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Why accelerators are getting hotter than B school

Opting to skirt student debt, tech geeks turn to accelerators to fast-track business success.

Four years ago, Nick Miller and Adam Zilberbaum were working 16-hour days trying to build Parking Panda, an online service that lets people reserve vehicle parking in advance of events and nights out. But instead of heading off to business school, they went to the Entrepreneurs Roundtable Accelerator in New York City.

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For three months in summer 2011, they got free office space, free legal services, free Web hosting, free flights and $25,000 in seed funding for their fledgling start-up. Today, their business has raised more than $5 million in funding, employs 30 people full-time and is the official parking partner of several Major League Baseball teams.

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Millennials interested in entrepreneurship are asking themselves if they should apply to accelerators and skirt MBA programs to fast-track their success and avoid huge debt loads. An analysis by Poets & Quants found that two-year MBA programs at places like Stanford University or Donald Trump's alma mater, the Wharton School of Business at the University of Pennsylvania, now cost upward of $200,000.

But getting accepted to an accelerator isn't a cakewalk: F6S, a website through which founders can apply to more than 1,500 accelerators, found that less than 4 percent of start-ups that applied to accelerators in the U.S. were admitted. And business schools, recognizing the trend, are launching their own accelerator programs and entrepreneurship funds.

"There's a growing interest and appetite from the student population to learn about start-ups and entrepreneurship," said Frank Rimalovski, executive director of the NYU Entrepreneurial Institute.

Still, many start-ups that exit accelerators have future success. According to Global Accelerator Network calculations, roughly 65 percent of start-ups that graduated from one of the network's more than 70 member accelerators raise funding after leaving, while another third successfully raise a second round of financing. Well-known companies, like Dropbox, Reddit, Meerkat, and Sendgrid, have all passed through accelerator programs.

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Whether an accelerator program is a better option than the formal business training offered in an MBA program is a matter of debate, but here are three reasons why an increasing number of tech start-ups are applying to accelerators.

1. You get financing for your venture if accepted into an accelerator.

For start-ups that do make it, some seed funding is the initial prize. Techstars and 500 Startups—accelerators ranked in the top 10 nationwide by the Seed Accelerator Rankings Project—offer more than $100,000 in seed funding in exchange for an equity percentage of less than 10 percent. And accelerator funding, aside from providing the freedom from overdue bills, looks like a good deal compared to tuition costs at business schools.

While the accelerator program contributes all the initial funding, it's easier to attract venture capital for follow-on financing after leaving an accelerator. The Seed Accelerator Rankings Project notes that one-third of start-ups that graduate from a top 10 accelerator raise an average of $1.5 million within a year of graduating.

But business schools picking up on the trend have also started their own accelerator programs, with funding, to which more than just MBA students may apply.

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For three years, New York University has put on a summer accelerator program that's open to all graduating NYU students and offers $7,500 in seed funding. NYU's Rimalovski said MBA students from the Stern School typically apply. At the Kellogg School of Management at Northwestern University, a new Zell Scholars program selects 10 MBA candidates each year and gives $10,000 in seed funding to start to obtain different business services.

"I think we're seeing that there is a lot of things happening in an accelerator-type format at business schools as well," said Linda Darragh, executive director of the Kellogg Innovation and Entrepreneurship Initiative.

2. You get a built-in network of skilled experts, mentors and investors.

At the end of an accelerator, start-ups usually get a "demo day," a chance to pitch their start-ups to deep-pocketed investors in the hopes of scoring more funding. "The first person who committed to invest in the company, we met through ERA," said Parking Panda's Miller. But being around peers who are also building companies, as well as start-up veterans, is another big perk.

"The most important thing was the access to mentors and other entrepreneurs who are further along than you who have done these things before," said McKeever Conwell, founder of RedBerry, a mobile app that resembles Instagram and allows retailers to gain followers who can then buy merchandise with a click through the app.

Conwell spent last fall at a DreamIt Ventures accelerator in Philadelphia after having spent several months at two previous accelerators, in Baltimore and San Francisco, respectively, when he was at work on a now-shuttered start-up. "I now have a network of people in the Washington, D.C., Bay and Philly areas," he said.

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Elliot Menschik, the former managing director of DreamIt Ventures' health IT accelerator and an adjunct associate professor of engineering entrepreneurship at the University of Pennsylvania, said the "nuts-and-bolts mentorship of 'been there, done it before'" isn't always available at a business school. By contrast, in an accelerator "you're surrounding yourself with people who have been in the trenches and have seen things go wrong," he said.

Still, business schools tout similar sorts of networking opportunities. "Business schools, in general, they have huge alumni networks, and alumni are always willing to help any grad who's starting off," said John Hull, executive director of the Business Innovation Institute at the University of Oregon's Lundquist College of Business. "Accelerators haven't been around long enough to have a huge alumni base. Most business schools have 50 years of living alumni floating around."

3. You learn entrepreneurship by doing it.

Admittedly, it's hard to compare an MBA education to an accelerator experience.

"Historically, business schools have taught students how existing businesses operate," Rimalovski said. "But start-ups on several levels are fundamentally different. … An entrepreneur really needs a different set of skills compared to someone who's trying to run a big company."

Business school is where students will learn operational marketing, financial reporting, management and maybe some accounting, as well as how to run large companies, how to scale smaller ones, how to reach existing customers and how to manage investments.

"If I was dumping a lot of capital into a single company, you'd better believe I'd want a lot of MBA guys sitting around that deal," said Paul Singh, a partner at Silicon Valley-based 500 Startups. "Business schools are really good at training people to look at capital-intensive things."

But for early-stage start-ups—and especially tech start-ups without the overhead costs of a health-care or hardware company—accelerators are a way for founders to test their mettle and really discover whether their company idea will make it in the marketplace. Whereas business school is an academic exercise, an accelerator forces founders to put their start-ups into practice immediately. They have to quickly build products and find customers, since they only have a few months and limited seed funding to see if their start-up idea really works.

Singh sums it up: "Entrepreneurship is hard to teach, but it can be learned."

—By Andrew Zaleski, special to CNBC.com