A Capital Crunch Is Killing Startup Accelerators

• The capital crunch presents a dilemma for accelerators trying to find feasible matches between startups and investors.
• Accelerators are also struggling to find promising startup teams, experienced mentors and strong leadership in new businesses.
• The capital crunch will end eventually. In the meantime, funding options like bootstrapping, bank loans, lines of credit and angel investors still exist.
• This article is for entrepreneurs seeking investors and support amid a lack of capital access restricting opportunities.

Raising capital is one of the first concerns for entrepreneurs launching a new business. Startup accelerators are a traditional method new ventures use to secure funding. These organizations nurture new businesses and introduce them to investors in exchange for equity. 

Unfortunately, startup accelerators are struggling to fulfill that mission amid an uncertain economic climate. Consequently, accelerators are in jeopardy — and so are entrepreneurs eager to start their dream businesses.

What are startup accelerators?

Startup accelerators are entities that assist entrepreneurs with startup costs, help them avoid startup mistakes, and provide additional resources. They link new ventures to investors and others who can provide the mentorship and support needed to start a business. While many aspiring business owners get along without them, others need accelerators to begin their journey and hit the ground running. Accelerators are particularly valuable for startups that need significant early-stage capital, such as tech companies.

However, there’s been a struggle in the accelerator industry recently, leading many companies to close. There should be a mutual benefit between corporate partners and the startup they support, but the process of matching with the right investors often leads to failures — and along the way, capital is wasted. In an economy where there isn’t much extra money to go around, the result can be devastating for accelerators, startups and investors.

Why are many startup accelerators failing?

The first accelerator program ever launched to help American entrepreneurs was Y Combinator, which made a big splash following its opening in 2005. Since then, many organizations have followed the accelerator model, offering startups mentorship, networking and investment opportunities. 

But the accelerator story doesn’t always have a happy ending. Accelerators can fail for various reasons — and when they do, many businesses and investors can be left out in the cold. 

Here’s a look at why many startup accelerators are failing. 

1. Accelerators fail because they can’t find good startup teams.

An abundance of accelerators means fierce competition to attract the best startup teams with excellent business models and potential. Accelerators are choosy about where they invest their money. But as the number of accelerators proliferated — and the recent economic downturn deepened — great startup candidates became fewer and farther between.

Most accelerators make money by obtaining equity in the companies that join their cohorts. Some may also charge for services or offer a combination of cash-for-service and equity financing agreements. However, if not enough startups enter the program — and not enough from past cohorts get funded and grow successfully — the accelerator’s longevity is at risk. Accelerators must continue bringing in new startups consistently.

2. Accelerators fail because mentors sometimes lack expertise.

Accelerators often provide mentorship programs that help startup teams build their businesses. Their goal is to equip startups with the best possible tools for business growth — after all, they have a stake in the company and are motivated to help grow the business.

Many accelerator programs owe their success to their experienced mentors. The best instructors attract the best entrepreneurs, and the transfer of knowledge from one expert to another is a recipe for success. However, when accelerator programs don’t have quality mentors, cohort members suffer — and the accelerator pays the price. 

3. Accelerators fail because they lose investors. 

Accelerators help startups pitch ideas to investors. One determinant that dictates whether or not an accelerator program will thrive is “Demo Day.” On Demo Day, the accelerator invites potential investors to consider partnerships to secure the future of many startup teams. However, sometimes the accelerator can’t establish a quality investor network, or investors come to Demo Day only for show or reasons other than investing. 

Losing investors or lacking quality investors can derail an accelerator. Even if the accelerator has internal funds to support a project, it won’t be able to cater to other equally promising projects. The opportunity cost can be too much to overcome. 

4. Accelerators fail because of weak startup-investor teamwork.

Accelerators can fail due to a mismatch between the investor and the startup team. Startup funding is only one investment aspect — many more factors must be considered and negotiated. For example: 

• What share will the investor receive of company earnings? 
• What are the investor’s personal goals? 
• What are the entrepreneur’s goals? 

Accelerators must discern which investor is ideal for which startup. While some disagreements can be negotiated and relationships mended, a bad match is problematic. If their goals are at odds, the relationship won’t work — and the project will be doomed. 

A case study of On Deck’s decline

The On Deck story illustrates how a solid accelerator program can quickly go awry. 

The On Deck ODX accelerator program was founded in 2016 to help aspiring business people connect with investors and transform potential business ventures. Its program offers up to $125,000 of capital and support in exchange for a 7 percent share in a startup. The company has helped 150 startups launch and operate.

However, things have been shaky for On Deck, despite its public image. It partnered with investor Tiger Global and planned to raise $100 million worth of capital to support startups. These plans proved too good to be true when Tiger Global disclosed it could only fund $10 million worth of projects. On Deck’s acceleration plans went awry; it had to tap into its Series B funds so it wouldn’t have to cease operations.

The impact was severe: On Deck laid off 25 percent of its staff. “As a community-centered company, our people have always been our highest priority. Our focus in the coming days will be on fully supporting our team — both those departing On Deck and those who will help us build the future,” an official website post read.

Despite cutting staff and seeking help from other investors, On Deck is still not in the clear. It runs the risk of being shut down for good because of the failed Tiger Global investment partnership.

How does the decrease in accelerators impact SMBs?

Since Y Combinator’s inception, many accelerator programs have launched in hopes of setting up a thriving capital funding industry full of opportunities. However, many would-be accelerators exited as fast as they entered. This paints a particularly grim landscape for SMBs in need of capital.

SMBs face the following repercussions of fewer accelerators: 

• It’s harder to launch a new business. Arguably the heaviest impact of the accelerator decline is the struggle of potential entrepreneurs to launch their businesses on their own. It’s certainly possible — many corporations did it long before accelerators were around. However, leveraging immediate capital and mentorship is an ideal way to build a business from the ground up, especially in today’s highly competitive scene.
• Resources and information are more difficult to acquire. Many startup teams don’t have valuable resources and industry knowledge, making succeeding without an accelerator more challenging. 

However, the decline in accelerators presents an essential lesson: SMBs shouldn’t rely too much on an accelerator to raise funds and find the resources they need to thrive. As competition grows, startups must find creative ways to circumvent the lack of funding. 

How can startups rise above the capital crunch?

The capital crunch seriously affects many aspiring entrepreneurs; they may be more reluctant to take the leap of faith and start their own businesses. However, there are still ways to launch your business if you’re determined to make it in your industry. Consider the following strategies to rise above the capital crunch: 

• Self-fund your business. One way SMBs can thrive despite the capital crunch is through bootstrapping, otherwise known as self-funding. Young entrepreneurs often use this method because finding the perfect investors can be arduous and time-consuming. With bootstrapping, you invest your own money or ask family and friends to help raise capital. While self-funding has many advantages, your risk is greater if everything goes awry. 
• Find other funding options. There are many other funding options to pursue. For example, research angel investors, reach out to venture capitalists, explore crowdfunding, look at a business line of credit, and find private funding sources. 
• Consider business loans. Getting a business loan from a bank is a possibility, especially if you have a business plan and your finances are in order. Microloans are also an option for helping small businesses launch and grow.
• Research startup competitions. Startup competitions often provide the necessary capital and mentorship if you win against competitors.

Launching a business is still possible

The capital crunch has undoubtedly hastened the demise of many accelerators, increasing the challenges of launching businesses for young entrepreneurs. Investors can play a vital role in a startup’s success, and less investor access is a serious detriment.

However, savvy entrepreneurs can find ways to succeed. They can explore funding alternatives and find support to set their business goals into motion. The capital crunch won’t be permanent, and accelerators and SMBs will undoubtedly enjoy smoother sailing in the future.