How To Get Seed Funding From An Accelerator

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The articles was originally published in One Million by One Million Blog by Sramana Mitra, an entrepreneur and a strategy consultant in Silicon Valley since 1994.

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A number of accelerators offer a good chunk of seed funding these days.

YCombinator, the best known of the lot, invests $120k in fewer than 100 startups, twice a year. For those ~100 slots, they get over 3000 applications. Companies are required to move to Silicon Valley for three months and YC takes 7% equity.

TechStars also offers about $120k in seed funding and takes 7-10% equity, and has offices in multiple cities.

Numerous accelerators offer $15-25k in funding around the world. That is the average at the lower end of the scale.

At the high end, there are accelerators like The Hive in Palo Alto that offers $1-3 million in seed financing. Naturally, they fund a very small number of companies (3-5), and go deep into each of them, which, by definition, means that they only fund Silicon Valley companies.

The odds of getting seed funding are very low, getting lower, because the number of aspiring entrepreneurs is increasing.

Given this dynamic, an entrepreneur should prepare extensively, and develop a relatively well-formed business concept before applying to an accelerator, especially a high-end one like YC or TechStars. To apply to the ones that offer higher levels of investment require even higher degrees of planning and preparation.

You should look at the full life cycle of fund-raising you will be going through.

I would, in fact, say that you should bootstrap your way to a degree of validation, as well as business strategy fleshing out, BEFORE applying to a high-end accelerator. The reason is as follows: the relationship between accelerators and angels/VCs is that they serve a screening function for the investors further down the value chain.

Your best utilization of a spot in a high-end accelerator that can fund your seed round would be to spend maximum time fund-raising for Series A.

Not changing direction.

Not pivoting.

Not experimenting.

You should focus 100% on Series A fund-raising once you get there, especially if you only have 3 months to use the program.

Otherwise, you have wasted a great opportunity that ain’t coming back.

What this means, is that you should do the real incubation / acceleration work outside of a high-end accelerator, and at one that does NOT take equity. This is a subtle and critical issue, because if you give up 7-10% equity at a low-end accelerator to get $15-25k in funding, and then another 7% to get another $120k, then your cap table starts to suck. Giving up 15% of the company for less than $150k in funding is a terrible deal.

When YC started, they were giving $15-25k in funding for 7-10% of equity. This model got copied rampantly all around the world. YC has since moved to a different model, as described earlier. But most of those other copy cats have not, because they cannot raise the level of funds to do actual seed rounds of $100k+.

As a result, we have a lot of companies coming out of these copy cat accelerators who have supposedly ‘graduated’ but have neither built a validated business, nor raised any seed funding.

YC, on the other hand, has strengthened its investor relationships and fund size, and they have raised the bar on the industry.

Hope this helps entrepreneurs trying to navigate this rather complex set of choices.

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