Accelerator or Startup Studio: What Should a Startup Founder Choose
The common reaction of an entrepreneur who applies to a startup studio for the first time is, “Why is the percentage so high? Accelerators get less!”
In this article, we will point out the key differences between the two business models of working with startups and explain what is the reason behind such a difference in shares that startup studios and accelerators get.
Difference Between a Startup Studio and an Accelerator
Accelerator is a fairly well-known term in the Russian-speaking venture capital community. But the information about startup factories isn’t so widespread. In this blog post, we will break down when entrepreneurs should go to accelerators and when they should start cooperating with a studio.
Accelerator for a Startup
An accelerator is a tool to promote an already existing project. To pass the selection process and get into an accelerator, you need to have a team and a working MVP.
The main goal of the accelerator is to move on from this part of the startup’s life cycle and find a product-market fit and scalable business model. It is supposed to increase sales, enter a new market, etc. Also, an accelerator helps its projects catch people’s interest on a demo day and later, with the funds received, follow the plan outlined during the program. Usually, a project stays in an accelerator for a short period from six weeks to six months. Mentors and experts as well as corporate and tech partners are engaged in developing the startup, too.
Demo day is a day when startup founders get promoted by their accelerator and pitch their projects to investors.
The accelerator’s financial interest is simple: it’s a share in the company that provides it with a stake in the project. Some accelerators provide pre-seed investments for startups. Other programs are paid, so they don’t take a share but accept a percentage of an investment round instead. Finally, some acceleration programs only provide their expert support and physical facilities while also claiming shares.
For startup founders, an accelerator is attractive because its program of team training is made transparent in advance for all stages. The time frame in which a startup acquires knowledge is short, and the number of investors (at least in programs that are known) is quite large. So there are chances some of them might find the project promising.
Startup Studio. Aspects of Working with Projects
The studio creates lots of startups on its own, but it can become a co-founder of the project as well. The main advantage of this business model is the full support of the projects at every stage of their development, up to A, B rounds, and sometimes beyond.
Another advantage of the startup studio is that it’s possible to cancel initially inviable business ideas, screening them out at an early stage. For example, in 2019, 45 out of 150 projects made it to our studio’s investment committee. On all following stages, 80% of them left. At the same time, the “mortality rate” after the seed round did not exceed 10% as projects with “childhood diseases” are eliminated in the incubator.
It saves time and money not only for the company and investors but also for the founder of the startup. They will be able to understand that their startup has no commercial prospects and switch to a new project or other activity within the studio. On the other hand, in an accelerator, founders get into a cycle of wandering around aimlessly while nothing happens. After passing the program, the founder simply closes the project.
The startup studio’s share in the project is larger than that of the accelerator. Why? It’s because of full-fledged support at all stages of the startup’s formation. Something that the studio provides, but the accelerator does not.
In terms of money-making, the accelerator’s main task is to take an idea that is already working, give it a jumpstart, and wait to see if it works enough for the accelerator to make a profit. To secure its financial future, the accelerator works with numerous startups that get promoted for investors’ money. In other words, the worst-case scenario is that the accelerator loses only a bit of money and time. The risks are relatively low.
On the other hand, startup studios cannot afford to pour their own and investors’ money into projects that might work. Hypotheses are tested in more detail. Unviable ideas are rejected at an early stage, while the promising ones are promoted with all the logistical and human resources of the startup factory. It allows avoiding throwing money down the drain and launch the most ambitious projects that later will bring profit to founders, studio, and investors.
But financial resources alone cannot create and promote a startup. It is done by people who need full-board working conditions from offices and equipment to legal support and efficiency analysis.
Back Office for Projects in the Startup Factory
Every entrepreneur should calculate how much money they need per month for routine operations (renting an office; paying utility bills or lawyers and programmers' fees). Without this routine, it’s not easy and sometimes even impossible to work on a startup. But everything you need to create a startup can be easily obtained from a startup studio that becomes a co-founder of the project.
- An office. We’re not just talking about a room with workstations, conference rooms, and equipment. It also includes office managers who can meet guests, offer them coffee and biscuits, receive and send documents, organize a party or some other event, and overall help with everyday issues.
- Lawyers. They will support startups’ documentation from analyzing the risks of a contract to signing an agreement and compiling reports. They are also willing to provide their expertise on the legal tasks of the project.
- HR department. It’s not only hiring and dismissal of staff but all the associated tasks as well, including initial interviews, screening, staff management, etc. HR unit will also compile employees’ motivational portfolios to increase the effectiveness of communication.
- The studio’s marketers will ensure the project promotion on the market: p from preparation to launch and further advertisement through various channels.
- Developers will work on the start-up.
- Designers are ready to help with a corporate style, whether it’s an advertising banner, a presentation, website prototype, or a landing page.
- Trackers will perform expert examinations and kickstart a project that stalled, which will save time, resources, and money. They also keep the team focused, set new goals, and build development strategies.
- An accounting department that pays for current issues and keeps track of the startup’s financial activities.
- Sales House is a studio’s centralized sales department that increases the speed and number of sales through streamlined business processes and connections.
Unlike newly-recruited people (and recruitment also takes a lot of time and energy), all the above-mentioned departments of the studio are already fine-tuned and have extensive experience in creating and promoting startups.
If you take the average metrics for Moscow, monthly expenses will not be great:
Office rent (50 sq.m.)
The table does not include associated costs: equipment, utilities, taxes. There are also no developers and designers. We’ve also taken average salaries; good professionals with lots of field experience are much more expensive.
But even so, the total cost is 517,000 roubles. It must be paid monthly no matter whether your startup is profitable or at the beginning of its journey. In a year, you’ll pay millions of roubles, and they also need to be paid on time. In a studio, however, all these worries are no longer part of the founder’s concern.
The Choice between a Studio and an Accelerator
So what should a startup freshman work with? To answer this question, let’s compare startup studios and accelerators once again:
Can be provided
It’s necessary to have your own
Involvement in a startup
Launches startups from its first steps to exit and beyond
Accelerates startups on a short timescale
Within the project and in the portfolio companies
Only within the project
Startup studio specialists involve investors, or the studio invests itself
You need to spark the investors’ interest all by yourself
Additional support (lawyers, accountants, marketers, etc.)
Share in startups
The studio gets a significant share in the startup and becomes its co-founder because of in-depth idea implementation. It provides office, specialists, and further support at all stages of project growth until it’s sold.
However, in doing so, the author of the idea avoids all the problems associated with making business independently. Which is inevitable if the startup gets into an acceleration program.