Before you join an accelerator, here’s how to do due diligence

There has been a proliferation of accelerators as of late, especially in the healthcare realm, but some are better than others, and entrepreneurs have differing takes on why they did or didn’t join them. Meanwhile, in the wider industry, we’ve been hearing quite a bit of debate about whether or not accelerators are even “worth it” for statups.

I’m a cofounder of an early-stage healthcare technology firm, Varsa Health, and when my team was invited to join Healthbox, a healthcare-oriented accelerator, as part of their Chicago 2014 class, we put together together the following due diligence checklist to help us assess the offer. We think it’s a useful list for any startup to work through before making the leap:

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1. What services is the accelerator providing? The big question is whether the accelerator is addressing “soup” needs or “soul” needs for your business. As an example, we moved into Healthbox in part because we were a remote team in three different cities and needed the office space they were providing. This was a clear business need. However, Healthbox also offered Amazon Web Services hosting credits. Although this is a great perk, it was not going to make or break our business. Therefore, we didn’t view something like AWS credits as adding to the direct value of the accelerator. (Accelerators can offer these add-ons because they are a filtering mechanism that makes it easy for a company like Amazon, Rackspace, or a startup law firm for that matter, to market their services to companies that have the potential for longer-term customer relationships.)

Another reason we joined Healthbox was because we needed to be speaking with the right individuals at different points in the hierarchy of health systems, ranging from directors to our end-users. Of course, we could have done this on our own, but as first-time entrepreneurs in the healthcare space, our networks were limited in depth. In contrast, we didn’t necessarily “need” the seminars by experienced entrepreneurs from other industries that Healthbox hosted every week. They were not a business need since our team all had prior experiences working in startups and had many mentors outside of the program. However, some entrepreneurs very much needed these sessions.

Takeaway: Look at what aspects of the program are going to enable you to reach your deliverables by the end of the program. If there are enough opportunities to take advantage while also being able to build your product, then the program is a true value-add.

2. How much will the capital help? It goes without saying that accelerators at a minimum should put a cash investment of some kind into the startup in exchange for equity. Malay Gandhi from Rock Health has a great perspective on this. That said, valuation based on accelerator capital is arbitrary and no venture capitalist and angel should ever value your company based on an “accelerator round” of capital (this is worthy of an entire discussion itself around funding amounts from accelerators). Many accelerators offer some form of a convertible note as follow-on financing. Some investors frown upon convertible notes with good reason, but again I think this depends on the context and timing.

Takeaway: Don’t pin your hopes on convertible notes saving a shabby business model.

3. How much emphasis is there on the demo day? Many accelerators tout their demo days the way colleges show pictures of commencement ceremonies. In reality, getting ready for demo day can be a distraction in many cases, as it takes away from valuable time you need for product development and other tasks just so you can build a nice slide deck. Again, think about the profit motive for the accelerator. Of course they want you to look good on demo day! You should, too, but for other reasons. Rather than solely focusing on raising your next round of capital, demo day needs to be a reflection on lessons learned and overall progress made. It should not be a finale, but rather a moment in time along the life of the startup.

Takeaway: If an accelerator thinks of its demo day as the ultimate deliverable of its program, you could be in trouble.

4. Are you likely to get mentor whiplash?: Be cautious about how you approach mentorship. We were concerned upfront about mentor whiplash, which is where you have multiple points of view from mentors. This can lock you into analysis paralysis. The trick is to ask the accelerator upfront how they mitigate this, since the whiplash is almost guaranteed to happen. For Healthbox, we had monthly strategy sessions with their team to help filter feedback we were receiving. Equally as important is to assess whether mentors are qualified, which can be done by asking for some example roles of mentors currently participating in the program. We had a mix of individuals from healthcare, venture capital, and other service industries.

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Takeaway: Be cautious about how much time you spend in meetings with mentors. This is valuable time that takes you away from product and customer development. If you’re hearing the same feedback over and over again, or it is completely irrelevant, you need to recalibrate your focus.

5. Does the location move you forward or backward?: Although every city and university would like to emulate the successes of Silicon Valley, entrepreneurs need to be practical and take the long view when assessing accelerators on geography and location. Is the accelerator in an area that is suitable for customer development, talent attraction, and growth? Is there a true startup community there that understands your particular industry and can help you scale? We chose Chicago because of our strategic relationships with universities here in the Midwest, along with the abundance of hospitals and research centers. We also had family here, which can play a major role for some entrepreneurs. While Chicago is less of an established hub compared to Boston or Silicon Valley, we knew that our chances of growing the customer base here mattered at least for initial growth.

Takeaway: Check out the community you’re entering. Is it receptive to startups? What kinds of exits has it had? Are there opportunities there specific to your type of product your building? If the region is lacking, this may hamper your long-term growth.

7. Can you get follow-on funding (if you need it)?: Some will disagree with me, but if you come out of an accelerator and you can’t at least raise a true angel round within six months of the program’s end date, the accelerator has failed you. No, raising capital is not the focus of a startup, and some companies are cash flow positive without the need for additional capital. However, for those seeking capital, the accelerator should have positioned you with the skills and framework necessary to make this happen. Raising capital is time-consuming, and closing may take several months, but a good accelerator will work with each individual company to assess funding strategies and where they should focus their efforts post-program.

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Takeaway: Whether you think you’ll need follow-on funding or not, it’s a good idea to check out the accelerator’s post-program funding history.

8. How much press/media attention are you likely to get?: We didn’t consider this to be a huge factor, but a well-known accelerator will be able to generate more attention for its portfolio companies. This “legitimacy factor” can help with certain startups/industries where PR matters from the get-go. We’re less affected by this than most, since everything in healthcare is going to take long to begin with. But press can be good if you’re out of stealth mode and ready for the attention. Also pay attention to press about the accelerator itself. Is it considered one of the top in the field? If so, major industry publications will cover its events and/or thought leadership. This gives its startups additional boosting as they seek to validate products in the market.

Takeaway: Look at past press coverage of the accelerator and its alumni. Does it match your expectations?

9. What is the office space like?: Is there office space available for use throughout the program? If so, is it a requirement that you relocate for the duration of the program? Is the space the kind of work environment where your team can be productive? For Healthbox, relocation was a requirement, with at least two individuals needing to work out of the space for the duration of the program. We toured the space in advance to make sure it would fit with our desire for an office where we could focus without the distractions of many co-working spaces. We loved the design, and this turned out to be a major draw for us. Something else to consider is the interaction with other companies in your cohort. Some of our biggest learning lessons came not from mentors, but from other companies in our 2014 class. All of us entrepreneurs were going through the same sorts of challenges together, but some were further along than others. We learned about everything from what to expect when in a contract negotiation with a hospital to how to structure some of our early pilot tests to which payroll system to use for employees. These kinds of interactions make all the difference in your accelerator experience.

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Takeaway: Tour the space before you commit.

10. Who is backing the accelerator?: Where is the accelerator getting its funding from? Who are the limited partners or investors, and what role do they play? For Healthbox, a number of the LPs/strategic partners are healthcare organizations that seek to identify up-and-coming technologies and better understand how to make innovation part of their own culture. This forms a rather interesting relationship, since these organizations had a vested interest in seeing portfolio companies succeed. These partners became key sources of insight for us as we conducted user research and built out our platform. Being able to take advantage of their relationship with Healthbox was a major value-add to the program.

Takeaway: Find out if the money behind the accelerator has an interest in your particular field.

11. How long are you welcome?: Most accelerators will still offer some resources post-program, but it’s important to figure out how to leverage them and what relationships alumni companies maintain (if any) with the accelerator. Are the staff members still able to provide certain connections or advice for companies? Are you able to continue working in the accelerator’s office?

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Takeaway: Talk with alumni companies about the transition out of the formal programming and into post-program status.

12. How good is the accelerator staff?: One of the most important things to consider is the staff at the accelerator. Outside of your founding team, these are the people with whom you will have the most interaction during the program. For us, it was about testing the compatibility. Did we believe these individuals could help us navigate the healthcare landscape? The answer for us was a clear “yes.” We looked at everything from their professional backgrounds to personality. One major factor to look for is operating experience, both within the industry and in a startup if preferable. Most, if not all, of the Healthbox staff came from a healthcare background. Some also held previous roles in startups, which is something I would like to see more of with accelerator staffing. Accelerators using the line “We’re a startup, too” fail to understand that they are by definition in a less risky position than their portfolio companies.

Takeaway: If the accelerator is a staff member’s only experience in working with startups or in your industry, that’s a major red flag: With accelerators, it all comes down to the Bo Schembechler quote, “It’s the team! The team! The team!”

Additional considerations

A few other things to consider before you commit to an accelerator:

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Not all accelerators are created equal: Simply put, there are too many that want to be Y Combinator that aren’t. Results are mixed, and unless the accelerator is in a location conducive for customer relationships or venture capital, don’t expect exits on the level of a YC.

Portfolio companies will be entering at various stages: No two startups are equal, and the stage at which a company enters an accelerator will vary. For example, we were the earliest stage company coming into the Chicago 2014 cohort. We had a rough idea of the business model, with some initial customer development and user research. Other companies already had hospital pilots and paying customers, and some had a product, but had to go through FDA approval. Each company is at a slightly different point in its timeline, and this can be both an advantage and disadvantage. We used it as an advantage to learn how to avoid mistakes other companies had made.

At the end of the day, accelerators have a profit motive just like every other investor: A lot of entrepreneurs I talk with tend to overlook this. With few exceptions, accelerators operate on a for-profit model and are no different than any other investor you will encounter. They want to provide you with the skills to succeed, but ultimately this is because they need to see returns. This is not necessarily a bad thing, as they want to see you and your company succeed, but understand it from their point of view. Accelerators know that at least some portion of their companies will fail. Their goal is to generate consistent returns for their limited partners or other investors depending on how they’re structured. If they take a few losses, that is okay in the larger scheme of things.

Timing matters more than anything: The right time to enter an accelerator is very narrow. We were most definitely at the early stage, and some of our advisors even cautioned against it. If you enter too early, you can risk not being prepared for the resources an accelerator has to offer. If you enter too late, you’re wasting your time when you should be busy scaling the company. I can’t give a definitive answer when it comes to timing, but if you’re at the point where you’re generating revenue and have moved beyond being “ramen profitable,” you should consider a different structure/funding source. If you still haven’t figured out the business model or how you will make money, you’re too early.

Location, resources, and infrastructure also matter: Along with Brian Lickenbrock and others, I spent a year during grad school looking at what it would take to make the Midwest a more viable area to launch and scale startups. We looked at many successful programs and cities; one major takeaway was that cities and regions that have built vibrant startup communities offer a variety of services and infrastructure that go well beyond any one accelerator or program. It takes a village to raise a child.

Steve Sprieser is the cofounder and CEO of Varsa Health, a data analytics tool for behavioral health providers and their patients. When he’s not working, Steve is a sub-elite marathoner.