By Alex Friedman
As dot-com and startup culture evolved over the last few years, a new investment opportunity cropped up that traditional investment groups weren’t prepared to take full advantage of. Smart investors, on the other hand, realized an opportunity to cultivate their own investments and achieve success by providing ancillary services like tech development, business planning, and marketing. This investment style is known as the accelerator.
The accelerator model is a one-stop shop for young businesses. It provides strategic guidance, some form of funding, and a support system. Rather than taking $1 million from a far-removed VC, startups are turning to accelerators — usually for less upfront funding — to gain access to their experience and strategy, and it’s working.
Accelerators Are Here to Stay
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. On Seed-DB alone, more than 4,200 companies have connected for some kind of accelerator engagement, resulting in more than $7.2 billion in funding. That’s billion, with a “b.” As this trend progresses, there are a number of exciting directions the accelerator model may go:
- Vertical market growth: This is the more traditional accelerator approach. It involves proficiency in one market and an ability to capitalize on all aspects of that segment. The beauty of this approach is that it can multiply opportunities by tapping into companies with complementary value in the same vertical, essentially building a supply chain.
- Corporate accelerators: Large corporations, such as Microsoft and Kaplan, are now starting their own accelerators because they can get involved in disruptive ideas before they become too expensive. For example, a car company could start an accelerator that invests in new dashboard technology or better batteries. Furthermore, testing a new idea through a startup is less risky because corporations can separate themselves from the project if it fails — or deploy quickly if it succeeds.
- A change in focus: The popularity of accelerators and the increased competition will eventually force accelerators to balance the major money opportunities with more solid profit centers as the market becomes saturated. Accelerators might start looking for smaller wins by investing in companies that have already seen some level of success. These companies may not produce a massive ROI, but they’re profitable.
3 Tips for Creating a Successful Accelerator
As investors flock to this space, capitalizing on these trends can be tricky. For example, Selvera, a weight-loss program, approached my company with a cocktail napkin idea. The brand used our accelerator’s expertise and support services in marketing and business planning to raise capital and launch, but we had to learn a few things to enable accelerators to work for us. These three tips will help you create your own successful accelerator:
- Watch how young companies are pursuing growth. All accelerators should ask three questions: Are these companies looking for investments from independent parties? Are they pursuing the perks of an accelerator? If so, what type of accelerator? Answering these questions will help you position your investment offering. In Selvera’s case, it needed an accelerator to supplement its team with design and technology talent it didn’t have in-house. But as the project evolved, so did its needs. Having a team that could spin up or down on demand provided flexibility.
- Look past the dollar. As competition among accelerators increases, young companies and startups are looking for more than a fat check. Instead, they’re searching for the accelerator that will provide them the right expertise and support, so ask yourself what you bring to the table besides money. Startups need to consult different resources to help them prioritize what they’re looking for in a program — find out how those areas align with your offering.
- Stick to what you know. Often, investors get involved in a startup thinking they have the experience to nurture it and get it to market, only to realize they didn’t have a fraction of what was needed. For the best return, stay focused on contributing to the markets that you know rather than getting stuck in a model you don’t understand. Use the skills, knowledge, and experience of your team to find the right industry segments, then excel in those areas.
The accelerator model has become a “graduate school” for startups because it allows young companies to gain access to connections and resources that give them a much better chance of success. Startups can get money from just about anywhere, so if you want to be a successful accelerator going forward, make sure you offer them something they can’t get anywhere else.
Alex Friedman is the co-founder and president of Ruckus, a full-service agency, tech partner, and accelerator that is devoted to helping businesses grow.
