Accelerators and Incubators
Accelerators and incubators have been around for decades, but, recently, their popularity has grown exponentially. Last year, Entrepreneur reported that there were 10 times more accelerators in the U.S. in 2016 than there were in 2008, with average growth being about 50% per year. Forbes reported there were over 2000 incubators in the world in 2014. Just about every major city in the U.S. has its own collection. Here in Tampa Bay we have Tampa Bay WaVE, Tampa Bay Innovation Center, and Tampa Bay Technology Incubator, just to name a few. In Pittsburgh, home of this firm’s largest office, there are several as well.
Although the terms are often used interchangeably (and may not be dramatically different from each other in some ecosystems), there are several differences between incubators and accelerators. Generally speaking, as the names suggest, accelerators speed up growth of early stage companies; incubators foster growth by providing formation-stage mentoring and a resource rich space to germinate. Both of these objectives entail similar offered services— education/mentoring, physical office space, and, most importantly, access to a network of investors and other resources. Still, the overall structure and processes of these two types of programs are very different.
The main distinction between incubators and accelerators is the development stage of participants and duration. Incubators tend to be geared more toward very early stage ventures (even as early as business planning), and incubator programs may have no set duration, though ventures typically participate for anywhere from one to five years. Accelerator programs, on the other hand, typically target somewhat more mature companies and usually have a short, set duration—typically three months—with a cyclical application/admission process. As discussed in this article, there are benefits and disadvantages to both models.
Another key difference is the business model. The vast majority of accelerators are for-profit entities that take an equity stake in participating ventures. This has the effect of aligning the accelerator’s incentives with those of its participants. Incubators, however, are usually non-profit organizations that do not take an equity stake. Their focus is on economic development, rather than return on investment. As a result, incentives between incubators and participant ventures are not as closely aligned.
The following summarizes some of the other characteristics of and differences between accelerators and incubators, as well as some of the advantages and disadvantages.
Accelerators
The short duration of accelerator programs has the effect of forcing startup participants to get a lot done in a very short period of time. This pace is highly productive early on, but in the long term it is unsustainable. Accelerator programs essentially afford the opportunity to test and validate business ideas in a short amount of time and the brevity speeds up the market selection process. This generally leads to either quicker growth or quicker failure, both of which can be viewed as a positive outcome. If a venture will inevitably fail, it is usually better to fail sooner, rather than later, so that more resources can be repurposed toward opportunities that are more likely to be successful.
As far as services and other assistance, accelerators typically provide a small amount of seed capital, work space and rather intense education and mentoring programs. These education programs are essential and usually involve educational seminars on a wide range of business topics as well as one-on-one guidance from experienced mentors. In accelerator programs, mentors typically work much more closely with founders than in other types of relationships. For example, angel investors commonly act as mentors for startups, but those relationships generally lack the structure to afford more than tangential mentoring. The short, fixed time frame of a mentor’s involvement with a particular participant, coupled with education being the main focus, creates an ideal atmosphere in which mentors can have substantial involvement in the growth process.
Another unique outflow of the limited duration of accelerator programs is the strong relationships that develop amongst peers—typically called “cohorts.” The cyclical selection process creates a school-like environment, in which participants entering the program together develop a team mentality, helping and motivating each other. As compared to incubators, accelerators typically produce less codependence between participant ventures and the accelerator due to the short duration, but they tend to produce stronger peer relationships in the long term.
Graduation from an accelerator program is typically marked by a “demo” or “pitch” day in which the graduating venturers pitch their businesses to a large group of investors. Because demo days are regular, scheduled occurrences, the investor presence is usually significant. This brings us to the most significant benefit to be derived from participation in an accelerator program—the network.
Accelerators and incubators tout a network of successful entrepreneurs, program alumni, angel investors, venture capitalists, corporate executives and more. Even the program directors themselves are often angels. The accelerator’s ability to attract such a valuable network is two-fold: (1) The accelerator fund is an attractive option for startup investors because it enables investors to spread risk across multiple startup ventures; and (2) the accelerator handles the venture selection process. With respect to the latter point, most accelerator programs are highly competitive, with top programs accepting as few as 1% of applicants; finding promising ventures is not all that difficult for an accelerator with a coveted program.
Accordingly, not only is risk diminished with respect to startup investments (typically the riskiest type of investment), but the chances of betting on an unsuccessful venture are diminished as well. For investors interested in startups, this mitigates two of their biggest problems. For startups, especially those with limited or no connections of their own, access to this network is invaluable. It’s a win-win.
Incubators
As mentioned above, incubators differ from accelerators most significantly in that they do not offer a program with a set duration. This has the benefit of allowing a participant venture to stay and benefit from the incubator generally as long as necessary—i.e. until it is mature enough to take on the real world. The downside to this, however, is that startups that survive inside an incubator, sometimes cannot survive on the outside. Converse to the point mentioned above, delayed failure is usually an undesirable result, having caused the prolonged expenditure of resources on a venture that was always doomed to failure. Further, market forces provide the valuable feedback that compels businesses to adapt, an essential part of the early-stage growth process. Nevertheless, some ventures do truly need time and resources, apart from market forces, to grow into sustainable businesses. It is these ventures that get to the very heart of the incubator’s purpose.
The incubator’s main contribution to its participants is the workspace. Incubator participants (usually called “tenants”) pay rent and fees for a workspace and administrative support services. Additionally, mentorship is offered (maybe involving a fee).
The incubator selection process is ongoing, rather than cyclical. Because of this, incubator programs are generally not quite as competitive as accelerator programs. This is of course not to say that incubator programs are not competitive (top programs are extremely competitive), only that, in a general sense, they are not usually as competitive when compared to accelerator programs. The ongoing selection process also generally leads to a greater dependence on the incubator, which can skew perception of a venture’s ability to survive on the outside. The selection process also does not foster the strong peer relationships seen with accelerators.
As with accelerators, incubator participants also receive access to a valuable network, which usually includes investors as well as legal, accounting, technology transfer and other professional consultants. The incubator, however, typically does not have its own investment funds, and so access to investors can be more limited in the sense that investors are not necessarily attracted by the prospect of diversification. Nevertheless, incubator programs, like accelerators, are often founded and operated by venture capital firms, angels, large corporations and others looking to make strategic investments, so this point may be no more than theoretical in some contexts.
Choosing to Participate
Participation in an accelerator or incubator program is not right for every venture. For some, a shared workspace can hinder progress. Spending time focusing on scheduled programing, rather than having the flexibility to focus on the needs that arise, is not always expedient. There is such a thing as too much mentoring and advice, especially when it is conflicting and confusing (think, parenting advice).
Nevertheless, for others, involvement with an accelerator or incubator is the game-changer. Many (dare I say most) first-time founders know their crafts better than anyone, but they do not possess the all-encompassing knowledge demanded of truly successful entrepreneurs. For these founders the value in a one-stop-shop educational program cannot be overstated. Further, as mentioned above, access to capital and a network of financiers, mentors and advisors, especially for startups with limited connections and exposure, is invaluable and eclipses most disadvantages.
The decision to participate in a startup accelerator or incubator program (assuming a spot is available, of course), is ultimately a business decision like any other. Yet, for many that do, that decision is the catalyst for greatness.