Tech Startup Accelerators: Show Me The Money!

There is a formula for running a successful tech startup accelerator. It was developed by the prototypical accelerator, Y-Combinator. Some accelerator programmes veer from the formula in an important way: they do not provide funding. This is a fatal mistake.

Precisely what is provided by a startup accelerator varies: funding, office space, brand/logo development, accounting, banking, PR help, entrepreneurship mentoring, legal aid. However, if it does not provide funding, then its managers have failed to understand what makes the formula work.

Here is the first issue. Without funding for its participants, an accelerator is drastically changing the participant-and-ideas pool from which it might choose nascent businesses. Instead of choosing from the best ideas and the most execution-capable entrepreneurs, it is choosing from the set of ideas possessed by entrepreneurs who have money. This is a much smaller set.

This is not what you want if you are an accelerator. Paul Graham understood this when he founded Y-Combinator - you want to choose from the best ideas and from the most execution-capable entrepreneurs.

Here is the second issue. Without having to fund the participants, the mentors are not invested in the outcomes. Their investments in the applicants forms a large part of what drives mentors. Mentors should be required to put their money where their mouths are. If they believe that the companies will succeed, then they would want to invest.

Remember, the participants in tech startup accelerators are stars. If they were to instead be working at a regular job, they would be advancing their careers and making bags of money. The entrepreneurs are paying an opportunity cost to participate in the program already.

For a paltry 2 million dollars, a tech startup accelerator can fund 2 years' worth of cohorts. Even one successful exit from any of those cohorts will recoup all of the money.

Some accelerators take the stupidity a step further and actually ask the entrepreneurs to PAY to enter the program. WTF?

Funding is not merely a way to entice entrepreneurs into the programme. It is much more. Beware of accelerators that fail to realize this.