Case Scenario: To Overcome the Liabilities of Newness, Consider Joining a Start-up Accelerator

Start-up Accelerators are fixed-term, cohort-based programs for promising start-ups. The two best-known accelerator programs are Y-Combinator, located in the Silicon Valley, and Tech Stars, which originated in Boulder, Colorado. Most accelerator programs follow the following format:

¦ Select a dozen or so start-ups for each class (many have between two and three classes a year)

¦ Provide each start-up $10,000 to $25,000 in seed funding in exchange for 5 percent to 8 percent equity in its business

¦ Bring the start-ups together for mentoring over the course of an on-site multi week mentoring program.

¦ Host a demo day at the end of the program where the participants pitch their businesses to angel investors, venture capitalists, and others. Accelerator programs differ from business incubators. Most incubator programs are government-funded, take no equity, charge a modest fee for rent, and focus on a specific industry, such as medical technology or clean tech. They also typically do not have a set duration. In contrast, accelerator programs exemplify the bullet points made above, and can be either privately or publicly funded. There are four primary benefits to joining an accelerator program, all of which help a start-up overcome the liabilities of newness. The first benefit concerns the network of people you'll meet and with whom you'll become acquainted. You'll be connected to not only mentors and advisers, but to former alumni companies.

If a company going through the TechStars program, for example, runs into a technical challenge, those leading the firm can ask the entire TechStars network for help. Engaging successful mentors and alumni companies helps a firm gain legitimacy and support. Both Airbnb and Dropbox, for example, are Y-Combinator graduates. Imagine how helpful it would be for a start-up that is currently going through the Y-Combinator program to get acquainted with people at Airbnb or Dropbox and earn their endorsement and support. Brand recognition is the second benefit of accelerator programs. The best accelerator programs are hard to get into. As a result, when potential employees, investors, or other companies see that you've graduated from TechStars, Y-Combinator, AngelPad, or one of the other better known accelerator programs, it sets you apart from other start-ups. This factor helps gain legitimacy. It's somewhat akin to having a degree from an academic institution to which it is very difficult to gain admittance. In turn, graduating from a school or a university with high entrance standards sets you apart in some individuals' eyes as a person who is talented and willing to work hard. The third benefit associated with joining an accelerator program is the opportunity to work side-by-side with other start-ups. As mentioned, most accelerators admit start-ups in classes, ranging from just a few start-ups to 25 at a time.

Most participants want to be well-regarded by their peers, which provides an incentive to work hard and succeed. A close bond often develops among the members of an accelerator cohort. The bond remains after the program finishes. As a result, when a company that has been part of an effective accelerator program graduates, it normally already has a group of other companies that are willing to lend it legitimacy and support. The final benefit is the learning that takes place. Along with providing mentoring and support, most accelerator programs provide training in developing successful business models, raising capital, connecting with potential investors, and protecting intellectual property. A start-up can normally get up to speed on these issues and others faster by participating in an accelerator program than going it alone. Early research results concerned with accelerator programs are encouraging. A study conducted by Yael Hochberg, a professor at MIT, and Susan Cohen, a professor at the University of Richmond and the University of Virginia's Darden School of Business, found that 59.3 percent of all companies in accelerator programs were able to raise follow-on funding after leaving the program. They also found that start-up founders were almost universally satisfied with their accelerator experience. Roughly 90 percent of the participants in accelerator programs surveyed in Hochberg and Cohen's study said they would repeat their accelerator experience.

Questions for Critical Thinking

1. Find an example of a start-up accelerator in the state in which the college or university you are attending is located. Describe the equity percentage the accelerator takes, how much seed funding is awarded, and in general how the program works.

2. Make a bullet-point list of the ways that participating in a start-up accelerator helps a firm overcome the liabilities of newness.

3. What, if any, are the downsides to participating in a start-up accelerator program?

4. If a college student has a business idea, what should the student do while in college to improve his or her chances of getting accepted by one of the better accelerator programs?