What Is an Accelerator?

By Oscar Ramos, Program Director of Chinaccelerator

Although accelerators emerged as early as 2005, and now so many startups want to be in one, most people are still confused about what accelerators are and what makes them so popular.

As one of the first accelerators in Asia and one of the hubs for cross-border innovation in China, Chinaccelerator receives multiple types of visitors interested in accelerators:

• Universities and business schools analyzing entrepreneurial trends in China
• Foreign government delegations exploring Chinese startup methodologies for their domestic corporations internationalization
• Multinational corporations examining Chinese innovation (products, best practices) that could have global potential
• Service providers searching for new channels to acquire customers for their products
• Investors looking for potential co-investments or strategic funding for their portfolio companies
• And of course lots of entrepreneurs, looking for early stage investors

Every one of these interactions has demonstrated that different people have different expectations and will, quite reasonably, compare accelerators to whatever they already know and understand. Therefore, to explain the concept of an accelerator, one must begin by deconstructing common assumptions and comparisons.

Accelerators are like co-working spaces…

The first contact point for visitors coming to an the accelerator is always an open space full of startups that interact with each other. Considering the global boom of shared office spaces, assuming they are like a co-working space is one of the easiest comparisons.

However, usually accelerators are simply tenants in an existing shared space. Additionally, in most cases the space is only available during the duration of the program, while co-working spaces have no time limitation. But probably the most important distinction is their revenue model. The standard revenue sources for co-working spaces are rent and services. Accelerators, if for profit, usually have an investor revenue model. They take equity in the companies and expect to eventually cash-out at a higher valuation.

Accelerators are early stage investors…

Most accelerators are in fact early stage investment vehicles that take equity and invest small amounts of seed capital.

Yet, the capital invested is by far the less valuable as an asset for “acceleration” as is hands-on support for “growth”. Some may argue that too much capital in the acceleration process could create negative impact. Founders are tempted to clone existing solutions instead of exploring new ideas to solve problems. There are lots of things more important than capital that entrepreneurs can use to be accelerated. Some of them can be acquired, but most are not. Sharing of best practices and hands on support is probably one of the key components that attracts organizations and individuals to accelerators.

Accelerators are like consulting firms or innovation agencies…

This analogy typically stems from the common objective of helping businesses innovate and grow using specific frameworks and the learnings acquired from working directly with real cases. For consulting companies, their processes and tools are important, but at the end of the day what really makes a difference is the people running the consulting projects and the expertise they accumulate.

Accelerators have their management teams, and in most cases people who can share years of experience in the startup world as well as tools for entrepreneurs. Another key part of the accelerators’ “consulting” support are mentors, specialists who share their know-how with respect to an industry or domain.

As alluded above, besides not making money from fees, accelerators are motivated by a potential long term return that derives from the success of each of the startups. The specific working style of every program helps entrepreneurs to learn ”startup management” faster than they would on their own.

Accelerators are like business schools or universities…

Management know-how and learning are fundamental to accelerators. Tech founders grasp key concepts about business. Marketers approach new ways of product launching and growth hacking. Founders coming from multinationals are always surprised about the existing discipline and systems involved.

But accelerators are about learning, not about teaching, and the learning happens in a different way. Maybe one of the most relevant differences is the structure of the curriculum. Although there is a basic common structure, the interactions happen most in 1:1 sessions with the companies and their managers.

Accelerators are like personal executive coaching…

The role of the management team and mentors guiding the founders and giving them new tools is sometimes compared with those assigned to an executive coach that helps new managers who were recently promoted.

Although the incentives are totally different and the 1:1 coaching definitely exists, this comparison misses what in my opinion is probably the secret of accelerators: “The cohort effect”.

Accelerators are like a private club or alumni network…

Accelerators run their programs with several companies in every batch. Going through the process with other teams that struggle and succeed allows founders to learn in real time, faster than they would do on their own. Of course, in order to be able to create that environment, the first challenge is to create trust so that founders are willing to be open and sincere.

Most accelerators actually manage an alumni network with companies that went through the program and have shared values besides a common shareholder.

In sum, accelerators provide value to companies by creating the right environment for innovation, including a welcoming community of mentors, investors, and service providers — and also by disseminating existing knowledge into the community in real-time by the companies in the cohort, with the invisible hand of management making sure all the pieces fit together.

Originally published at sosv.com on February 3, 2017.