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How Accelerators Help Start-ups Get Funding

How Accelerators Help Start-ups Get Funding
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Business accelerator programs offer start-ups low cost space, business services, talented employees, and contacts who can help find customers and partners in exchange for a small stake.
Unlike business incubators, business accelerators are highly selective. But like anything worth having, getting your start-up accepted by the best accelerators is a matter of winning a competition. But that is probably wise since most ventures fail.

As an investor in start-ups, I have heard the accepted wisdom that out of 10 portfolio companies, only one is likely to be a big success, the rest will either fail or barely return the investment -- "only" half of my investments failed.

And just to get into an investor's portfolio, a start-up must defy daunting odds. The venture capitalists I interviewed for my book Hungry Start-up Strategy: Creating New Ventures With Limited Resources and Unlimited Vision (Berrett-Koehler, 2012) made it clear that they talk to about 1,000 ventures a year and invest in one or two.

But getting your venture accepted into an accelerator can help immensely when it comes to getting into a venture capitalist's portfolio. That's because when a start-up is accepted, it has three months to develop a working prototype for its product and to get a customer.

Related: Cred, Connections, Cash -- The Workings of a Business Accelerator

If the start-up meets those milestones, it can tap the accelerator's network of investors to raise venture capital. And for the venture capitalists, the accelerators serve a valuable function – by forcing the start-up to demonstrate that it can get a customer before they write a check.

The more selective the accelerator, the more likely they will accept the "hottest" start-ups -- which have the greatest odds of yielding a bidding war among the most prestigious venture capital firms.
So which are the best accelerators? Y Combinator tops Forbes's April 2012 list of the top 10 incubators -- followed by TechStars, DreamIt Ventures, AngelPad and others. 

The value of Y Combinator's 172 companies in April was $7.78 billion, for an average of $45.2 million per company. That includes its most valuable companies, Dropbox and Airbnb, as well as relatively small and shuttered ventures.

Companies that graduated from Y Combinator in March 2012 competed to raise capital at valuations between $10 million and $15 million. Big-name venture firms, including Sequoia Capital, early Facebook investor Yuri Milner, Ron Conway and Andreessen Horowitz provided $150,000 in guaranteed funding to each startup.

Related: Is Your Business Ready for an Incubator? 5 Tips from a 'TechStars' Grad

Consider these two examples of start-ups admitted to Y Combinator and ended up with checks from venture-capital firms three months later.

CEO and co-Founder of Bump Technologies David Lieb was irritated at having to type contact information of people he met into his smartphone, so he developed a mobile app that exchanges contact information and photos by simply "bumping" phones.

Lieb and two co-founders worked on Bump app for a year as a side project, launched it and then entered Y Combinator. After three months, Bump reached more than 4 million downloads, received $3 million in VC investment and left Y Combinator.

Eric Frenkiel worked at Facebook before co-founding fast database start-up memSQL. He concluded that there was a big need for faster databases that could analyze the huge volumes of data that social networks generated. Three months after entering Y Combinator, Frenkiel had found a customer and his partner, Nikita Shamgunov, had developed the technology.

Frenkiel and others I have spoken with at Y Combinator got value from watching the rapid progress of other companies in their cohort. These peer entrepreneurs were tackling the same challenges. Peer pressure pushed them harder to succeed. Y Combinator partners and its network of investors and advisors also provided useful advice.

When Frenkiel and Shamgunov demonstrated their product at the end of their Y Combinator stay, they received $150,000 in capital from Milner. Milner was in Russia at the time and delivered the good news via "a moveable contraption that's one-part Segway, one-part webcam." Frenkiel joked that "I never in my wildest imagination would think a robot would ever give money."

As Lieb and Frenkiel learned, it's not the robot that gives them money, it's the power of incubators to present start-ups to top venture capitalists. They have cleared a major investment hurdle: building a product and finding a customer willing to use it.

Related: Starting Up Under One Roof: A Look at Residential Incubators

Peter Cohan is president of Peter S. Cohan & Associates a management consulting and venture capital firm. He is the author of Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision (Berrett-Koehler, 2012).

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