At the very early stage of entrepreneurship, there is a real gap between the first-time entrepreneur—who lacks the experience to steer their business in what will be choppy waters—and the usually inexperienced friends and family who offer 90% of the initial funds to get ventures off the ground. Likewise, for all the people who hang around startups, as investors or mentors, many lack the ability to gauge the viability of a business.

Startup accelerators and incubators have filled this gap. Over 7,000 business accelerators and incubators exist worldwide. However, many of them fail to achieve the results they set.

The Batavia Industrial Center, is commonly known as the first U.S. business incubator, opened in Batavia, New York in 1959. Eisenhower was US president and Grace Hopper was a key promoter of the computer language COBOL.

In the past decade, we have seen an explosion in the accelerator business. Pioneered by YCombinator Silicon Valley’s flagship, led by Paul Graham, incubators have returned with a vengeance. YCombinator has seen significant successes, including Airbnb (which it turned down twice), Dropbox, and Heroku. Accelerators are now a global phenomenon, and there isn’t a major city where an accelerator isn’t cropping up. If your city hasn’t got an accelerator, it is time to move!

To meet their full economic potential, incubators need to overcome two mistakes.

1. They need to provide real value to the startups, not just office space, and, 2.  They need to measure success in more than just outside funding provided.

Adding Real Value

Incredibly, during the dot-com era, in the US, many law and accounting firms decided they would become incubators (and we’re guessing they were planning to clean up on professional fees). Many of those efforts failed.

When you look at why accelerators fail, it is because many assume that cheap office space, second-hand furniture, a phone, and quick broadband equal good business incubation. Not quite. That implies mistaking cheap space for meaningful program content. Neither are discounted legal services, accounting, or other commodity services.

What determines whether a business can get off the ground successfully and become sustainable? There must be a validated market opportunity with customers willing to pay for a product or a service, combined with the development of a product or service that addresses such an opportunity. This is simple, yet time after time, this is missed.

Success Depends on Leadership

Accelerators must evaluate the startup leadership team’s management capability and help develop their skills, especially when the entrepreneur is a techie lacking business skills. Engineers have historically been very good at picking up business skills with the right mentoring. People lead some of the best companies with technical competency, not an MBA. Getting to the next level is well within their capacity, and an accelerator’s role should be to guide them in that process.

The next level for a startup is a validated business idea with the endorsement of reference customers and a product that caters to their needs. The rest—an office, legal documents, staff, new laptops, social media accounts, motivational posters, and beer in the fridge—do not equal valuation.

The benchmark accelerators should be measuring themselves against their success in helping startups solidify their businesses, gain early stage paying customers (or at best users who are adding value), a leadership team in place and a plan. Forget awards, acclaims, photos in the press and state support. They all count, yet they are meaningless without the former.

Success is More Than Funding

Many accelerators use their funding numbers as a success metric. Successful companies usually operate as organically grown, self-sustaining entities without external financing. For them, the goal is to achieve customer validation, not an accelerator’s financing statement. Yet, as accelerators often use funding as their success metric, they usually force inexperienced entrepreneurs into an unnecessary financing round. Cue disaster waiting to happen.

Accelerators if done right can develop the best value firstly for the startup, and also, for any potential funder or investor looking to work with early stage companies.

Of course, where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is a critical aspect. Equally important is providing education on what is and isn’t fundable. Upfront funding (usually someone else’s money) is not the right approach to attract the right startups in the first place, nor is it the best method to develop companies.

Contact us today if you want to design and manage an accelerator program.