The short answer to this question is, “It depends.”
For founders who want to enter new markets and “internationalize” their companies, accelerators offer a viable path for some. It is important to understand the offer - and the alternatives - in order to assess the pros and the cons. The two main categories we will consider in this article are accelerators, for example 500 Startups and YC, and specialized market entry consulting firms.
What is an Accelerator?
Most of the better-known accelerators are early stage investment firms. They are “Lean VCs” who make a bunch of “small bets” on a cohort of companies two to three times a year. A few of these investments may pan out such that the companies in question receive follow-on investments. The rest will not.
All companies joining at the same time participate in the same program. The program is “one size fits all”, although aspects of the program are individualized. Examples of this are introductions and mentoring.
The companies in the cohort are accelerated through a combination of “Startup School”, mentoring, events, introductions to the accelerator network, fundraising guidance, access to a coworking environment, etc. Most programs conclude with a “Demo Day”, an event where companies pitch to early stage investors for their next round.
How do Accelerators Operate?
Some of the better-known examples of accelerators are Y Combinator, 500 Startups and TechStars. Valuations of all the companies in a cohort are identical.
For instance, 500 Startups invests $150K USD which buys an ownership stake of 6%. The terms of the investment give them the right to invest up to $500K or 20% of the next round, whichever number is bigger. The companies who receive the investment are required to participate in an acceleration program. Tuition for the program is $37.5K of the $150K investment. Travel and living expenses are separate and are the responsibility of each individual company. Y Combinator has a similar model.
The acceleration programs mostly take place in the US, e.g. the San Francisco Bay Area, Austin, Miami. Some accelerators offer “pre-acceleration” programs in international locations. During an accelerator program, the founders need to be physically present at the accelerator location for key program events. Participants are generally allowed to spend time elsewhere between key program events.
To get maximum value however it is best to be at the accelerator location for the full program. This allows founders to actively build network during the program. The programs are time-boxed, e.g. 3 months for Y Combinator.
Is an Accelerator Right For You?
You need to ask yourself a number of questions. Here are some of the most important ones:
- Does the valuation make sense? Since you will have to part with 6 – 7% of your company for $150K, you will want to ask yourself whether that valuation makes sense. The valuation comes out to be $2.5MM assuming 6%. If you raised your last round at a $20MM valuation, that probably doesn’t make sense.
- Is the acceleration program content relevant for a company at your stage? Accelerator companies are mostly pre-series A and pre-seed stage companies. Raising a round of $150K and going to “startup school” is highly relevant. The focus of building or refining an MVP makes sense. Learning how to raise money and pitching at Demo Day makes sense. On the other hand, if you have already raised a seed or series A round and have a going business in your home country, an accelerator program may not make sense for you.
- Are you even a candidate for an accelerator program? Accelerators have become a “top-of-the-deal-flow-funnel” for venture capital firms. To be good candidates for accelerators, companies need to be good candidates for follow-on venture investment. If you have the potential to become a billion dollar company, you are venture compatible. If you have the more modest – but less risky – ambition of becoming a multimillion dollar company, you probably are not. There are many founders who want to grow in a more organic, but less risky way. If you are one of them, an accelerator program is probably not for you.
- Does the geography make sense? If you are planning to enter the US market through Miami, you probably won’t want to do an acceleration program in San Francisco. Is the program you want available in Miami? Or Chicago, or whatever city you are planning to make your US point of entry? Also, can you afford to spend the time 3 or 4 months straight in a location thousands of miles from your company’s HQ?
- Does a cohort program give you what you need? Cohort programs offer some individualized mentoring but are mostly “one size fits all”. Does that suit your needs? Does the accelerator have mentors who are experts in your space? How well is their network targeted to your industry focus?
If you “do the math”, and an accelerator program is not for you, what are the alternatives? The main alternative source of market entry support is to work with specialized consultants who offer these services.
What are Market Entry Consulting Firms
Some companies are more mature. They have a going business in their home countries. They are doing more than $1MM in annual revenue. Maybe they have raised their first $500K to $1MM USD. They want to explore their opportunities in the US, and they want customized, personalized go-to-market support. If these companies ask themselves the questions above, they might conclude that an accelerator is not the right choice for them.
Where accelerators are cohort based, market entry consulting firms generally work with companies one-on-one. They provide individualized support. Programs are customized around the specific needs of each client.
Where accelerators are investment based, market entry firms are “fee for service”. There is no exchange of equity for dollars. The business model is similar to lawyers, accountants or other professional service firms.
Market entry consultancies do not teach founders “entrepreneurship”. At least not in a “Startup School” format. They work with clients on the big challenges of going to market in the US. This includes validating product-market fit, tuning the business model, and figuring out sales and distribution. Some market entry consultants may also offer a coworking environment and “back office” services. Usually they do not provide accounting or legal but refer companies to trusted partners.
Most consultancies are geographically focused. If they are located in Miami, they work with companies who want to enter the US through Miami. There are several reasons for this.The most important one is they work side-by-side with the entrepreneurs they assist. Also, their networks are mostly in their home city.
How to Evaluate Market Entry Consultancies
There are various flavors of market entry firms. Many are one-man/one-woman operations. Unfortunately, as a founder, there is no simple way to “separate the wheat from the chaff”. It is easy to make a mistake. That said, there are some things to think about when recruiting a firm to work with:
- Is the consultancy an individual or a team? A team will have a bigger network and complementary skill sets. All things equal, it is preferable to work with a team
- Does the company know your industry? Do they have a network in that industry? Do they have access to industry experts in your space?
- Have they done similar projects in the past? Do they have happy customers?
- Can they offload you on backoffice tasks? Back-office issues are not mission critical but they are a time drain. If someone can provide that service for you, it frees up your time to work on the hard stuff. And the hardest hard stuff for new entrants is SALES.
- Does the company have a proven methodology for working with companies like you who are entering the US market? Is there a step-by-step process that shows you they have done this before?
- Can they provide end-to-end support for your market entry? It usually takes 18 - 24 months to set up a presence in the US. There are stages to this ranging from finding product market fit to building a repeatable sales model. Does the firm have the people,
- There is one more thing and it is the most important of all: HAVE THEY WALKED THE WALK? Are they just corporate “refugees” who left the corporate world and became consultants, or have they lived the entrepreneur life and brought their own companies to the US? Are they “talking heads” who learned “the talk” at business school or are they do’ers who learned their lessons “in the trenches”?
Tier one accelerators like Y Combinator are a terrific solution for companies at the right stage in terms of product, team and funding. For later stage companies primarily focused on internationalization, a specialized market entry consultancy may be a better fit. Either way, you will be working with advisers whose experience can help you grow more rapidly than you could alone.
You will primarily be leveraging their experience, know-how and network. When choosing someone to work with, be especially vigilant that you work with people who not only “talk the talk” but have “walked the walk”.