Why do service providers work with accelerators?

Whether it’s Ignite or another accelerator programme, once you’re in you’re going to be given access to a whole bunch of freebies and perks from other companies… just because you’re there!

Cool, right? It is. It’s also really useful for an early stage company when their infrastructure bills are zero for the first year of their life, when it’s costing them nothing to send their customers emails, and even when they can get their branded swag sorted for free.

At Ignite we’re lucky to have wonderful relationships with the teams at Nexmo, Amazon Web Services, SendGrid, Stripe and Digital Ocean as well as many more that not only support our teams through access to discounted/free services but actually spend time with them, either through mentoring or 1-1 sessions during a programme to impart knowledge on a number of subjects (including, but definitely not limited to their own products — much more useful than a straight sales pitch).

What’s in it for them though? Why bother throwing all this free stuff at loads of companies in accelerators, surely it’s just a waste of time and money, right?

Having been on both sides of this (as a services provider at SendGrid, and now as Programme Director at Ignite), I thought that it might be a good time to explain why this is an increasingly popular way to expose a product to companies, and where the value in it tends to return to the companies, and what the startups that take advantage actually take away.

Technology providers are ultimately looking for one thing — customers and new customer relationships. They get these through various acquisition channels that include, but again aren’t limited to, paid marketing, organic traffic, offline activity, referral and outbound marketing. Outbound marketing is the one we’re going to look at here.

Outbound marketing is what businesses are doing when they engage with startups on accelerator programmes. They do it because they want those teams to become customers who will be in a position to grow and scale over their lifetime, and not every account that signs up to use them is going to do that. However, there are — each and every year — batches of accelerated startups from Ignite, Techstars, Wayra and many more programmes, that have been given an unfair advantage in their start in life and are just that bit more likely to grow and scale the way that technology providers want.

It’s much the same as investing straight up capital into startups — risky; but if you spread bet correctly, you’re going to land on one that blows up and consumes the losses/outlay of everything else. Let’s run some fake numbers to demonstrate the point:

MassiveInfraCorp offers a deal to startups giving them a plan for hosting that would normally cost them $70/month, for free for 12 months. That’s $740 annually that MassiveInfraCorp is just burning, right? Wrong. It’s not even close to that. What they charge and what it’s costing them when a startup uses their service are typically vastly different — they’re just missing out on the profit each time a company takes this deal.

So, Startup A takes the deal and they get their free year. MassiveInfraCorp is now their hosting service, yay! Startup A probably isn’t going to stop using MassiveInfraCorp at the end of their free year, because they’re happy with the service and the additional support they got during months 1–12. MassiveInfraCorp are also hoping that, post their time in an accelerator programme, Startup A went out and raised some seed capital and can now pay their full bill from month 13 onwards.

The twelve months previous to this where MassiveInfraCorp missed out on profit from Startup A is written off as a customer acquisition cost (CAC). Let’s say it was around $240 for the year ($20/month). This is a cost that all companies have to incur; whether it’s through paid advertising or outbound, they’re spending money to acquire a customer. It’s just part of doing business.

Now, as long as Startup A remains a MassiveInfraCorp customer, and grows to a stage where they are paying more monthly than they got for free originally (because they’re a bigger business now, it’s going well!) then it won’t be long until that CAC has been paid back. From there it’s all good money!

Typically, service providers who work with accelerators are more likely to see a return on their CAC because of the additional support that they offer to those teams, and their ‘unfair advantage’ when it comes to supportive network, cohort effect, and follow on funding opportunities. It’s really a model that works.

Well… it works for those companies willing to put the time in, because this kind of support and programme of freeness can sometimes be a tough sell at the C-level. Yet, with paid marketing, and traditional advertising having less of an impact for the dollars that get spent on them, having a more traditional face-to-face presence and playing a supportive role in the birth of a business can serve a provider far better, for far longer, than those ‘tried and tested’ means of acquiring their customers.

But what about the startups? Isn’t it just an endless parade of people trying to hook them into signing up? For sure, it can be if it’s not set out correctly, and particularly if that company isn’t going to approach their interactions with startups on accelerators with a ‘give first’ mentality.

There are plenty of ways to demonstrate your value as a service provider to startups without them having to use your service directly (ways that can turn them into customers down the line). For example, when I was meeting startups on accelerators during my time at SendGrid, we always started every conversation the same way: “Tell us who you are, what you’re doing and what we can do to help.”

You get to know the founders, their business, and if there’s a direct use case in what they’re doing for what your product does then sure you can discuss that, but if they’re talking about struggling on their sales channels then why not see if you can connect them with someone from your sales team for a chat so they can grab experience from people that do it day in, day out. Same goes for marketing, hiring, operations, finance — everything — you’ve been on the journey, pass the knowledge back down the line!

No salesy stuff, just support and mentorship.

The team will remember this, and when they’re looking to switch a provider, or solve that particular problem you’re the first company they think of.

It’s worth mentioning that it’s a two way relationship though. I tend to find that teams who sit in sessions with service providers that don’t come with questions, or try their very best to extract as much value out of the relationship as possible will always lose out.

You don’t ask, you don’t get.
It’s a relationship. It takes two to make it work.

Shout out to Nexmo, SendGrid, Amazon Web Services, Digital Ocean and Stripe who have all nailed this and continue to add value to our teams year after year. You’re all great!