5 Ways Accelerators Make Money

by | Jan 23, 2020 | Accelerator | 3 comments

Worldwide there are more than 1000 active Startup Accelerators. Not all Accelerators make money as many are funded and connected to either universities, governments, or receive grants from high-net-worth individuals and institutions. A small portion of the accelerators around the globe are privately funded.

How Do Accelerators Start

Accelerators often get conceived in roughly the same manner. In most cases, experienced founders decide to launch an accelerator and raise a fund to be able to fund the operations. Furthermore, is also used to fund the startups that will partake in the accelerators’ program.

Most of the operations funding is needed to pay employees. The founders of the accelerator themselves often take a small salary if necessary for legal purposes, or do not take a salary at all as these individuals usually don’t really need it. These founders are often already wealthy prior to setting up their own accelerator.

Launching a privately funded accelerator is near impossible for the majority of people. Mainly because it requires a vast network, credibility, and wealth. The founders are usually also active angel investors which helps them build their network and credibility before launching their own accelerator.

What is important to note is that accelerator founders do not launch an accelerator program because they are seeking an additional revenue stream for themselves. An accelerator is a long term investment that will likely pay off very little if anything in the early years.

If you need to pay yourself a high salary through the accelerator to be able to sustain yourself, it will most likely fail. Furthermore, as accelerators invest in startups at a very early stage, the timing of exits is very hard to predict and can take a very long time as even the timing of Series A/B/C investors coming in could be a lengthy process. This is assuming that the startups even make it to a series B or C funding round.

Unlike Venture Capital, there is currently no single traditional method of exiting for accelerators. It is comparable to a mutual fund but without the ability to sell the equity in an open market. Investing in/through an accelerator is a long term commitment, most likely at least 10 years.

Corporate Accelerators

Accelerators make money

Although Corporate Accelerators are in many ways the same as ‘normal’ Accelerators, there are some key-differences which lead to different challenges and objectives for both types of Accelerators.

For instance, the challenges mentioned above regarding funding are often negligible because the accelerator receives funding from corporate sponsors which cover operational expenses and make the accelerator less dependant on successful exits from startups and other types of funding.

Corporate Accelerators will also have additional objectives as they serve corporates by sourcing startups working in a specific industry that is relevant to the specific sponsoring corporate.

Some corporates choose to launch and run their own accelerator programs which in many cases is a less effective and efficient method compared to sponsoring an accelerator as it brings many challenges.

Outsourcing the Accelerator program makes sense as it drastically reduces the risks and costs associated with an accelerator program. Furthermore, corporates can make use of specialized expertise a corporate accelerator would have as, unlike the corporates, the core business revolves around sourcing, scaling, and investing in startups.

Corporates who sponsor accelerator programs also don’t need to invest in the startups themselves, rather the corporates can skip the entire investing, scaling, and mentoring process, and instead move straight to acquisitions or partnerships if the corporate accelerator offers an interesting prospect. Outsourcing the above-mentioned processes, also means that the corporates won’t need their own operations teams and all the associated costs.

Different Ways Accelerators Make Money

One way Accelerators make money, is when one of their graduates (startups that successfully went through an accelerator program) either gets acquired or goes through an IPO.

Basically the process can be broken down as the following:

  • 1st, sourcing and investing in startups. An accelerator buys an ownership stake in the startups it believes to have the potential to become unicorns.
  • 2nd, increasing the value of the startups. The Accelerator then applies a value-adding process to “accelerate” the growth of the startup.
  • 3rd, selling the equity stake with a premium. The Accelerator (hopefully) sells its value-added equity, either through an acquisition or IPO.

The 2nd point above is especially important as it differentiates the successful startups from the rest. For instance, having experienced mentors is essential to be able to guide the startups within a cohort to grow and scale within a short amount of time.

There are a couple of other methods through which an accelerator can generate revenue. For instance, through sponsorships. Many accelerators get large corporates to cover their major operational costs. For instance, venues, food, events, guest speakers, demo-days, etc.

In return, the corporates get (social) media exposure, and more importantly, the opportunity to recruit talent, acquire startups, and learn more about corporate innovations and new market disruptions. For these corporates, accelerators can function as scouts that will help them recruit, track and manage relevant startups and entrepreneurial talent who may greatly benefit the corporates in the future.

More and more accelerators make money by offering these corporate innovation services as it can be very lucrative and beneficial for all parties involved.

Other Accelerators make money by closing Real Estate deals. Accelerators can offer workspaces where founders will be able to engage with one another. The Accelerator would charge startups by offering desks for rent. In a way, the Accelerator is actually offering similar services to a co-working space.

Alternatively, Accelerators make money through offerings of training and consultancy services for startups, in exchange for money or equity. For instance technology development consulting and design.

Finally, Accelerators can oftentimes be eligible for some types of government or private donor grants. These grants are given to promote entrepreneurship, further develop the startup ecosystem and local economy, and make a region more attractive to companies and investors.

Summary

Basically, there are two main methods for Startup Accelerators to make money. The first one being obtaining equity in a startup in exchange for funding or services provided. The second method is to provide services in exchange for cash.

In both cases, receiving money or equity does not equal to actually making a profit. For an Accelerator to make a profit, they would need to either be able to convert the equity into successful exits and/or make enough money providing services to cover the costs and make a profit.

Learn more about startup accelerators

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3 Comments

  1. Kenny Chin

    How about receiving a commission/cut from VC or investor if they invest in one of their graduates. This is different from selling their own stake in their graduates.

    Since they are not providing funding, they won’t have a high equity.

    And you miss out, some accelerator charges startup to participate in their program.

    Reply
    • Ben Lim

      Hi Kenny,

      You are right about the charges. There are some Accelerators charging Startups. Ours doesn’t. In fact, we provide a lot of value for Startups while maintaining the program at no cost to Startups. We believe Startups should not pay for a good Accelerator program, as this is pretty much a global standard. More information: https://www.nexea.co/startup-accelerator-malaysia/

      Generally in the startup Accelerator industry, and also for the Venture Capital industry, no commissions are being paid. This is because Accelerators want their Startups to get further funding/valuation increase. Also, VCs need to find good companies. So there are already motivated intentions without the need for commissions.

      Reply
  2. fiireseo

    Good content.here i improve my knowledge int he buisness startup and accelerates the starups.also,i got the facts about How Do Accelerators Start.thankyou for your good article.

    Reply

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