What does an Accelerator Company do?
An accelerator company, also known as a startup accelerator or seed accelerator, is a type of organization that helps early-stage startup companies grow and succeed faster. The goal of an accelerator company is to “accelerate” the development and growth of promising startups.
How Accelerator Companies Help Startups
Accelerator companies provide several kinds of assistance and resources to help startups quickly build and scale their businesses:
Seed Funding
One of the main things accelerator companies provide is seed funding. This is an initial small investment, often in exchange for equity in the company. The funding gives startups capital to build their initial product, hire early employees, and start growing. Typical seed funding from accelerators ranges from $20,000 to $150,000.
Mentorship
Another critical thing accelerators provide is high-quality mentorship. Accelerators recruit experienced entrepreneurs, investors, and experts to be mentors. These mentors meet regularly with the startups to give guidance, advice, and coaching on all aspects of building the business. This mentorship is extremely valuable for first-time founders.
Educational Programming
Most accelerators offer an intensive multi-month educational program for the startups in each cohort. The program includes seminars, workshops, guest speakers, and more. Topics covered include marketing, sales, fundraising, hiring, product development, and other key areas for building a successful startup. This educational program rapidly upskill the founders.
Co-Working Space
Accelerators usually provide free office space for the startups to work out of for the duration of the program. This co-working environment allows the founders to focus 100% on their startup and get a lot done quickly. It also facilitates peer learning and collaboration between the startups in the cohort.
Investor and Customer Connections
Top accelerators have extensive networks of angel investors and venture capitalists. At the end of the accelerator program, they organize a “Demo Day” where the startups pitch to a large audience of investors and customers. This gives the startups broad exposure and helps them rapidly raise their next round of funding and get initial traction.
Alumni Network
After startups complete an accelerator program, they become part of that accelerator’s alumni network. This alum network can be precious—alum startups often become mentors, investors, advisors, or customers for future startups that go through the accelerator. The alum network provides an ongoing support system well after the program ends.
How the Accelerator Model Works
Accelerator companies generally run programs a couple of times per year. Here’s how the process usually works:
Application and Selection
First, startups apply to be part of the accelerator’s upcoming cohort. The application process is usually highly competitive, with acceptance rates under 5% for top accelerators like Y Combinator. The accelerators select the most promising applicants based on the strength of the founding team, market opportunity, and initial traction.
Program Participation
The startups selected to participate begin the core accelerator program, which usually lasts 3-6 months. During this period, the startups rapidly grow and develop their businesses, working intensively and getting support from the accelerator staff and mentors.
Investor Pitch and Fundraising
The accelerator program culminates in a Demo Day, where the startups pitch their businesses to a large audience of potential investors and customers. The exposure and validation of completing a top accelerator program helps the startups quickly raise their next round of seed or Series A funding to continue growing.
Alumni Support
After the accelerator program, startups become part of the accelerator’s alumni community. They often stay connected to the accelerator and future cohorts through events, an online community, and ongoing ad hoc support from accelerator staff and mentors. Accelerator companies measure their success by the long-term success of their alums.
Benefits of Accelerators for Startups
Going through an accelerator program provides several critical benefits for startups:
Speed of Growth
The number one benefit is radically increased speed. Compressing a year’s worth of business growth and learning into a few months lets startups figure out their business model and start scaling faster than they could have otherwise.
Quality of Mentorship and Advice
The caliber of entrepreneurs, operators, and investors involved with top accelerators is very high. For first-time founders especially, learning from these experts through mentoring helps them avoid costly mistakes and guides them on how to grow their startups correctly.
Prestige and Validation
Getting accepted into a top accelerator is extremely difficult, but it is a big vote of confidence in a startup’s potential. A brand like Y Combinator or Techstars in a startup’s history provides instant credibility to future investors, hires, and customers. This prestige makes everything more accessible for those startups.
Investor and Customer Connections
Especially for first-time founders without extensive networks in the startup world, the connections an accelerator provides to top angel investors and venture capitalists are a considerable benefit. Warm introductions from trusted accelerators make it much easier for startups to raise money and close sales deals.
Peer Support and Motivation
Going through the intense accelerator experience together builds close bonds among the founders in each startup cohort. These peer relationships provide crucial support during the inevitable ups and downs of the startup rollercoaster. Alum founders often continue to help each other out for years after the official program ends.
Accelerator Success Stories
Many of today’s most successful and well-known tech startups started at top accelerators. Some famous accelerator alumni include:
- Airbnb (Y Combinator): Airbnb went through Y Combinator in 2009 and is now a public company worth over $70 billion. Y Combinator’s early mentorship and funding were crucial in Airbnb’s journey.
- Dropbox (Y Combinator): Dropbox founder Drew Houston was a solo founder when he did Y Combinator in 2007. The accelerator helped him find a cofounder and refine Dropbox’s business model. Dropbox IPOed in 2018 and is worth over $8 billion today.
- Stripe (Y Combinator): Stripe was started by Patrick and John Collison, two young brothers from Ireland. Y Combinator helped them move to Silicon Valley in 2010 and rapidly grow the business. Today, Stripe processes billions in payments valued at nearly $100 billion.
- Plaid (Techstars): Plaid makes APIs that help fintech apps connect to banks. Going through the Techstars accelerator in New York in 2013 helped founders Zach Perret and William Hockey grow the business. Visa acquired Plaid for $5.3 billion in 2020.
- SendGrid (Techstars): SendGrid, which provides email APIs for developers, went through the Techstars accelerator in Boulder in 2009. The accelerator’s mentorship helped SendGrid figure out its business model and pricing. SendGrid went public in 2017 and was acquired by Twilio in 2019 for $3 billion.
There are now hundreds of accelerators operating worldwide in various sectors and geographies. The core accelerator model has proven to be an effective way to help startups succeed.
Limitations and Downsides of Accelerators
While accelerators provide significant benefits for many startups, the model has some limitations:
Narrow Focus on High-Growth Startups
Accelerators tend to focus on startups that are pursuing substantial market opportunities and have the potential to provide significant returns for investors. This means they are not a great fit for startups going after niche markets or building smaller lifestyle businesses.
Pressure-Cooker Environment
The accelerator experience is very intense and fast-paced. Founders work long hours and are under constant pressure to hit milestones and show progress every week. This can be exciting but can lead to burnout if founders aren’t careful.
Giving Up Equity Early
Most accelerators take a significant equity stake, usually around 7%, in exchange for a small seed investment. While this equity is often well worth it, founders need to be thoughtful about giving up ownership at such an early stage.
One-Size-Fits-All Approach
While accelerators try to tailor their programs, most still follow a fairly standard playbook and curriculum. This works well for many startups but isn’t a perfect fit for everyone. Some startups may be better off pursuing alternative support paths.
