The startup launch and scale landscape is changing, but that’s nothing new.
Before venture capital investments were the norm, business owners had to apply for a loan from the bank and before that, they had to bootstrap their venture completely.
As technology evolves and entrepreneurs get more creative, it’s no surprise that the process for obtaining startup capital is shifting but it is worthy of discussion as not every change will be one for the better.
Startup founders seek Venture Capital as early as the seed stage. Typically, VC’s won’t invest until the startup team has found some meaningful way to demonstrate that their idea has traction- but they no longer require startup teams to submit heavy business plans with three-year financial projections and cost analyses. Although it may seem like VCs are doing entrepreneurs a favor here, this is more the result of the VCs, not wanting to read through long business plans that will likely become obsolete in a few months.
Startups change rapidly and unpredictably, for this reason, business plans are next to useless.
If a startup shows some promising progress, a VC firm would invite them to pitch, discuss their go-to-market strategy, and side-bar with each other until they’ve reached a decision. At this point, the startup founding team is presented with a money for equity offer that looks something like: “we will give you $100,000 in exchange for 30% of your company.”
VC firms have to take a significant portion of equity to reduce ( or at the very least) maintain their portfolio risk level. Investing in new startups is a huge gamble because there are so many things that can go wrong. Investors know this and use it as leverage when negotiating with entrepreneurs.
Once the deal is made, the venture firm provides resources aside from capital. Typically, VCs are great for making introductions for the founders to key partners, adding credibility to the startup by sitting on their board and cross-promoting the startup venture to other businesses they know and work with.
Startup accelerators have one goal: help entrepreneurs take their idea or early-stage venture and turn it into a business worth investing in.
The key benefits an accelerator provides are curriculum (a week by week program that walks founders through the stages of business building), hands-on support (including tech and recruiting help), networking opportunities (accelerators have wide-ranging connections with various stakeholders and key partners within the startup ecosystem), and access to space, mentors, and other basic resources.
Accelerators are like entrepreneurs schools.
Most often, accelerators have a theme or an industry vertical that they stick to. These themes can range from startup stage (like idea-stage, seed-stage, series A stage, etc.) through industry type (like sustainability, social impact, tech, retail, etc. ). Accelerators run their programs once or twice a year with each program’s group of founders being called a “cohort”. There are anywhere from 6–30 entrepreneur teams in each program cohort.
Accelerators Vs. Venture Capital
In recent months, I have noticed a lot more VC firms boasting about their new program cohorts and I have also noticed a lot of Accelerators advertising their startup funding style.
The problem here is that Venture Capital firms were not meant to run “learn to be an entrepreneur” programs and Accelerators were not meant to “fund new startups in exchange for equity.”
However, this switching of activities is exactly what each side is doing in the current market so I began to question: is this a good thing or a bad one?
The below chart depicts a comparison between the major elements that matter to startup founders when they are considering their next steps.
As you can see, VC firms provide way more funding than Accelerators do but they also take a ton more equity (in most cases) than Accelerators.
Both organization types have roughly the same benefits when it comes to connections as VC firms tend to have deep connections and Accelerators tend to have many broad-ranging connections- which means they’re tied for that element because there are the same number of pros and cons to each.
Additionally, traditional VC firms make a few big investments each year whereas Accelerators generally make a lot of small investments because they have so many entrepreneur teams in their cohorts. The number of investments made each year matters because the more investments you make, the less unique attention can be paid to any one investment.
This is not to say that accelerators don’t give their startups individual and hands-on attention. In fact, I would argue that they give more hands-on attention to each of their founder-teams because they have more resources at their disposal including industry experts and mentors who volunteer to spend time with the founding teams. Venture Capital firms, on the other hand, are less likely to be directly involved with the launching and scaling of startups and act more in an advisory role.
In my opinion, new innovation within old investing models is fantastic. I love the out of the box thinking coming from both VC funds and Accelerators but I am worried that these activities might not be in the best interest of the entrepreneurs involved. I have to question the incentives of Venture Capitalists when they go out a create a “program” for entrepreneurs.
Are they just trying to fill their startup pipeline or are they really trying to help founders learn how to start, launch, grow, and scale a business?
Do they have the time it takes to engage hands-on with each founding team in their cohort or are they just hoping the curriculum alone will be enough for entrepreneurs?
On the flip side, I question why Accelerators are so interested in the funding for equity model. The more prevalent the money is in the equation, the less entrepreneurs vet the Accelerator to really determine if this is the right fit for help building their business. Money can blind people, and entrepreneurs are especially vulnerable to this trap because they’re very passionate and often broke. What incentives do Accelerators have to keep their program exciting and updated when entrepreneurs are coming for the money anyway?
All in all, I think the shift we’re seeing in both the Venture Capital space and the Accelerator domain is a positive one. The more options and resources founders have the better as far as I am concerned, but we all need to watch this trend closely and make sure that the winners here are always the entrepreneurs. To take advantage of these innovative amazing humans for financial gain and popularity is immoral and unacceptable.