The Key to Acceleration? Diversity

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When you hear the words "startup company," I expect you think about two founders and an idea — one that is just barely "off the cocktail napkin." Those kinds of startups were the applicants for the first accelerators (e.g., Y-Combinator, Techstars). But now that there are more than 200 accelerator programs worldwide, the times seem to be changing. In the last two years, there has been a shift in the diversity of companies applying for startup accelerator programs. Many later stage startup companies are now valuing the accelerator experience as a growth stimulator or an infusion of energy to get them over a growth hump.

Graduate School for Startups?

In a previous post, I discussed the pros and cons of an MBA versus an accelerator program. But you can also think of the accelerator model as the new graduate school for startups. It allows startup companies the opportunity to grow their knowledge base and to gain access to connections and resources that improve their chances of success. An accelerator experience is considerably more than just the seed money offered by the programs, which is why it is now appealing to later stage companies that are experiencing growth challenges. Whether your idea is just off the back of the napkin or has already gone through a number of iterations, an accelerator program can make the difference between failing, becoming a lifestyle business or building something that is highly scalable.

Growth Acceleration

Accelerator programs are starting to court later stage companies, and for good reason. Later stage companies usually have revenue and a more proven product. Someone has already "bought" their idea as a customer or at least as an initial seed investor. There is some traction to work with rather than just the hope of traction.

According to a Wall Street Journal interview with David Brown, managing partner for Techstars, up to half of the hundreds of companies accepted to Techstars in 2014 were revenue-generating businesses. Techstars has been shifting recently towards more mature startups by expanding its outreach and pool of applicants.

Microsoft Ventures appears also to be joining this trend, according to a TechCrunch article in early 2014. Six of the 16 companies in their Summer 2014 accelerator program in India were later stage companies. Calling it "Accelerator Plus," their program is for mature companies that are closer to venture capital funding rather than seed or angel funding.

At SparkLabKC, our first class of companies was comprised of primarily early-stage pre-revenue companies, but for our second and third classes, we attracted more companies with revenue that needed to scale. A great example is Lucky Orange, which was in our second class and had 800 customers before entering our program. Now nine months later, they have almost doubled their user base. Royal Loyal and the Swapping Company are two companies in our new class that come with an established customer base. We'll be working with them to refine, advance, and accelerate their customer growth during the next three months. 

Benefits of and for Later Stage Companies

For accelerator programs, the benefit of adding later stage companies to the mix is further risk reduction for investors. If a company is already "shipping" something and has someone that is buying, it reduces the uncertainty about whether anyone will really engage with the founders' idea.

For later stage companies, the attraction of an accelerator program is not as apparent, especially when founders get caught up in the amount of money offered by the program (usually $18,000 for 6 percent of equity) in exchange for equity. If a company is already valued at $3 million, $18,000 can seem like it is not worth it because 6 percent of the company is technically worth more like $180,000. However, the 6 percent is in exchange for much more than $18,000. It includes access to a network, serious mentoring, free office space (for at least 3 months... and in our case up to 1 year), education, and urgency. At SparkLabKC, we value our accelerator program at $75,000 to $100,000, depending on how much the founders leverage the network and how long they stay in our space after Demo Day.

Diversity Matters

Just like in any profession, diversity is often the key to long-term success. It is no different in early stage investing and acceleration. When we pick companies for the SparkLabKC accelerator program, we are looking for a variety of products, business models, and stages of development. Achieving a certain level of diversity helps spread the risk for our investors. A recent article by the Young Entrepreneur Council in Forbes puts it well,

"Accelerators are effective because they’re able to take on a limited financial risk by spreading smaller sums across a greater number of investments — testing ideas, markets, and development teams or strategies.

It's a High Risk Proposition

Early stage startup investing is a high risk proposition no matter if it is a single investment or in a pool. However, at SparkLabKC, we believe that the acceleration process reduces that risk, because it spreads the risk across many companies. We also think the coaching and monitoring of those companies through the program and after also reduces some of the investment risk.

Personally, I'll take a group of 10 companies growing together over a lonely entrepreneur in his or her garage any day. Those 10 companies are collaborating and learning from each other's mistakes and successes. They are pushing each other to be better. And when those 10 companies have diversity in terms of stage, it's not only a richer learning environment, but also improves our chances of success as an acceleration program and investment.

Our diverse new class of companies are hard at work and we're excited to share the results with you on Demo Day!