- Accelerators & Incubators will partner with FINRA approved Funding Portals (aka Crowdfunding Platforms)
- Because the real value is in getting Founders/Businesses "Business Ready"
- Founders will not benefit from this partnership and will opt to skip the Incubators and Accelerators going directly to crowdfunding platforms.
Hello Beautiful People! Recently you may have seen how YCombinator put 40 of their Startups onto the WeFunder platform. Which was an inevitable step in the evolution of crowdfunding. On YCombinator's side it was them opening the gates to a Trojan horse of epic size. How is that? I'll explain in the following bullets.
A natural partnership - Accelerators/Incubator and Funding Portals
In all truth I don't actually know what the difference is between an incubator and an accelerator. Yes, I could google it but that would be like googling "What is the Yellow Pages?" At any rate, in my head accelerators and incubators help Founders get their business, business ready, to accept additional investments so they can scale by playing matchmaker between Startups and VCs/Angels. All of this though comes at an expense. The expense of joining or being accepted to an accelerator/incubator varies. Sometimes its as low as $20k and other times its as high as 20% equity in the business or some combination there of. YCombinator's "standard investment" is $125k investments for 7%. However, there are some non standard options as well. Prior to the JOBS Act that mode of business made a lot of sense for Founders who did not have a network of high-networth individuals. However, since 2016 we've seen more and more startups opt to skip the sunk coast of joining an accelerator/incubator and go directly to crowdfunding. Fast forward to March 2021 and YCombinator sealed the nail in its coffin by encouraging 40 of its startups to pursue crowdfunding. Why this is a nail in their coffin (albeit it will be a slow death) is because how will Accelerators/Incubators justify their existence when Founders can skip their fees and equity grab and head directly to The Crowd?
How Accelerators/Incubators (A&I) will justify their existence is that they will continue to provide the basic "business ready" activities that Founders need in order to become Business Ready so they can then become Platform Ready, which leads them to launching their fundraising activities to really determine if they're Investor Ready. Note - Whether Founders are trying to raise funds from Angels, VCs or The Crowd each group requires the same data points to be able to vet the deal. So there is no "easy" way to raising money for your startup. Its a marathon and regardless of what you call it its still a 26.2 mile process.
The Value of getting Founder's Business Ready
The real money in the startup ecosystem is Accelerators and Incubators. For instance, crowdfunding portals generally get paid based on success fees. These fees range from 5% to 14% of the raise. Meaning that if the Startup fails to raise any money, then the portal makes no money. Where as if the Startup raises, say $1M or $5M, then the portal receives their % of the raise. There are some other fees associated with crowdfunding portals, typically around $20k per campaign, not including the cost of marketing that Startups spend marketing their deal. Note - Funding portals can't actually market your funding campaign for you. Read this great article from CrowdCheck that explains it in full. However, Accelerator and Incubators also make money due to the equity they own in the company (some funding portals also take equity) and some also charge cash fees to Founders. Now on the A&I side there is a lot of risk involved. Generally there is a 96% failure rate in VC backed Startups. However, when that last 4% hits, they win so big that their $125k investment often translates out to a 10,000x return. So, who has the most upside in businesses? A&I do.
- Have equity exposure
- Equity chunks are often greater than platforms
- Can also receive cash up front from Founders to be part of the Accelerator or Incubator
Founder's Keeping Equity & Skipping Accelerators & Incubators
There are about $5M reasons that Founders who are Business Ready should skip accelerators and incubators. When YCombinator sent 40 of its Startups to WeFunder to raise capital it was the same as hanging out a sign to Startups that read, "Here are $5M reasons you don't need us". Yes, Founders will still need some technical assistance and the marketing that being associated with the brand "YCombinator" brings. But then the question becomes, "Is the brand / marketing upside of such-and-such accelerator/incubator worth X?" Bootstrapping startups and in particular startups who are "only" looking to raise $500k to $2M to run lifestyle companies (lifestyle companies are companies that "only" generate $20M a year and provide the Founders AMAZING lifestyles) will weigh the options of going through A&Is and instead opt to play their odds like Monopoly and Go Directly to The Crowd.
There is sunk cost to raising money. Its somewhere between $5K and $2B. Read this article to understand why.
As of April 25th there are 64 and counting FINRA approved platforms. Pick one.
Because regardless of the platform you pick for your deal, you (the Founder/Issuer) are still responsible for building the community and marketing your deal to bring investors to it. Remember - funding portals can't do your marketing for you. Funding portals are a tool (e.g.: excel sheet who keeps track of who invested what) and are not a service (e.g.: Accelerators who provide technical services to get your business Business Ready.
Thats it! May the odds and algorythms forever be in your favor!
About the Author
Samson Williams is a serial entrepreneur and accidental investor. When not starting business with his enemies (“Entrepreneurship is hard. I only recommend it to my enemies.”), Samson is an Adjunct Professor at Columbia University in NYC and University of New Hampshire School of Law where he teaches on blockchain, cryptocurrencies and the Space Economy. Samson is also President of the Crowdfunding Professional Association and investor into two investment crowdfunding platforms Brite.us - CrowdInvesting Done Brite and GoingPublic.com. For more information on Samson visit www.SamsonWilliams.com and follow him on social @HustleFundBaby.