What is the business and revenue model of a venture accelerator? Where does it get the money to survive? What is its exit strategy?
My answer, below, to this question on Quora is one of the most popular about this topic and remains a perennial favorite of mine.
What is the business and revenue model of a venture accelerator? Where does it get the money to survive? What is its exit strategy?
If you are talking about a conventional private accelerator in the Y Combinator or TechStars model that operates a seed fund, then the business model is this:
(a) Raise a private fund from angel investors and venture capital firms. Sometimes startup mentors and accelerator founders also invest in the fund. The fund usually has a limited purpose and lifespan and is intended to support a single accelerator class or cohort of startups in a single year or a small number of years. Very occasionally some of the money comes from grants, foundations or government, but usually, that kind of money goes into public sector accelerators, rather than private accelerators. Also, many accelerators have in-kind sponsors who provide things like food and accounting services in exchange for publicity.
(b) Recruit and then select a group of startups at the right stage of development for admission to the program. Some accelerators admit 5 to 10 startups per class. Some admit dozens per class. Upon admission to the program, invest between $10K and $50K (or even $100K) into the startups for a set amount of equity or as a convertible note, to be held by the accelerator investment fund. The equity amount is usually between 6% and 10%, although a few accelerators take less.
(c) Put the startups through an 8 to 12 week development program that usually involves free office space, mentors, research, development, coaching, training, networking, investment pitch practice, etc. Often, there is also a package of free and discounted services available to the startups, like PR, accounting, web hosting, graphic design, etc. Some accelerators have niches and specialized services, but almost all provide some mix or variation of this list. Networking is usually considered the #1 most important and impactful component.
(d) Put on a Pitch Day where the startups make public pitches to investors and the community. Also, arrange private presentations to investors and follow-up presentations. Continue coaching the startups about how to attract, structure and accept investments.
(e) Soon thereafter, some of the startups will raise some money. Hurray! Also, some of the startups will go out of business, sooner or later. Ugh! Also, some accelerators do follow-on investments into their top performing startups at the end of the program, often as a co-investment with other outside investors.
(e) Some accelerators run a program once a year and some do it multiple times per year. A few do it on a rolling basis.
(f) Eventually (1 to 5 years later…) a few of the startups will get bought by larger companies, get re-capitalized in some way, go through an IPO, or otherwise reach liquidity for shareholders. The accelerator will then liquidate its shares, pay back its investors their initial capital and split the remaining profit between the investors and the management of the accelerator.
From TechVentureGeek, post What is the business and revenue model of a venture accelerator? Where does it get the money to survive? What is its exit strategy?
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Kraettli Lawrence Epperson
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