Accelerator Programs: The New Angel Investing Opportunity

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“There’s no question about it: Business [accelerators] make all the difference for many startups,” Natalie Burg, Forbes Magazine

Building a startup company is risky business. More often than not they’re unproven, untested, and unestablished. Investing in startups is even more risky. As FundersClub notes, “Making money as an [angel] investor is possible, but it’s also very risky, and you could lose all of your money as anywhere from 75 to 90 percent of startups fail.” 

Investors take these leaps of faith in hopes of getting in on the ground floor of the next Twitter, Google, or Facebook, where one investment can make up for many failures. Startup investing represents an asset class that can produce unprecedented profits. However, finding the next Twitter or Facebook with one investment is both unprecedented and unlikely.

Trends in Startup Investing

The accelerator program investment represents one of the newest trends in early stage company investing. These types of startup programs are typically 12-weeks long and provide a group of early stage companies with intensive education and mentoring. Instead of making one bet on one game changing idea, investors put their money behind all the companies in a class, which are hand picked by the accelerator programusually a rigorous and highly competitive process. 

The top startup accelerators in the world—Y Combinator, TechStars, DreamIt Ventures—have been operating for only eight years and are now valued at more than $6 BILLION each. As Tomio Geron of Forbes explains, “These programs provide new entrepreneurs with mentorship, advice and practical training on technical, business and fundraising topics to help them get from idea to product to launch and beyond." These resources greatly increase a startups chances of success and improve the potential for a return on investment.

Here are four key reasons to consider investing in a startup accelerator program in your community:

1. Diversify Your Investment

Spread the wealth… literally. One of the major advantages of investing in startup accelerators is the ability to diversify your capital across several promising companies rather than investing all your capital in one company. Most accelerator programs work with 10 startups at a time. These companies are pre-vetted and evaluated for admission into highly selective programs seeking the cream of the crop. 

Even if several fail, you still have a stake in those that succeed. By putting your money into an accelerator, you tie your investment to 10 completely different yet entirely original ideas/products, which spreads your risk and exponentially increases your chances of a return. 

It's not a lot different than putting your money in one company versus many in a number of industries in the stock market. Sure, there will always be one or two in the group that don't make it very far, but at least investors won't have only one egg in their basket -- they'll still have eight or nine that may return an investment.

A study of the top five startup accelerators in the United States by Venture Beat revealed that "companies in accelerator graduating classes from before December 2009 returned 11.3x on capital invested. These are fantastic returns for entrepreneurs, VCs, and accelerators.”

2. Maximize Success

Most great startup ideas are just that: ideas. Therefore, their founders need hands-on help in areas such as marketing, product development, market analysis, etc. Startup accelerators offer a compendium of successful entrepreneurs and businessmen ready to offer advice in their areas of expertise. This collection of market specialists provides a massive advantage to the companies in the program. As an investor, you also will have a chance to mentor those companies and keep a close eye on their progress if you want.

Fast Company staff writer Matthijs Keij notes,

“For many entrepreneurs, being part of something larger has helped them get their businesses off the ground more quickly and smoothly. Ultimately, an [accelerator] can be the perfect bridge to make the big step from idea to execution.”

3. See Your Money At Work

Most companies in accelerators are preparing for an investor round as part of their Demo Day pitch that caps off the end of most programs. Think of these presentations as an "Open for Business" sign and an indicator that they are now ready to raise a Seed Round, or "A" Round, of capital. If you've invested in an accelerator program and watched the 10 companies develop, you will be much better informed on whether you want to participate in a company's next round or not. Think of your investment in an accelerator as a vetting opportunity for your next investment.

Warren Buffet, arguably the most successful investor of all time, cautions, “You don’t have to swing at everything—you can wait for your pitch.” Investing in a startup accelerator is a more precise and calculated way of “waiting for your pitch.” The ideas/products that complete accelerator programs have been tested, altered, and retested several times to increase their potential for success once they hit the market. When investing in startup accelerators, the risk is slightly mitigated because the potential for success and growth remains so high, and it also opens up potential opportunities for follow-on funding with those that look ripe for success.

4. Support Your Startup Community

At SparkLabKC, most of our investors also act as our mentors. Many have commented that they "like the impact their investment has on the companies and the startup community." Being a part of the SparkLabKC Accelerator Program is as much an investment in companies as it is in the future prosperity of our community. A SparkLabKC company could be the start of the next Cerner, Sprint, Marion Labs, or Hallmark. You never know!

If you're looking for a chance to invest in our next big breakthrough and our entrepreneurial community, please get in touch!