Accelerator Program/VC Funding Related Questions

Asad Shaikh AWS/NoSQL/Big Data Architect at Capital One

January 13th, 2014

Recently, I contacted a VC firm which specializes in the industry in which my startup is based on for funding my startup. I sent them an investor presentation and I was contacted back by a VC representative to apply for an accelerator program sponsored by them. I do not have much understanding about how accelerator programs work especially what motivates the parties (mentors, VCs, people running the program, and startups) involved. If you have participated in an accelerator program or if you have knowledge about the how they work, I would appreciate your assistance in answering following questions:

T. The accelerator program I am looking into requires me to either move to a specific location or travel to that location on monthly basis for about a week at a time for about eight months. Since I cannot move, my question is how would I cover the cost of traveling and lodging? Would it need to come out of my pocket?
T. The accelerator program expects that I participate fulltime in the program. Currently, I am supporting my startup from my fulltime job, if I get involved fulltime into the program, how can I afford to pay for the startup activities, not to mention, my existing bills (mortgage, etc).
3. From the information provided, it appears funding is only provided, if provided, after I complete the program successfully and attract attention from investors. I understand that I will gain a lot from the program (mentoring, advice, etc), but how can I manage a startup with no money at all especially when my startup does not have any revenue and the program is about eight months long. I value all the input, value feedback, and all that would come my way, but what good would be if I do not have the resources to apply what I gain from the program?
4. How does the funding process work, I have heard there are series of fundings, what are the usual requirements and how much of funding is provided in each phase?
5. How do investors/VCs valuate a startup which does not have any revenue yet?
6. What kind of equity VCs can ask for from a startup which does not have any revenue yet?
7. It appears that the accelerator program would require some equity in the startup (even if startup is not funded by participating investors) in return for participating in the program, is that normal? Is that the motivation for the accelerator programs, to get equity in startups in return for connecting founders with mentors, VCs, advisors, etc?
8. Who pays for the accelerator program?
9. What motivates investors/mentors to participate in the program?

Thanks a bunch,

Asad

Anonymous

January 13th, 2014

Great questions! Just thought I'd chime in here and give a tip for getting the most out of FD:Discuss. General community best practices are to post questions one at time, at least in terms of your best bet to get a response. I see you've already got one though!

Just trying to provide some helpful tips where I can. I'm interested to see if anyone disagrees with this rule of thumb.

Bill Hludzinski

January 13th, 2014

I am in NYC and there are a number of accelerators/incubators there. A typical deal might be that they take 12% of your company, and supply you with office space and mentorship for 6 months, and at the conclusion have a demo day where you and the rest of your graduating class pitch for some number of investors that have been invited in for the demo day. An accelerator / incubator can be extremely useful for: 1) giving you general business counsel/mentorship, 2) vetting your startup and prepping it to be pitched to investors, and introducing you to investors and getting you into networks of people in the industry. I've had the same problem of not wanting to quit my day job, and I would advise against you doing so. With your day job you have unlimited runway. When you have a cap on your runway (i.e. no day job), you will sooner or later be desperate for money and may end up making bad business decisions or surrendering too much equity for investment dollars. I just heard a talk by one of the founders of Diapers.com/Soap.com, and he said that he didn't quit his job until they had something like $27 million a year in revenue. The solution that I found is Founder's Institute. They charge you a $1000 fee and take 3%, but you can keep your day job. You go at nights and they help you build your business, give you CEO and investor mentors, and the demo day at the end. It's allowed me to keep my day job and I'm starting the Spring session right now. See if they have a chapter near you - they have a lot of chapters worldwide. Bill

Dimitry Rotstein Founder at Miranor

January 14th, 2014

1-3,7) http://lmgtfy.com/?q=startup+accelerator

Note, however, that accelerators generally require the entire team to be 100% dedicated to their startup. If you have another job, and/or if you have no co-founders, your chances of being accepted to an accelerator are slim to none (some even expressly forbid it).

I've never heard of a VC that suggests you apply to an accelerator, but it sounds like they were just trying to get rid of you without saying no (VCs hate saying no). Check if that representative you mentioned was a GP (general partner) or an "associate partner" (I put my money on the second option). Unlike GPs, associates decide nothing - talking to them is a waste of time at best.

4. There is no solid answer to these questions, even though entire books were written on the subject. Funding depends on many factors, and everything changes constantly. At present, people usually talk about 5 stages: pre-seed (idea or early development), seed (minimal viable product, first customers), round A (growing revenues), round B (small company), and round C (small-medium company).

Accelerators usually take pre-seed startups and turn them into seed or round A. VCs usually don't come in until round A.

5-6. Early stage investors (angels, micro-VCs) often provide a fixed investment (or at least in some narrow range). For example, they'll invest $200K for 20% (which values your startup at $1M), no matter who or what. Late stage investors (most VCs) usually won't invest at all if you don't have revenues. So overall, early stage valuation is not really a big issue.

8. A good accelerator pays for itself. In any case, the money they invest is so small it doesn't really matter - accelerator founders could pay it by themselves, if they wanted to.

9. YCombinator proved that accelerators are a great business in their own right - that's generally enough motivation. Some accelerators are supported by large companies (Microsoft has a major one) - I guess it allows them to scout for big talents in hopes of hiring them later. As for the mentors... well, some of them might get paid for it (a job is a job), but I think most see it as a way of a) helping young entrepreneurs like the ones they used to be, b) putting it on their resumes (it does look good), and c) plain old ego boosting.

Hope that didn't sound too cynical.

Jeffrey Cary Senior Project Manager at netPolarity, Inc.

January 14th, 2014

Good morning Asad. I am in the same position at the moment, but have worked with incubators and accelerators since 1992. Currently I am working with accelerators both in New York and Minnesota. It is very involved. and a conversation regarding this topic would be more productive than email. Feel free to contact me at 678 767-0808 and we can discuss. Regards, and best of luck. Jeff Cary