External support comes in many forms and will depend on the nature of the business, and the relative experience of the entrepreneur. A physicist looking to develop cold fusion may have little knowledge of financial management, for example.
This is where startup accelerators and incubators are vital for startups. Both concepts share the goal of grooming a startup to appear more attractive in the eyes of an investor. Both provide a strong support system for new businesses by providing access to mentors, training schemes, funding, a media network and so on. Although the terms accelerator and incubator are often used interchangeably, there are distinctions to be made between them. In simplistic terms, accelerators work to ‘accelerate’ business development, while incubators aim to nurture innovative business ideas.
Still confused? Here’s a breakdown of the key differences between startup accelerators and incubators:
It may seem obtuse to state purpose as a fundamental difference, but making this distinction clear is important when selecting between accelerators and incubators for a business.
The purpose of a startup incubator is to help an entrepreneur to build his business from the ground up. Incubators accept startups (or more accurately founders) when the venture is still in its idea stage. Incubators value those with innovative ideas who are unable to shape these concepts into operational businesses, typically resulting from an absence of resources or experience.
The purpose of an accelerator is to help a startup advance to the next stage of their business development. Accelerators work with entrepreneurs that already operate an established business. These businesses are still early-stage ventures, aspiring to scale up but lacking the expertise to do so.
Incubator programs offer guidance on shaping their business, forming a founders team and gaining traction in the market. Once a startup moves beyond this initial stage, they will require an advanced level of mentorship, support and expertise to grow the venture further. An accelerator program would be more appropriate at this point.
- Program Design
Startup accelerators generally follow a structured framework. These programs operate on a set schedule and all activities are planned and executed in an organised manner. Accelerators are characterised by their adherence to a more traditional, rigid model of promoting growth.
Conversely, incubator programs observe an open-ended format. This reflects the freedom of direction present at the genesis of a startup. There is no fixed time limit for an incubator program and they function spontaneously. This relaxed philosophy works for an incubator as entrepreneurs at this stage typically have fewer financial commitments associated with their business. This lies in contrast to a business that is operational and more established.
A fixture of accelerator programs is the hosting of a scheduled ‘demo day’ during which participants present a demo to potential investors. Incubators may also allow participants to pitch before investors but nothing is pre-planned here and there is no fixed demo day with an incubator program.
- Range of Resources
Both incubators and accelerators support participants with valuable resources but there are differences in the range of resources provided. An incubator program extends shared office space to participants as they generally stay within the program for a longer period. Office space might seem like a basic amenity, but for early-stage startups, it represents a huge leap forward, allowing them to focus on business development. This highlights why searching for the right incubator and co-working office space is so important.
Most accelerator programs won’t provide you with office space but instead, will encourage entrepreneurs to find their own space which will be the headquarters for their operations.
As a point of further divergence, incubator programs do not usually offer in-house technical resources. If a participant requires resources, the incubator program will not help directly, instead, they will be connected with a tech team specific to their technical requirements. Accelerator programs provide a range of tech resources for participants, often tailored to requirements.
Incubators usually rely on outside funding from angel investors, VC firms, government entities as well as major corporations. As these are sponsored by external parties, they can offer services without taking commission from the participating entrepreneurs. Independent incubator programs do exist but are both atypical and rare.
Startup accelerators are mostly privately-run programs. They fund themselves by accepting equity as a form of payment from participant startups. There are corporate accelerators, and these are generally operated by large corporates as for-profit organisations.
- Seed Funding
Accelerator programs generally extend seed or pre-seed investment, to the amount of $10,000-$100,000, depending on the particular accelerator program. Corporate accelerators may offer larger sums, having greater financial muscle to back them up. In return for the seed investment, the accelerators take a percentage of the startup's equity, usually in the range of 7-10 per cent, varying upon the seed capital received by a participant startup.
Seed investments are simply not present in incubator programs and their focus is on guidance towards pitching to investors for funding. An incubator program will not provide upfront funding, and as a result, does not require equity in return.
Incubator programs are considered desirable due to their network of accomplished mentors. Mentorship panels are led by venture capitalists, dynamic startup executives, industry experts and other external investors. Access to their guidance and the opportunity to establish a professional network are the key benefits for participants. For a startup at the idea stage to form such connections is invaluable and it would be beyond the abilities of an entrepreneur without the help of an incubator.
Startup accelerators follow a strict schedule that typically runs for 3-4 months. Within that time frame, startups are trained in business development skills that would take years to acquire unaided.
Incubators have no set time frame and mentorship periods can stretch to 2 years depending on the needs of the participant. The focus of an incubator is not fast-paced growth but at the rate suitable for the individual entrepreneur.
Accelerator programs are keen to see quick growth due to the funding extended to participants, with training and mentorship structured to generate immediate returns. As incubators don’t invest capital, these programs have the facility to allow participants to grow gradually.
- Selection process
Accelerators are more traditional and hence follow an extremely rigid selection process. So, how to enter into an accelerator program? Accelerators have a stringent application process and are highly competitive. Leading accelerator programs receive thousands of applicants each season, with 1–2 per cent of applications selected.
Applicants should have an existing business because generally ventures at the idea stage get rejected. Successful candidates should provide Proof of Concept (POC) and Minimum Viable Product (MVP) or a design prototype.
Incubation programs generally do not follow a set application process. As they work with idea stage startups, an MVP is not a realistic metric in the selection process. These programs select participants deemed to have disruptive ideas and preference is shown to participants who come with trusted referees.
So, is an incubator or an accelerator program right for you? Following the general rule that a venture in its infancy should join an incubator program, and those established startups wishing to scale up should join an accelerator, the choice may seem simple. However, the answer to this question is highly individual and depends as much on your beliefs and attitudes as it does on the shape of your startup.
“Is a program necessary in order for me to reach my next step?” is more pertinent for the astute entrepreneur. Incubator and accelerators are highly competitive in their application processes, and this environment may not suit every entrepreneur or business.
Bear in mind when joining an accelerator – once you have given away a portion of your equity, it is gone for good. Ask yourself, “Does the additional guidance benefit my business sufficiently, or should I be exploring options such as business loans?”
Despite the aforementioned considerations, the advantages of gaining access to an incubator or accelerator program cannot be overstated, and one simply needs to look at the alumni lists of some of the biggest programs to understand the value associated with them.