Operating Costs

How accelerators make money to manage operating costs

There are over 500 startup accelerators in the US and over 1000 worldwide. Most accelerators are aligned with Universities (at over 35%), some are government funded (local government mostly) at 29% and some (15%) get grants from rich individuals and institutions such as Kauffman Fund. The remainder (21%) are privately funded accelerators such as 500 startups, Angel Pad, etc.

First, the definition of a seed accelerator, so we can understand the scope of the program:

A fixed-term, cohort-based program, including mentorship and educational components, that culminates in a public pitch event or demo-day.

While there is no reliable data on how many of these accelerators are doing well, graduating great companies and surviving, there is some data on how they are managing to stay afloat and “keep the lights on”.

Most accelerators, raise some money to invest in the startups they fund. Many (over 61%) offer some form of space to their startups to operate in during the cohort. Accelerators also have a staff of 1-5 people (some even more, but the average is 1.8) to manage the program, support the startups and recruit, select and engage the local community and ecosystem of entrepreneurs.

All this costs money. In the US, that’s usually upwards of $400K (that’s the low bar) and in other countries, more than $250K per year.

Typically the cost of the space and maintenance is about 30% to 40% of the budget, the cost of people about 40% – 45% and finally the cost of programs, marketing, etc. tends to be about 20%. This excludes the investment in the startups.

While investors in the accelerator are willing to fund the startups (and take a % stake in them), most are unwilling to pay a “management fee” for running the program.

Having interviewed and talked to many accelerator programs, over the last year, I have a list of 9 different ways programs have tried to raise the operating costs of the accelerator. I thought I’d document these so it would be useful.

  1. Sponsorship: The most frequently used means to raise operating funds, is to have large corporate sponsor. Some local government organizations also sponsor these accelerator as a means to be connected to the community. Many accelerators also raise sponsorship from local legal, accounting and real estate firms who benefit from the startup community or wish to target entrepreneurs and startup talent with their products and services. Nearly 60% of companies and 30% of all operating budget funding is sponsor driven for the 15 accelerators I know.
  2. Events: Many accelerators run events that aid future entrepreneurs, community participants and local businesses. These events are typically networking opportunities and charge attendees a nominal amount of money to cover the costs, enable marketing for the accelerator and pay for the “marketing resource” at the accelerator. Some accelerator programs also put together hackathons and still others run large industry events to generate operating cash. Typically the problems with running these events is that they take up resources and time, but if you can generate enough cash from these events, you can support 1-2 resources who can help with other activities at the accelerator during the non-event days.
  3. Entrepreneur-in-residence programs: A relatively newer program is the EIR, where employees at large companies or those at smaller ones who want to learn how to be more entrepreneurial, end up spending time at the accelerator in exchange for a fee. Typical fees are between $25K to $50K in the US. These EIR programs are full immersion programs and last 6-12 months or 1-2 cohorts. During the program, the EIR is going through the entire process from start to finish and “learning on the job”. Many of the participants end up becoming investors or entrepreneurs at the end of the program and return to their companies, learning about lean methodologies, innovation approaches and how to build on an idea and bring it to market.
  4. Grants: Both government and private donors typically give grants (no strings attached usually) to accelerators to support entrepreneurship, which promotes local jobs, makes a city more attractive to larger companies and also helps the local economy.
  5. Rentals: Many accelerators charge a portion of their investment as a fee for the space during the program per seat. So, if the accelerator invests $100,000, and the startup has 3 founders and employees, then $5000 might be charged per month of the startup for the 3-4 months they are in the accelerator space. This is more of the domain of co-working spaces, but many accelerators are starting to do this as well.
  6. Research Reports: Few accelerators I know write research reports based on their startup data for larger companies. These companies pay for the syndicated research reports so they can use them in their internal presentations. These research reports tend to be focused on a particular area of expertise and also a market domain. It is not unusual to see companies pay $50K for a syndicated report for the year about the startups within a specific area of their interest.
  7. Code Academies and Hacker schools: Many accelerators have also joined with coding schools, which teach programming to new and interested talent. This serves two purposes. First, the accelerator can raise cash by conducting training and second the graduates become good source of talent for the accelerator startups, who pay a fee to recruit the talent.
  8. Innovation scouting for larger companies: Many larger companies are also looking to recruit talent, acquire companies and learn about new disruptions and innovations. These companies are willing to pay a little money to scouts who can help track, recruit and manage a startup pool of entrepreneurial talent. Many accelerators provide this as a service to larger companies.
  9. Distribution, Sales, Design and Marketing consulting: A few early stage accelerator are also providing the equivalent of the “coding” school for non developers by running marketing and sales training programs. The difference is that the graduates are employed by the accelerator program and they end up being consultants to the startups who charge a fee for their services.

These are the various programs I have seen, and I’d love your input on if I have missed any that you have seen.