecosystem is filled with thriving businesses that got a push in the right direction. They include brands such as Dropbox, Stripe, Twitch, and Airbnb.
Startup accelerators are group-based programs with a fixed term and are mentorship-driven. It includes seed investments, industry connections, mentorship, and educational components. The aim of joining such a program is to accelerate your startup growth.
Since startup capital is required to drive growth, founders should choose an accelerator program carefully. There are different funding structures designed to serve a particular purpose or fill a specific gap faced by these young businesses.
Therefore a good accelerator considers the best interest of the startups in their program and their own sustainability when making funding decisions and evaluating the offerings.
Accelerator Funding Strategies and What to Consider
Startups are interested in different funding interventions. So they may pursue grant, debt, or equity investment in their growth process.
Further, they may choose the accelerator program based on the financial support offered and its implication on the startup business. They may also select an accelerator based on non-financial benefits like venture building or technical assistance, access to networks, training, peer learning, and more.
However, startup founders cannot get all support they need from just one single accelerator program.
Similarly, accelerator programs consider different factors when deciding whether to offer debt vehicles, equity investment, or grant funding startups in their portfolio.
Here is their approach towards startup funding.
Financial Upside: Accelerator programs experience certain difficulties when raising funds, so they take that into consideration as well as their opportunities when deciding the type of funding most appropriate to startups. For instance, equity has high upside potential, grants require constant efforts to fundraise, while debt or recoverable has minimal upside.
Administrative Cost & Complexity: The type of funding an accelerator program gives is based on its legal structure, the size of its team, and skillsets. It’s costly and time-consuming to maintain oversight on equity funding, especially when the portfolio grows. It’s easy to administer a grant but challenging to monitor in the long run. Structuring and monitoring a debt is highly complex and riskier.
Selection: Definitely, the volume of applicants is more than what accelerator programs can offer. However, the list of accelerators is growing each day, thus increasing competition among these mentorship programs, early-stage impact investors in addition to other support programs. They’re all competing for the best startups, so they consider this when deciding what type of funding to offer these businesses.
Impact: The majority of accelerator programs want to work with underserved users, so their choice of funding should portray an inclusive business model. Equity creates a long-term engagement between the accelerator and the founders, thus preventing any drift from the mission. Grants support underserved populations, which at first might seem less profitable. Debt powers startup models for an extended period due to its favorable terms.
Scale: Funding helps startup businesses scale, but it should contribute to it by derisking future investment. The best funding option should bridge the gap between series A rounds and angel investments.
Thriving Innovation Ecosystems: The explicit mandate of some accelerator programs is to oversee ecosystem development in a certain sector, region, or country. Therefore their funding structures have to demonstrate this mandate. So an accelerator program may use equity to make later-stage investments after getting a signal that this is a promising startup opportunity. They may use grants on early-stage and debt because it has valuable ecosystem benefits such as credit ratings.
Funding Models and Amounts
Accelerator programs engage in direct financing, but this may vary from company to company. For instance, some programs can offer up to $125,000, while others offer no capital. Equity is the most preferred funding option by accelerator programs with a large cash component.
Three things affect the accelerator’s funding models and amounts. These are:
Programs’ Own Sources of Funding: Programs can offer equity, grants, or loans based on their capabilities as well as their source of funding.
Location: While most accelerator programs prefer equity investments, the option can be legally complicated when the ownership involves different countries. Still, the program location – is it a private sector or non-profit company – affects the capital instrument to use. So philanthropic funders or foundations prefer giving grants instead of equity investments because they don’t want to take ownership stakes in for-profit startup businesses.
Startups’ Goals: Startup models that require intensive capital or working capital may prefer debt; however, accelerators rarely give this type of capital. Actually, funding startups through loans can contribute to the accelerator program sustainability and subsidize its costs, especially when the repayments are made frequently according to the program goals.
Why is Impact the Grant Funding Models’ Primary Consideration?
In some cases, the funding approach that programs take might be influenced by its focus on impact or inclusion.
Generally, the underserved users tend to be risky to serve. For that reason, they may require risk-taking capital to seed and test innovative businesses developing solutions for such a category.
Still, more research, data, and insights is needed when developing models that can successfully reach users in this segment because they’re less understood or their needs are unknown.
For those reasons, the majority of programs targeting these lower-income, underserved markets prefer grants funding because it offers them more flexibility they need to push product innovation boundaries.
Still, programs that are committed to accelerating inclusive fintech through knowledge outputs and learning agenda may opt for grant funding. In fact, the programs actively promote the flow of ideas, information, and best practices in order to broaden the philanthropic funding impact. Indeed this gives more entrepreneurs access to knowledge need to spur more innovation.
Areas of Improvement in Accelerator Programs Startup Funding
1. Assistance in Raising Funds
Generally, accelerator programs should help startups choose the right investors for their business. Startups have limited experience and exposure in the world of business unless it’s a serial entrepreneur. Also, fundraising may consume a lot of time, so getting help to find the right fit instead of sifting through lists of investors is valuable.
So it would be helpful if accelerator programs would help startup founders more optimally target and evaluate investors. This will help them succeed in raising capital even in the future when they complete the accelerator program.
2. Investors Education
Founders in emerging markets have to educate investors before they get funding. This is common in less developed ecosystems and products. Therefore, the entrepreneurs are required to spend a significant amount of time educating investors about this segment, value chains, and their target markets.
Shifting this role to accelerator programs can free more time that founders can use in their business rather than creating educational content for investors who might not even fund their business model.
3. Selection of Accelerator Programs
There are several accelerator programs in the market, and founders need help to pick the right one for them. Actually, there are over 7000 business incubators and accelerators globally, and nearly 90% of these are non-profits. Thus they mainly focus on community economic development.
However, accelerators’ clear differentiation of offerings and greater coordination can help founders choose the right program for their startup business.
Some of the information that startups need is types of support, funding stages, funding mechanisms, and more.
4. Underrepresented Founders
Some accelerator programs have restrictive eligibility criteria and requirements that lockout women and underrepresented founders. These include the need to present documentation in English, and being present on-site at a specific location deters local founders in emerging markets.
However, embedding locals, women, and non-traditional founders in their target communities or creating a diverse program team will bring on board a diverse founding team.
How is the Startup Accelerator Process?
Accelerator programs are designed for early-stage startups. The following is the process of joining an accelerator program.
Application: Getting accepted by top accelerators can be difficult and have a low acceptance rate (1% – 3%). However, this should not deter you from making your application. You will actually interact with their operator during the process, which will help you gather more information regarding their program.
Funding: Founders opt to take the accelerator path because they need capital. On the other hand, the accelerators offer seed money for an equity stake in your company. This may range between $10,000 and $125,000. Founders should be careful when giving up a share of their company because it will affect future fundraising rounds.
Commitment: Entrepreneurs are put through a 3-6 months on-site program with co-working provided. They spend 100% of their time during the program working on their startup. It’s also an intense, high-pressure environment. Therefore, these founders are expected to focus during this intensive time as well as make progress.
Learn: An accelerator program is all about learning. So an entrepreneur should expect to attend workshops, seminars, and mentorship opportunities. These programs cover topics such as pitching to investors, the legal aspect of the business, launching a venture, among others.
Networking: Accelerator program provides entrepreneurs with plenty of opportunities to network with industry support providers, fellow founders, and potential investors. These are invaluable connections, particularly when it comes to future fundraising.
Graduation: An accelerator program has a fixed term and is cohort-based. Therefore, each startup in that particular cohort will be given an opportunity to make a presentation as well as pitch to a group of active investors. This is typically known as a “demo day.”
Therefore joining an accelerator program is something startup founders are proud of, and the connections they create during the program may lead to lifelong relationships. Actually, your future venture capitalist introductions might come from this program, and accelerator funding is all that your startup needs.