Leading experts in the field of business have recently reported that accelerators have not been performing to the expectations set by both startups and investors. While this announcement comes as a blow to offline and digital accelerators, we have distilled the salient points of the report here to outline how success accelerators can respond and once again garner respect from entrepreneurs on both sides of the startup equation.
The math shows us why investors are disappointed: the average investor fund allocates 63% of its budget to methods involved in deal sourcing alone. Imagine how much of this funding could be re-allocated to startups themselves, if success accelerators would simply streamline a few key aspects of their business practices!
Keep reading for more details on MIT and ANDE’s concerns and key methods accelerators can engage, in order to provide more efficient services to investors and startups alike.
Accelerators disappoint in investment readiness support
Recent studies by the Aspen Network of Development Entrepreneurs (ANDE) and MIT Innovations have demonstrated that both investors and startups are disappointed with the training that accelerator programs have been providing startups for the investor process.
The overarching aims of ANDE’s study, in particular, were to evaluate the quantifiable value created by accelerators, as well as to design an objective framework that could be used in the future to compare the impact and quality of incubator and accelerator programs. Through analysis of over one hundred interviews with 18 active impact investors and 54 startups, ANDE found that both incubator and accelerator programs left much to be wanting when it came to investor meetings.
This particular finding from the report reflects my own experience and exchange meetings with a variety of different accelerator investor readiness programs. Whether I was meeting with a B2B digital accelerator, a corporate accelerator, an impact accelerator or a state-owned accelerator, I learned that startups are increasingly concerned with the lack of preparation provided them to successfully meet with investors and garner key investments.
Dealing with accelerators: the startups’ perspective
My personal experience in the field confirms the conclusions of the ANDE and MIT reports: Early-stage companies typically derive more value from investment readiness services than their growth-stage counterparts. While 40% of early-stage startups reported that they received financing due to an introduction of their accelerator, only 5% of growth-stage startups report similar successes.
Alumni of accelerator programs have suggested that investors and startups alike require more substantial support on a range of topics, including legal services, market penetration strategies, accounting, investor connections and solutions for raising capital, as well as methods for strengthening growth.
Accelerators and incubators from the investor’s perspective
While 50% of early-stage investors (meaning angels and funders with up to 500,000 USD financing volume, received at least one deal from an accelerator) only 13% of growth-stage investors (meaning venture capital firms with 500,000 to 2,000,000 USD funding volume) sourced a similar deal. These numbers reflect concerns from later-stage investors: just as investment readiness and opportunities to reduce transaction costs are important for early-stage investors, accelerators need to attend to these concerns during the growth-stage as well.
Early and growth-stage investors insist that accelerator programs need to better facilitate transactions, prepare startups for the investment process, and help increase efficiency during transactions and post-investment on-boarding processes.
Basically, investors are looking for digital accelerators and offline accelerator programs to create quantifiable value. And investors are willing to pay successful accelerator programs for getting this value.
Investors are interested in partnering with accelerators because there is real potential for investors and accelerators to increase deal flow and build a robust ecosystem for everyone involved in startups. Building this ecosystem is part of accelerators’ responsibility and investors insist that a key aspect of this ecosystem building is simplifying due diligence and effective mentoring towards investor-readiness.
Because it’s clear that accelerator programs represent a large, untapped resource for delivering tangible, quantifiable value about startups to investors
So what do investors think accelerators should provide as value-added services? The answer is derived from the areas in which investors were disappointed with accelerator services.
Investors are looking for:
Increased pipeline volume and quality
Investors want accelerators to filter strong candidates for investment from weaker companies. They want accelerators to train and develop entrepreneurs for the investor process.
Decreased transaction costs and increased efficiency
Accelerators need to reduce their origination and due diligence costs, make their transaction processes more efficient, and standardize their reporting. Financial auditing and legally sound structures are particularly important.
Decreased portfolio management costs and better process facilitation
Investors would like accelerators to make on-boarding easier, to facilitate ongoing reporting and financial audits for their startups, to ensure that all processes are legally standardized, and to provide their startups with competitive Management Information Systems.
If these standards can be met, accelerators can create substantially more value for investors
It’s simple math! The average allocation of an investor’s fund operating budget breaks down into three major sections, give or take a few %:
- 25% deal souring
- 38% due diligence
- 37% portfolio management
In other words, a staggering 63% of the average investor’s budget goes to deal sourcing and due diligence alone!
Effective accelerators could certainly help to reduce cost in these areas. They can also help investors fund startups by dealing with other inhibitions. For instance, many investors who are interested in funding startups have not yet done so due to misalignment with their investment criteria: a startup’s stage of maturity, poor deal flow, weak management, or concerns about sector and geography. Accelerators make excellent confidants for these concerns, helping relevant startups anticipate hesitant investors’ objections.
But opportunities to reduce transaction-related costs and increase post-investment value for startups abound!
The ANDE report provides compelling values for the significance of just 5 to 10% cost savings:
While this image is compelling as an overview, how can accelerators adjust their practices in order to save costs? Here are some brief and concrete suggestions for building more successful offline and digital accelerator programs:
In order to reduce transaction-related costs for investors, accelerators should:
- Prepare a due-diligence folder
- Prepare financial statements (audited and historical statements are particularly significant)
- Provide education and background on term sheets, contracts, and deal terms
- Provide professional legal transaction support
In order to create post-investment value for investors, accelerators should:
- Introduce expectations for their investments and prepare post-investment reports
- Develop strategies and implementation plans for business growth and sales and market penetration strategies. An implementation plan for the first 6 months after investment is particularly significant.
- Create and support alumni networks with the major goal of encouraging peer learning.
- Provide professional legal support.
- Implement reporting and account systems.
- Support processes for financial accounting and audits.
While this may seem overwhelming, at Key2Investors, we support accelerators too; after all, we attend to the increasingly important maxim: care for the caregivers.
Key2Investors: a digital accelerator program module designed to satisfy investors and help accelerators get startups to the investor-readiness stage
To some extent, Key2Investors is a digital accelerator program itself: one of our major focus areas is training startups to successfully navigate their first round of financing. And we do this digitally.
We are also part of an online accelerator: we provide investor-readiness modules, and we help other digital accelerators get their startups to the necessary level of investment-readiness.
In other words, we create values for every member of the startup process, from investors, to accelerators, to the startups themselves. Our offerings include:
- Tools and templates that allow everyone involved in the startup process to achieve investment-readiness quickly and effectively:
These tools and templates range from investment summaries and startup valuation calculators to a database of investors and more!
- Support to bring startups to the next level
including checks and checklists for investor readiness and negotiation, an extended strategy guide, as well as go-to-market and financial planning and beyond.
- Training via online coaching
via live and recorded Q&A sessions and deep-dive virtual lab videos on a range of aspects related to reaching investor readiness.
All of these resources and more are combined on an online platform designed for and actively used by startups themselves, as well as by accelerators with bulk-seat and white-label licenses.
Join our modules today to troubleshoot the problems identified by ANDE and MIT, and offer your startups and their investors the most efficient and streamlined processes for collective success!
Access our plug and play digital accelerator module on preparing startups for the investor process.