June 23, 2024
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Growth Accelerators: Equity or Cash Fees?

On average, statistically it takes between three to four years for a new startup to become profitable. However, considering that 90 percent of all startups launched fail, many entrepreneurs regularly search for ways to speed up this process.

“Startup accelerator programs provide founders with a startup-to-exit roadmap,” explains Andrew Ryan, the founder and CEO of ASTRALABS, a startup venture studio based in Austin, Texas. “They develop an effective startup and fundraising strategy with input from expert mentors, then help founders to connect with a global community of other founders, angel investors, and venture capitalists.”

In the last five years, Andrew has helped over 2,500 startups raise more than $650 million in venture capital. His Newchip startup accelerator’s programs empower founders to cut the normal time for startup fundraising in half. Whereas typically only four percent of startups are successful with fundraising, 70 percent of Newchip graduates go on to successfully raise funds.

Newchip is part of a movement in the startup world that has gained considerable momentum during the past decade. Accelerators boost a startup’s chances of success by providing business mentoring and support in addition to capita, and have helped to launch well-known businesses like Airbnb, Doordash, Coinbase, Reddit, and Instacart. 

Should you trade equity for acceleration?

While participating in a growth accelerator program can provide startups with a much-needed boost, it often requires founders to make a tough decision: Will they trade equity for acceleration?

The Newchip Accelerator  does not require that participants pay for their acceleration by giving up equity in their companies, but that is not the norm with other accelerator programs or fundraising avenues. In most cases, giving up equity is the price you pay, though there are some things to consider before taking that step.

First, giving up equity can means giving away a portion of the company’s ownership. When investors are given equity in a company, they become shareholders, becoming partial owners of the company. That means they have a vested interest in seeing the company succeed. If they feel the founder is not running the company optimally, they will want to see changes. If they have enough equity, they can demand those changes.

Where does that leave the founder? It may leave them at the helm of a business that is not what they had envisioned. That is one of the downsides of leveraging equity for growth acceleration.

Second, giving up equity can mean giving up a considerable amount of future profits. Equity gives investors a stake in a company for as long as they hold their shares. In the early phases of a startup, those shares might seem like a small sacrifice to the founder. But as the company grows, which is what the accelerator program helps with, the sacrifice can start to seem a lot bigger.

Consider a startup valued at $500,000 that trades five percent of its equity for the benefit of growth acceleration. The $25,000 price tag may seem reasonable. However, when the company grows to be a $5 million company, that five percent equity is suddenly worth $250,000, meaning that the founders traded $225,000 in their company’s value for an early equity investment. As the company continues to grow, so too does the total value lost for founders.

Generally, accelerators demand at least five percent equity in exchange for the guidance and funding they provide. Sometimes, it can be as much as ten percent. For founders who believe their company has a bright future, even five percent can be a lot to give up.

“Our accelerator programs set a new standard for how startups find funding, achieve growth, and fuel innovation in this new global economy,” Andrew explains. “We provide the initial team, strategic direction, and capital to reach product-market fit without creating the tension that can be caused by becoming equity holders. We believe a 100 percent equity-free model is a more founder-friendly model.”

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