Your startup is just a commodity for accelerators…
Since November 2015, I have been an intern at Microsoft Accelerator Paris. I have the best job in the world. I get to work with amazing founders building awesome companies, and support them while they go through fundraising, sales growth and internationalization.
Last week, one of the entrepreneurs we accelerate brought up something interesting:
“As a startup accelerator, you are like a company, and we the startups are your customers”.
It is interesting to try and think of an accelerator as an economic unit. The comparison, however, is not valid and this is why: in the world of accelerators, startups are the commodity and investors are the clients.
How does a seed accelerator make money?
Most accelerators have the same business model as business angels and seed funds: they take equity in projects, hoping for a successful exit in the next few years. True, the best startups are hunted by accelerators, but not so much as customers, rather as resources.
Here is the insider perspective of the acceleration process:
- First, source startups. An accelerator buys startups (actually, equity of the startups) as raw material
- Second, increase value. The incubator then applies a value-adding process — the “acceleration” — to the startup
- Third, sell with a premium. The incubator (hopefully) sells its value-added equity during a Demo Day
So here is the point: the real customers of the accelerators are the investors, not the startups. The investors are the ones buying equity at the end of the day. Put it another way, an accelerator is nothing but an equity factory, trying to increase output value.
As someone working in an accelerator, this analogy is definitely food for thought, since you can apply business reasoning to your day-to-day operations. How can I secure my supply chain (=sourcing)? Can I scale up my production (=acceleration program)? What is the Customer Journey (Investors Relationship)?
Interesting enough, if you replicate this framework to the next levels of funding, you end up seeing the whole startup path, from inception to IPO, as a series of trade. Two guys mine a gross idea out of their brains. They add a first layer of value — MVP, IP, traction, and so on. Then, they sell it to bigger and bigger direct customers: business angels, venture capital, growth capital. Until they sell to the final consumer, that is the one who will actually use the startup, not just resell it: a corporate (acquisition) or the public market (IPO). You could say that trading private equity is just another B2B2C business.
Not all accelerators are born equal
However, some accelerators do not take equity in the startups. That's the case at Microsoft Accelerator: the whole program is 100% free. We do not take equity from startups. We do not charge fees to startups. All the budget we get, we get it from one stakeholder: Microsoft Corp. They give us money for offices, staff, marketing and everything we need to accelerate French startups in the best conditions. Why do they do that?
The return on investment for Microsoft comes in four ways:
- Ecosystem: By having good startups in its ecosystem, Microsoft can offer to its larger clients even more innovative solutions without having to develop them in-house.
- Marketing: Microsoft Corp shows that they love startups and act in favor of the startup ecosystem.
- Open Innovation: Microsoft employees get acquainted with and learn from real-world innovators
- Acquisition: Microsoft Accelerator can source deal flow for the M&A department of Microsoft Corp or for thee early-stage fund Microsoft Ventures
- Sales: Microsoft Accelerator offers $500k of Microsoft cloud and software to all the accelerated startups. Some of them will then become long-term customers.
The cost of staying relevant
True, the benefits for Microsoft are harder to quantify, and definitely not in hard numbers. But this kind of programme is a huge leverage for the rest of the group.
A corporate accelerator is not just about improving your image or acquiring technology. It’s about being connected to the future.
The world has never been changing so fast. Some companies fight against change ; they might as well fight against wind. Other companies, more and more, understand that they must embrace change — or die.
Initiatives such as Microsoft Accelerator are a good way for large companies to stay relevant in this new paradigm. Corporate accelerators, as well as intrapreneurship and corporate funds, are the necessary means to build up strategic innovation capabilities in the long-run. As an element of sustainability, it would make sense for big corporations to include Innovation besides Profit, People and Planet, in an updated version of their bottom line.
Your startup is just a commodity for accelerators… and that’s okay!
Seed accelerators buy, transform and sell startup equity just like any basic commodity. Corporate accelerators use startups to gain competitive advantage. As an entrepreneur, should you fear it?
As long as the interests are aligned, there is nothing to fear. Founders usually want to increase the valuation of the company, and that's exactly what a seed accelerator wants too. Founders may also want to gain access to clients, get into a corporate ecosystem, or even position themselves for an acquisition. In that case, a corporate accelerator definitely makes sense.
The whole point of this is that as a founder, you make sure that you are a right fit for the acceleration program you consider joining. Before wasting everyone's time, do your homework! Check the website, read about the programme and the benefits they offer. And most of all, talk with the Alumni! I cannot stress that enough: it is critical that before joining any accelerator, you talk with several founders who have gone through the programme previously, to get an honest, unbiased feedback about what you can reasonably expect. That is the only way to make sure you will not regret your choice.
If you like this article, share the love and click the❤. You can also take a look at this article, which covers 4 rules about startup growth — lifecycle, process, people and dashboard.
