Accelerators and incubators are often used interchangeably, but they are not the same. Yes, they both cater to startups but they do it in different ways and with different goals.
If you have a startup or an idea and are considering which route to take then you should first understand what these two business systems are.
This article takes a look at accelerators and incubators with a focus on how they operate and the benefits they offer.
The need for accelerator and incubator
Most founders face the same problems, and this depends on how far their startups have grown or advanced. The earliest stages are where you develop the startup’s foundation and this is what an incubator helps you to achieve.
Once you have developed a solid business plan or your business model seems to be working, then it is time to accelerate its growth. That is when you need the services of a startup accelerator.
You should keep in mind, however, that a founder’s analysis of his or her startup can be subjective. So, his idea of a solid business plan or minimum viable product might be different from market realities.
The best way to gain more insight, then, is to network with industry insiders. Those that are already active in the markets. Accelerators and incubators excellently offer that opportunity.
What is a Startup Incubator?
A startup or business incubator is an organization that helps founders to transform their ideas into a solid business. Incubators include all the tools that the first-time entrepreneur will need to survive and they often provide them at very low rates.
A typical incubator offers a co-working space, with access to necessities, such as high-speed Internet, relevant hardware like telephones, printers, and a conference room. They are different from technology parks or hubs, as only small startups are usually allowed in incubators.
The incubator can also include legal and managerial help. This helps founders to easily create a solid business plan, a minimum viable product, launch their company, learn how to manage the day-to-day operations, and find paying customers.
Some will also include networking events, help with marketing and market research, accounting, and access to mentors, angel investors, regulatory compliance, and bank loans.
There are 2 types of incubators – non-profits and for-profits. Non-profit incubators are usually founded or bankrolled by governments, communities, universities, and so on. They can charge a small and affordable fee for their services and that is it.
Profit-oriented incubators, on the other hand, are in the business for the money. This isn’t necessarily bad, as they are often providing a much-needed solution. However, their fees may be higher or they may demand an equity stake for their services.
What is a Startup Accelerator?
A startup accelerator is a short-term program that helps startups and their founders to scale into larger, more profitable organizations. They try to achieve this using a structured and intensive program that often lasts between 3 and 6 months.
This program usually includes mentoring, classes, and workshops on methods to scale their existing business. The founders are also lectured on the necessity of teamwork in scaling an enterprise to new levels.
All participants of an accelerator program must graduate on a fixed date. This is another major difference to incubators. At graduation, though, the founders usually receive a seed investment from the accelerator. Plus an opportunity to pitch their business to other investors.
This seed investment can range from $10,000 to $125,000 depending on the region and the company involved. It can also come with up to $1 million worth of perks, such as cloud-hosting credits, legal consultations, and so on.
However, it also comes with strings attached, as the accelerator usually demands an equity stake in the company, in exchange for the investment. This stake can range between 7% and 10%, but it could also go as high as 20% or more.
As great as this sounds for many, acceptance into accelerators is not easy, as the best programs only accept 1% to 2% of applicants. Each batch can feature 10 to 20 teams, depending on the program, and they often work together or meet periodically.
Accelerator vs incubator comparison
|Duration:||1 to 5 years||3 to 6 months|
|Focus:||Fostering innovation||Monetizing innovation|
|Scope/Goals:||Develop an MVP||Team Work/ Expansion|
|Payments:||Fees for amenities||Equity stake|
|Funding Sources:||Not for profits, universities||Venture capital firms|
|Basic Provisions:||Office, legal help, mentors||Funding, pitch training|
To understand these two systems better, here is a side-by-side comparison of their different features.
- Training – Both systems provide training for their startups. Incubators focus on providing the training needed for basic business practices from incorporation to customer management.
Accelerators, on the other hand, typically focus on presentation training. As it helps the founders to secure the funding for scaling their business.
- Duration – Accelerators are usually fast-paced, often ranging from 3 to 6 months. This is approximate though, as there can always be differences. But most accelerators work in batches and once a batch finishes, the next batch is on.
Incubators are more laid back. While they typically last from 1 to 5 years, there is no limit to how long a startup can last in an incubator. A lot also depends on the incubator’s owners, as some are focused on developing a particular community, while others are pure businesses.
- Focus – Incubators focus on fostering innovation in a particular field or environment, while accelerators focus on making money from these innovations.
Industry veterans or universities often fund incubators to foster innovation in their given fields, while governments attempt to foster innovation in a specific geographic area.
- Goals – An incubator focuses on helping a founder to turn his ideas into a real business. And this means creating a solid business plan that can attract seed funding to help make the business a reality. Or creating a minimum viable product, which is a bare-bones model of the business that works.
Accelerators on the other hand, mostly focus on turning working business models into financial successes. To do this, they mostly accept startups with a promising business model or MVP and then teach its founders the principles, methods, and advantages of teamwork.
- Payments – Both business models need to receive some sort of remuneration for their services, to stay profitable. There are no fixed rules here, but incubators tend to charge small fees for their services, while accelerators tend to prefer an equity stake in the startup.
Of course, prices depend on the exact business in question and the goal of its founders. Community and government-funded incubators, for instance, will logically charge less than profit-oriented incubators.
- Funding Sources – Accelerators are usually funded by venture capital and other profit-oriented firms, while incubators are often funded by philanthropists, universities, communities, and governments in a bid to stimulate innovation in their location.
- Seed Funding – Accelerators and incubators can both engage in seed funding rounds for the startups. However, non-profit incubators tend to only connect the founders with angel investors, banks, and other funding sources.
Many incubators, however, will invest in a promising venture. And as with accelerators, the amount invested and the returns expected can vary. Sums between $40,000 and $80,000 can command 6% to 8% stakes in the U.S., while lesser sums can command the same percentage elsewhere.
- Business Support & Provisions – Both models provide infrastructure and business support services. But incubators focus more on this area. These can include office space, laboratories, conference rooms, communication, and networking services.
Here are some notable incubators from around the world:
- Idealab – Founded in 1996 and based in California. Idealab has produced over 150 companies, with about 50 IPOs and acquisitions. They include Picasa, Pet.net, Overture, Citysearch, and so on.
- Seedcamp – Launched in 2007 and based in London, UK. Seedcamp counts hundreds of companies in its portfolio, including Transferwise, UiPath, and Revolut.
- Joyful Frog Based in Singapore, Joyful Frog Digital Innovation helps to develop talent in the South East Asian region.
- Capital Factory – Popular hub for entrepreneurs and startups in Austin, Texas.
- ActiveSpaces – African tech incubator based in Cameroon.
Here are notable accelerators:
- Y Combinator – Most popular accelerator launched in 2005. Y Combinator is based in California and has helped launch over 2,000 companies, including Dropbox, Coinbase, and Reddit.
- Techstars – Located in Boulder, Colorado, Techstars has helped over 1,600 companies with its program. Alumni include Bench Accounting and DigitalOcean, Inc.
- Startup BootCamp – Network with many locations around the world. They include Cape Town, Dubai, Istanbul, New York, Mumbai, Berlin, and London.
- 500 Startups – Founded in 2010 and based in San Francisco, California. 500 Startups has a portfolio of over 2,400 companies.
Reaching the end of this accelerator versus incubator comparison, it should be obvious to you by now, that none of the two is better than the other.
Each of these models has its advantages and disadvantages, making it a better fit for certain startups than the other. So, it is up to you to analyze your business and its needs, to decide which is best for you.