Getting into an accelerator run by Y Combinator, Techstars, or 500 Startups is to a founder what getting into Harvard or Yale is to a college student. Startup accelerators are an excellent way for early-stage founders to scale up their businesses. Accelerators provide know-how and collaboration with other like-minded entrepreneurs to get leads and introductions to the “right” investors.
There are many accelerators out there to choose from, and at times having specific verticals or sectors and may vary depending on where you are based at the moment. If you end up joining an average accelerator, it may affect your future follow-on funding. I also know some that even charge you for things such as participating in their programme.
As a founder, what should you look at before joining an accelerator?
Analyse and understand the level of involvement
Before signing the onboarding documents, you need to know exactly what the accelerator is offering, whether it’s advice, funding, investor introductions or office space.
If it’s giving advice, what type of specific skills and resources are they going to commit to and plan to share with you? If it’s investor introductions, what network do they have access to, and how have they leveraged it to help previous startups?
Make sure you’re able to align with it – or risk being ostracised or abandoning any support even after getting funds. Speaking to a few previous cohort startups that have joined the programme could be a good way to see if there are any red flags.
What are the motivations behind the money
Startup accelerators are usually backed by a group of people, such as successful entrepreneurs and corporates that want to have exposure to early-stage companies. They usually play the long game by taking up an early equity stake in your startup in exchange for funding to your company and for you agreeing to participate in the accelerator.
Accelerators are finding some type of return which can be financial or non-financial in nature. When a corporate sponsors an accelerator, is it just to look good on the annual reports? To diversify their corporate venture portfolio? Or to create an impact in the local startup space? Who are the investors behind the accelerator? What have they invested in previously? What is the risk appetite?
Understand the legal agreements and documents involved
Since most accelerator programmes will take an equity stake for their investment in your company, you have to ensure the terms set out in the definitive agreements (usually including the term sheet, accelerator agreement, subscription agreement and shareholders agreements) are accurate based on the initial term sheet. Ordinarily, they should not get undiluted shares (or anti-dilution) or even ask for a board seat. This is usually a red flag.
Try not to grant an accelerator control over crucial decisions (also known as ‘reserved matters’) that may hamper the ability for you to progress your startup. If you are a first-time founder, getting a startup lawyer will be crucial to ensure that the terms are industry standards and the same as what you initially agreed in the initial term sheet stage.
Anti-dilution, in particular, can complicate follow-on investors and even turn off future new investors.
Discuss and be clear on the success metrics
What is the end game for the accelerator? It may be hard to figure their metrics out, but if they cannot give you a definite answer, you may wish to check former startups in a previous cohort about their experience and how they believe the programme benefited them.
Ultimately, accelerators are profit-motivated service providers, just like other corporate entities out there. Future newcomers may want to build alternative accelerators and offer different values than the other competitors. Your startup is precious; take care of it, do your due diligence, and do not compromise on things that can hurt the business in the long term.
–
Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic
Join our e27 Telegram group, FB community, or like the e27 Facebook page
Image credit: Canva Pro
The post What founders need to watch out for before joining a startup accelerator appeared first on e27.