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How Accelerators Help Startups Get Funding

Business accelerator programs offer startups low cost space, business services, talented employees, and contacts who can help find customers and partners in exchange for a small stake.

Unlike business incubators, business accelerators are highly selective. But like anything worth having, getting your startup accepted by the best accelerators is a matter of winning a competition. But that is probably wise since most ventures fail.

(Read more: Pitch Fest for Entrepreneurs)

As an investor in startups, I have heard the accepted wisdom that out of 10 portfolio companies, only one is likely to be a big success, the rest will either fail or barely return the investment — "only" half of my investments failed.

And just to get into an investor's portfolio, a startup must defy daunting odds. The venture capitalists I interviewed for my book "Hungry Start-up Strategy: Creating New Ventures With Limited Resources and Unlimited Vision (Berrett-Koehler, 2012)" made it clear they talk to about 1,000 ventures a year and invest in one or two.

But getting your venture accepted into an accelerator can help immensely when it comes to getting into a venture capitalist's portfolio. That's because when a startup is accepted, it has three months to develop a working prototype for its product and to get a customer.

If the startup meets those milestones, it can tap the accelerator's network of investors to raise venture capital. And for the venture capitalists, the accelerators serve a valuable function — by forcing the startup to demonstrate that it can get a customer before they write a check.

The more selective the accelerator, the more likely they will accept the "hottest" startups — which have the greatest odds of yielding a bidding war among the most prestigious venture capital firms.

Top Accelerators

So which are the best accelerators? Y Combinator tops Forbes's April 2012 list of the top 10 incubators — followed by TechStars, DreamIt Ventures, AngelPad and others.

The value of Y Combinator's 172 companies in April was $7.78 billion, for an average of $45.2 million per company. That includes its most valuable companies, Dropbox and Airbnb, as well as relatively small and shuttered ventures.

(Read more: Rental Startup Airbnb Goes Hyper Local, but Is It Safe?)

Companies that graduated from Y Combinator in March 2012 competed to raise capital at valuations between $10 million and $15 million. Big-name venture firms, including Sequoia Capital, early Facebook investor Yuri Milner, Ron Conway and Andreessen Horowitz provided $150,000 in guaranteed funding to each startup.

Consider these two examples of start-ups admitted to Y Combinator and ended up with checks from venture-capital firms three months later.

CEO and co-Founder of Bump Technologies David Lieb was irritated at having to type contact information of people he met into his smartphone, so he developed a mobile app that exchanges contact information and photos by simply "bumping" phones.

Lieb and two co-founders worked on Bump app for a year as a side project, launched it and then entered Y Combinator. After three months, Bump reached more than 4 million downloads, received $3 million in VC investment and left Y Combinator.

Eric Frenkiel worked at Facebook before co-founding fast database startup memSQL. He concluded that there was a big need for faster databases that could analyze the huge volumes of data that social networks generated. Three months after entering Y Combinator, Frenkiel had found a customer and his partner, Nikita Shamgunov, had developed the technology.

Frenkiel and others I have spoken with at Y Combinator got value from watching the rapid progress of other companies in their cohort. These peer entrepreneurs were tackling the same challenges. Peer pressure pushed them harder to succeed. Y Combinator partners and its network of investors and advisors also provided useful advice.

When Frenkiel and Shamgunov demonstrated their product at the end of their Y Combinator stay, they received $150,000 in capital from Milner. Milner was in Russia at the time and delivered the good news via "a moveable contraption that's one-part Segway, one-part webcam." Frenkiel joked that "I never in my wildest imagination would think a robot would ever give money."

As Lieb and Frenkiel learned, it's not the robot that gives them money, it's the power of incubators to present startups to top venture capitalists. They have cleared a major investment hurdle: building a product and finding a customer willing to use it.

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