While accelerators have helped nearly twice the number of companies grow and start, there are still many questions about the value they provide to a startup. Which is why I see a dramatic change happening in the next few years in the model that accelerators operate in. The change, will be subtle but will have dramatic consequences on their operations.
Startup entrepreneurs are largely used to paying for outcomes – they don’t mind paying (in India they will negotiate a lower rate, but will be open to paying) for customers acquired, revenue produced or key resources hired.
I think the same will happen to accelerators. As entrepreneurs start to question the value of the accelerator, some of the progressive accelerators will start to offer outcome based ownership ratchets. Currently most accelerators get a fixed 6-10% of the company in exchange for $10K – $50K, regardless of outcomes.
The future will see a sliding share of ownership based on outcomes the accelerator generates for the startup.
This will also coincide with the un-bundling of services offered by accelerators. Currently the services include – space, some money, mentorship (advice, guidance, consulting) and network (access to the investor list, partnerships, etc.)
I can see the future when the initial amount of money (which itself will be optional) invested results in a small fixed ownership (say 2% – 3%) and then a 1-2% on closing the financing round which was initiated or supported by the accelerator or 1-2% per customer closed or 0.5% based on the accelerator helping hire a key resource, etc.
In fact many accelerators will offer the initial seed money as an option as opposed to a default.
Startups would then choose whichever services they see value in or those that they seek outcomes for.
Why do I think this will happen?
First, the perception among most entrepreneurs is still that accelerators are for “first time”, “student” or “inexperienced” entrepreneurs. The large exits and even larger companies are being created by entrepreneurs who skip the accelerators and directly go after financing by an angel or venture investor. Accelerators want to ensure those experienced “hot” startups or entrepreneurs also come to the accelerators as their first choice. These experienced entrepreneurs though, dont value all of the services equally, thus the un-bundling.
Second, many entrepreneurs are still not clear on what the value is that is being provided by the “mentorship” or the “network”. While the seed money provided has definite value, it is a very small amount to warrant a 6-10% dilution.
Finally many entrepreneurs still dont believe accelerator interests are aligned a 100% with theirs. Although most entrepreneurs know that the success of their startup is largely due to their own efforts, they should expect to see tangible value from the accelerator to help put them on the right track towards success.
Do you know of any accelerators that are aligning their interests to the entrepreneur’s outcomes? Any progressive accelerators that are trying this model?
Mukund Mohan helps startups at the Microsoft Accelerator and is a seasoned entrepreneur.
He founded and sold BuzzGain, a leader in Do It Yourself PR, to Meltwater in January 2010 and he also founded and sold 2 Silicon Valley startups in the Internet & Enterprise software markets. Mukund has held executive, manag ...
