Launching and growing a new business venture of any size is a stressful, challenging endeavor, particularly for persons with limited business experience. Building a successful startup can require expertise in any number of areas including finance, marketing, leadership, product development, sales, product positioning and more. A lack of skills or expertise in one or more of these critical areas can mean the difference between success and failure for a budding startup. Similarly, not all potentially successful entrepreneurs with strong startup ideas have equal access to the resources they need to launch and grow their businesses.
Recognizing that not all founders have exactly the same capabilities and access to resources, startup accelerators and incubators emerged to support new entrepreneurs. These entities help early stage startup ventures by offering structured pathways to grow their businesses, helping them jump-start their growth while building a solid foundation for sustained success. In many startup circles, the terms incubator and accelerator are used interchangeably, but in reality, the two are not the same. While both are beneficial, each offers a different pathway to growth for early-stage startups. For founders with the goal of obtaining Venture Capital (VC) or Angel funding for their startups, participation in an accelerator or incubator can increase access to investors and capital.
Although accelerators and incubators both share the goal of helping startups launch and grow, the approach each takes is different from the other Let’s take a look at how each entity supports early stage business ventures, helping them to grow and achieve sustained success.
Accelerator: An accelerator is a fixed-term, cohort-based program for early stage startups. Established in 2005, Y Combinator was the very first business accelerator. Accelerators offer participating startups access to a variety of support resources including mentorship, educational components and often times, investment capital. All accelerator programs culminate in a public pitch event or demo day where the startups present to potential investors such as VCs or Angel investors. Most accelerators tend to be focused on particular industries or sectors.
In order to participate in an accelerator, a new business venture must apply as a team of at least two persons. Accelerators consider that one person is insufficient to handle all the work associated with a startup. The process is highly competitive with top-ranked accelerators accepting just 1% to 3% of all applicants.
Once accepted, accelerators work with startups for a specific amount of time, usually anywhere from 90 days up to six months. The startups must “graduate” by a particular deadline, meeting all required milestones along the way. During this time, participating teams receive intensive mentoring and training, and they are expected to iterate rapidly. The mentor network, typically composed of startup executives and outside investors, is often the biggest value for prospective companies interested in participating in an accelerator.
In addition, accelerators usually offer access to capital—generally in the $20,000 to $50,000 range—and sometimes take a portion of equity in the startup. This usually ranges from 3% to 8%, although there are some accelerators that demand more. Accelerators only invest in the companies that are participating in their programs.
Accelerators tend to be focused on particular industries or sectors. For example, the Cleantech Open is focused on supporting startups in the clean technology space. Their technology categories include:
- Energy Generation
- Energy Distribution & Storage
- Energy Efficiency
- Chemicals & Advanced Materials
- Information & Communications Technologies (ICT)
- Green Building
- Agriculture, Water & Waste
The Cleantech Open is the world’s largest accelerator for cleantech startups, providing entrepreneurs the resources needed to launch and create successful and sustainable clean technology companies. Like most accelerators, the Cleantech Open provide participants with training, mentoring, infrastructure, relationships and funding opportunities to help grow them into successful, sustainable companies. Other accelerators focus on different technologies, industries or sectors but largely follow the same type of model, offering similar services, resources and support networks.
Because the definition is somewhat fluid, there is no truly accurate figure as to the actual number of startup accelerators there are around the globe. Estimates range from a low of about 234 startup accelerators to about 400. Online resources for finding local startup accelerators include Seed-DB, Global Accelerator Network and F6S.
Incubator: The The first known business incubator was established in 1959, in Batavia, New York. Incubators provide startups with a wide range of supportive services and resources. These resources may include space (at little or no cost), technical assistance, training or mentorships. Incubators differ from accelerators in two distinct ways. First, unlike accelerators, a startup may stay involved with an incubator for a period of up to two years. Second, since incubators usually do not offer any funding or capital, there is no equity requirement. Most incubators are funded by governments or universities so they are able to provide the resources without requiring any equity. The goal of some incubators is to prepare startups for participation in an accelerator.
And although incubators do not provide seed capital like accelerators do, they can help participating startups access funding through:
- Access to in-house and revolving loan and microloan funds.
- Facilitating connections with Angels, VCs or other types of investors
- Assistance in applying for loans.
The International Business Innovation Association (InBIA) has a website listing business incubators by state as well as those located internationally. According to InBIA, “As of October 2012, there were over 1,250 incubators in the United States, up from only 12 in 1980. NBIA estimates that there are about 7,000 business incubators worldwide. The incubation model has been adapted to meet a variety of needs, from fostering commercialization of university technologies to increasing employment in economically distressed communities to serving as an investment vehicle.”
How to determine which, if either, is right for your startup
Making the decision as to whether or not launch your startup within the framework of either an accelerator or an incubator requires thoughtful consideration and analysis. The first step is to conduct a serious self-assessment in regards to personal confidence in terms of the defensibility of your business model, your business management skills, execution skills and ability to raise funds. Second, if you are interested in launching your startup with the support of an accelerator, you must either have a team in place or at the very least, be able to pull together at least on or two more persons with whom you have an extraordinary high level of confidence. If you are interested in participating in an incubator, then you must be willing to launch and grow your business within the confines of the structured program. Lastly, remember that the application process for both incubators and accelerators is highly competitive—you must be up to the task of rigorous critical review and competition.
There are numerous advantages to launching a startup with the support of either an accelerator or an incubator. Some of the key advantages of both include: 1) access to peer support and skilled mentors; 2) direct or indirect access to capital; 3) access to technical assistance, learning opportunities and other support resources; and 4) successful completion of either program can result in valuable publicity and quickly boost your credibility level, both of which can help you scale and grow your business at a faster clip than what would otherwise be possible.
Though not many, there are several disadvantages to launching an early-stage venture in an accelerator or incubator. First, some entrepreneurs find working in a structured environment confining and even at times, suffocating. Other founders have indicated that they found the experience of working alongside other entrepreneurs and peers to be distracting. Lastly, launching within the framework of either entity can require adherence to a fairly rigid business model. Some entrepreneurs launch their startup with one idea but as the business grows, they find that changing direction to be the quickest path to success. This type of flexibility is not always possible when launching in an accelerator or incubator.
For the inexperienced or relatively new entrepreneur, launching a startup with the support of an accelerator or incubator can offer significant advantages by helping them avoid many common mistakes on the path to growth and success. However, not all types of startups are right for either type of entity and even then, the competition to obtain an open slot is intense, requiring extensive commitment. Nonetheless, their potential to help jump-start a new business venture makes both the accelerator and incubator well worth investigation and analysis.