A few weeks ago, the terrific folks at Startup America Partnership asked me to host an hour web conference called “Ask the VC”. I had a great time answering questions on a wide variety of topics related to entrepreneurship, the current funding environment and how we look at companies during various stages of growth. As I was speaking, I kept thinking that many of these questions would make great blog topics. So, here is the first of, I hope, a string of topics driven by the entrepreneurs themselves. However, if you read nothing else in this post, please join the Startup America program; it costs you nothing and provides so much!
Question: “Accelerators are very popular right now. Admittedly, not all are created equal. On average, is an investment from them at $20k, in exchange for 5-10% of the company, actually a good deal? It seems like a low valuation opportunity for the investors, not the entrepreneurs”
This question is very relevant right now given the explosion in accelerators, incubators, and programs designed to foster innovation. The simple answer is yes, they are worth it if you are able to get in a program that can accelerate your path to success. Most of the programs are staffed by great entrepreneurs themselves, have venture and angel investors working with them directly, and provide access to tools, people, technology, space, services or a myriad of other things that can be extremely helpful at the earliest stages.
If I am correct, Techstars claims that the success rate for their graduates in securing funding is in the 70%+ range. By any measure this is truly amazing and worth 5-10% alone. With that said, if your company is more mature and has some existing traction, you need to think long and hard about the dilutive effect that the implied valuation might have (although many of these programs only take common stock, warrants or in some cases, a convertible note with some discount).
My advice is think about the types of groups that you are applying to, what they can bring to the table and whether your chance of success can be dramatically accelerated by the program. If the answer is yes, take the deal.