When Marco Filippi, cofounder of shared vehicles app Volvero, was abruptly ejected from his accelerator’s Slack channel and denied the second tranche of the stipend he had been promised, his initial shock gave way to the realisation that he had missed a major red flag during the application process.
“I wish that I had asked about a contract,” he tells Sifted.
Filippi had not been offered a contract when the programme began and, as such, had little legal recourse when the accelerator dropped him with no explanation.
Accelerator programmes are a hot topic in European tech, and their pros and cons attract a mixed bag of opinions. Amid a tight fundraising environment, accelerators can still be an attractive proposition for inexperienced founders looking for a capital injection, with the added bonus of some mentoring and guidance.
But as Filippi discovered, not all accelerators are equally favourable for founders.
So, what do you need to look out for?
Watch your equity
Accelerators often take equity in return for their investment, which is typically around 7-10%. The total amount that early-stage startups typically allocate to investors is 15%, so if an accelerator already owns up to 10% that can be a big issue in future fundraises. Budding investors may be unhappy with their percentage and founder shares can get further diluted.
“When we got the most out of it, it was fine to give out the equity,” says Anita Schjøll Abildgaard, cofounder of Iris AI — which offers artificial intelligence software to help readers understand scientific texts. She took part in two accelerators that offered funding for equity, and says that the positive experience and connections she took away from one made the equity trade feel worth it.
For 7-10% equity, you need a lot of value provided for it to be worthwhile
But she has also experienced cases where the connections made or the timing of the programme wasn’t quite right, and left her feeling a little short-changed. When that happens, founders will wince at the deal they’ve agreed to, she says.
Khalil Hefaf, investor at Target Global, warns that accelerators can take a lot more than 10%, in some cases as high as 25%.
“[That] is quite a brutal dilution for founders in exchange for very little actual financing,” he says.
“At the end of the day, you want the company to succeed [and] founders [to] own a good chunk of equity in the early stages given the upcoming dilutive rounds.”
James Pringle, investor at Portfolio Ventures, agrees. Unless the accelerator is providing access to early enterprise clients in the startup’s targeted centre, the equity demands are high.
“For 7-10% equity, you need a lot of value provided for it to be worthwhile,” he says.
In the UK, he adds, founders have other options for early-stage funding that are kinder to cap tables.
“Given the recent increase in SEIS [seed enterprise investment scheme] to £250k, founders frequently have the option to fund their company with greater control and reduced dilution by raising an early pre-seed round,” he says.
Don’t get blinded by big dreams — or big promises
Breaking into America as a European startup is a tough task, and accelerators that offer access to the US market have proven attractive to founders in Europe.
Björn Schimmöller, cofounder and CEO of deeptech synthetic immunobiology company iuvantium, had that in mind when he applied for a global cohort based in Canada. But the reality failed to live up to his dream.
Schimmöller tells Sifted that the time and effort involved in travelling regularly from Oxford to Canada meant that the cost of participation far outweighed the benefits.
“The enticing idea of getting exposure to America blinded me to the consequences of that,” he says.
Think about the costs
Schimmöller says other European startups attending the global accelerator had more than one cofounder come along, and had to foot the bill — which included travel and accommodation. In hindsight, only one of them needed to have attended, he says.
Early-stage founders are cash-strapped and the expense that attending would incur can make a serious dent in much-needed funds — as a result, Schimmöller recommends that founders take accelerator attendance recommendations with a pinch of salt and consider their company’s individual financial situation first and foremost.
“It’s a big expense, and there was no point going there with more than one person,” he says of the accelerator he took part in. He adds that he thinks the accelerator should have made that clearer, rather than encouraging multiple team members to attend.
Schjøll Abildgaard, who also attended a global accelerator for Iris AI, echoed that founders should think carefully about whether a bigger expenditure will really pay off: “be sure that you want to spend the resources you need,” she says — which include the financial expense of flying out of Europe, but also the time commitment of taking part.
Talk to alumni — and not just the ones that the accelerator connects you with
Founders wouldn’t close a deal without doing their due diligence — and the same applies to accelerators.
Filippi recommends that for programmes that have had multiple cohorts already, applicants should reach out to alumni of the programme and ask them about it.
It is typical for programmes to introduce you to a number of alumni they have chosen. But due diligence requires finding the people who weren’t hand-picked in order to uncover any unfavourable stories under the surface.
Schimmöller also recommends finding out who the mentors involved in the programme are, and identifying if there are any that have operated in the same sector or geography that founders can learn from, before committing to attendance.
That insight was the most valuable part of his experience — so if the mentors aren’t relevant to a founder’s journey, there’s a limit to how much actionable advice they can glean.
