The Accelerator Conundrum and Good Business Sense

Acceleration is the “term du jour” for start-up companies, and entities called “Accelerators” have sprung up across the country to serve the thousands of companies that want to be the next Google, Facebook, or Twitter.  Acceleration services come in several flavors:

• First, there is real estate – as in a space to hang out and collaborate.  Physical accelerators typically house 5 to 25 companies – providing private offices and shared workspaces.  The rent is low, but the landlord is likely to be taking some equity for his trouble as well.  Since entrepreneurs find it hard to rent office space at market prices, this can be valuable, but you should ask yourself this question:  Would the CEO’s kitchen table work just as well for the two meetings a week when the whole is team is required?  Skype and FreeConferenceCall.com work pretty well, too, when group thinking is required.
• Next, there is mentoring.  Start-up companies are notoriously short on expertise across the board, because, generally speaking, it’s the guys who are inventing the product that start the company, and the other functions come later.  Plus, hiring a full management team and all the key employees that would make life easy is very expensive, and, besides expertise, the top thing start-ups lack is money.  For better or worse, early on, company founders drive sales.  Finance is a bank account.  Marketing is a mystery, and human resource management is a subject for another day.  If the mentor team at the Accelerator can provide cogent advice in these areas that saves time and money and juices your company’s performance, this is a huge bonus.
• Third, it’s even better if your mentors know something about your market.  Enterprise software, clean energy, social commerce, and healthcare IT require radically different knowledge and skill sets.  If you’re looking for a physical accelerator, pick one where the operators and mentoring team know something about your market, products, customers, and business model.
• Lastly, there’s the price/value equation.  Typically, Accelerators invest $50,000 to $100,000 for 3 to 7 percent of your company, and some ask for some of this funding back in rent.  Plus, your stay on-site may be short.  You might be “graduating” four to six months after you enter.  Is it worth the price?  For the Accelerator, the risk is small.  Historically, 20 percent of the companies that come through their doors will survive two years or more, and 10 percent will produce an excellent exit.  Your mentors might love young companies, but, for them, it’s a numbers game.  For you, it’s your work life and personal passion all rolled into one.  You should ask yourself:

• Can I get $50-100K in seed funding from some other place more cheaply and without as many strings attached.

• Do I really need office space nowDoes the accelerator offer the right type of mentoring?

• Can I hit key milestones during that four to six months that would attract additional funding?

Here are the other thing syou should ask yourself:

How good is my idea?
Does my idea have legs for the long-term?

These days, there seem to be two types of start-ups:

• Companies that build defensible products and business models.  If you are successful, you end up with a 12 to 18 month lead in the market.  As a result, you can make mistakes and survive them.  I have a client in Austin called StoredIQ that provides a Big Data Management software platform for unstructured data that is better at finding, collecting, indexing, and analyzing huge amounts of data than any other piece of commercial software in the world.  Better than HP-Autonomy, better than EMC.  The IT world is just now catching up to what they do, which means that the market is coming to them.  It’s a good place to be.  It took millions and millions of dollars to build the StoredIQ platform, and, someone wants to enter their market from a standing start, it will take millions and millions to catch them.
• Companies that create a killer model that can be rolled out fast and grow rapidly but is easily copied.  Facebook and LinkedIN have built dominant positions by building social networking platforms, building a critical mass of users, and then figuring out how to charge for access to the masses.  Both started early, built software platforms that appear simple on the surface but are complex underneath – making them hard to replicate on a grand scale, although Google is doing its best.  Therefore, a lot of entrepreneurs have created either niche social networking products – think social networks for doctors, lawyers, or accountants – or tools that connect with and enhance Facebook or LinkedIN – hoping that one or the other will buy them for a good price.  Note, however, that only 2 out of 100 “killer” social analytics tools will end up in the Facebook or LinkedIN product portfolio, and figuring out how to make money off of them as an independent is a big challenge.  

Groupon and LivingSocial have both built up big leads in the Daily Deal space, but barriers to entry are very low, big companies like Amazon and hundreds of small companies have entered the fray. For Groupon and LivingSocial, sustaining a high growth model will be a huge challenge.

If your business model is easily copied, there are two major implications:

1. There’s an added premium on execution.  You have to be as perfect as you can be in an imperfect world, because 25 or 50 companies are trying the same thing.
2. You might not need as much money to get started, but you’ll need more down the road to fund rapid market penetration against a torrent of competitors.

As strategy consultants who do a lot of "acceleration" of young companies at the kitchen table, we're big fans of long-lasting, defensible business models, even if the idea might be a little less sexy.

Here’s the bottom line.  Whether you go into an Accelerator space or leverage the kitchen table, there are three things that you should do right out of the gate:

• Create a great plan.  It can be simple, but you should some idea of where you want to be in 2 to 3 years.  You can do it by writing down simple milestones and documenting your product plan, or you can go deeper and write a full business plan.  Either way, you have to have a plan, and your fellow managers and employees need to understand and endorse it.
• Sharpen your story - continuously.  Never use 100 words when 10 will do.  People talk about the elevator pitch all the time.  You really need one, because, when it comes to attracting investors, employees, and customers, you want to give your pitch and then hear those magic words, “Really.  That’s interesting.  Tell me more.”
• Finally, know your numbers.  You need to set a multi-year forecast out of the gate that tells you what it will cost to build your product, how much revenues your initial customers could bring you, and how much funding you’ll need to reach your goals.  The forecast translates your plan and story into numbers and tells you how big the mountain is that you are fixing to climb.  And, if you can, match your forecast against the projected size of your market.  If you're trying to build a $50 million company in a $75 million market, your funding chances are probably pretty slim.  If you are remaking a $5 billion market that is old and stale or creating a huge, new multi-billion dollar green field market, your chances for funding at a fair valuation are much better.