Want to raise growth-stage capital? Join an incubator or accelerator, studies suggest
Earlier this month, Pitchbook released a landmark report which concluded that one-third of all US startups that raised a Series A in 2015 had gone through an accelerator program at some point in their development. Coupled with similarly promising data about business incubators - including one study that noted 40% of early-stage incubatees sourced their investment through connections within the incubator itself - and it appears that joining these types of programs bear long-term financial fruit for growing companies.
According to Pitchbook, one-third of US startups who earned a Series A in 2015 had gone through an accelerator program.
There are numerous reasons that may explain such findings. First, the really good incubators and accelerators should be striving to build investable companies. The fact is a majority of successful businesses are going to need to take on funding at some point in their lifecycle; according to Brian Devaney, 2 out of every 3 software companies on the Inc 500 all took on external funding (versus bootstrapping). This makes it imperative to help those organizations understand 1) that they will likely reach that outcome and 2) how to get there.
Incubators in particular have a strong economic development focus, which translates to metrics such as jobs created and revenue impact. Although by no means insignificant, elite programs tend to focus on strengthening a company’s position in the marketplace in order to set it up for investment, acquisition, etc. IN ADDITION TO core economic impact. This includes helping entrepreneurs validate their solution with (paying) customers, solidify their value proposition, improve their financial prospects and assemble the appropriate team to scale it. These are primary factors that investors review before backing a company.
Another reason centers around the incubator / accelerator network. However, it is not just the simple notion that the program has expanded connections which ultimately lead to an investment score. The incubator or accelerator should be making a concerted effort to involve investors and investment groups as part of their core programming. For instance, at CEI, we host valuation workshops offered through Invest Southwest and Arizona Technology Investors; we are the host location for the VA Angels early-stage investment group; we are active participants in investment-centric events such as Venture Madness; and of course we have a shortlist of well-vetted and engaged private investors who we can reach out to if necessary. Our business development team still has to work hard on getting our companies investment ready, but if we accomplish that objective then we can continue to nurture these vital connections on behalf of our clients.
Lastly, startups who go through an accelerator that offers direct equity investment gain exposure to the inner workings of a deal. Both the company and the program would in theory experience a more in-depth due diligence process prior to accepting, thus ensuring the most promising ones are selected. Moreover, the accelerator leadership plays a critical role in determining the direction of the company, thus further accelerating - no pun intended - the commercialization and growth process. This engenders greater accountability on both sides to source and scale the best startups possible so as to position them for future venture funding. Finally, many programs offer some type of culminating event or “demo day” that primes dozens of potential investors for its cohort of companies.
Keep in mind: no program can guarantee external investment as a result of participating, so it is imperative to go through your own vetting process before choosing any incubator or accelerator. But clearly, the opportunity is there to acquire growth-stage capital as a result of being involved with one.