Difference Between Incubator And Accelerator

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Difference Between Incubator And Accelerator

The terms incubator and accelerator are consistently used interchangeably. In reality, many innovation programs are a hybrid of both. Nevertheless, there are significant differences between these two. The main difference between an incubator and an accelerator is in the maturity level of the projects each accepts. Incubators mainly support early-stage startups, whereas accelerators tend to focus on scaleups. While both provide guidance and mentorship, the project’s maturity will change the focus of the support it needs.

Incubators nurture startups through the beginning phases of their project in the same way that an actual incubator supports a prematurely born baby live. They help startups grow by first giving them the necessary physical support like a real office and help them develop and prototype their product. They also help startups carry out customer discovery and plan out their business structure. In short, incubators help startups set the foundations for their business.

Accelerators, on the other hand, focus on scaleups. A scaleup is at the stage where businesses are at a later stage of their development. They already have a strong foundation like product-market fit, paying customers and revenue, looking for more significant business traction, and seed investment.

Tech giants like Dropbox and Airbnb are graduates of these innovation programs. Other notable alumni include present-day tech standouts like live-streaming service Twitch, restaurant delivery DoorDash, payment processing Stripe, and grocery delivery and pickup service Instacart.

Incubator: Definition and Origins

The formal definition of an incubator is that it helps startup companies and individual entrepreneurs develop their businesses by providing a full-scale range of services, starting with management training and office space. There are various definitions of an incubator, but the commonality among these definitions is that incubators provide help at the earliest stage of a startup. The International Business Innovation Association (InBIA), a global non-profit with over 1,200 incubators, accelerators, and entrepreneurship centres in 30 countries, also defines business incubators as catalysts for either regional or national economic development.

Attributes Of An Incubator

  • Typically charge monthly program fees or membership dues in exchange for office/desk space and access to program offerings.
  • Offer programs to member companies that typically include mentoring, education/training, and informal learning opportunities.
  • Host events to provide networking and learning opportunities for both member companies and the local community.
  • Member companies are usually required to apply to ensure they meet the incubator’s criteria or mission (industry, stage of company, founder demographics, Etc.).
  • Usually have graduation policies that are typically based on achievement of agreed-upon milestones, growth metrics, or time-based stipulations.
  • Typically, companies join incubators on a rolling basis (non-cohort) and can reside in the incubator for 1-3 years.

Impact Of Incubators

InBIA’s Impact Index, based on the U.S.’s incubator and innovation network (by far the largest and most advanced in the world), gives us a glimpse of the purpose by which incubators operate. 90% of incubator and entrepreneur programs seek to grow entrepreneurial culture, 75% of programs currently or plan to provide mentorship programs, and 70% seek to encourage minorities or women. Only 12% of entrepreneurship programs directly offer seed funding.

Types of Incubators

InBIA categorizes its members’ incubators by the following five incubator types:

  • academic institutions
  • non-profit development corporations
  • for-profit property development ventures
  • venture capital firms,
  • and combination of the above

Origin Of Incubators

The idea of incubators have become common since the dot com era of the ’90s, but their origins date back to 1959. The formal concept of business incubation started in the U.S. in 1959 when Joseph L. Mancuso opened the Batavia Industrial Center in a Batavia, New York warehouse. It then expanded in the U.S. in the 1980s. It spread to the U.K. and Europe through various related forms like innovation centres, the French pépinières d’entreprises and technopoles, and science parks. Today, the International Business Innovation Association (InBIA) estimates that there are over 7,000 incubators worldwide. Around 1,500 of which are in the U.S. and about 1,000 in the E.U. Incubation activities are not limited to developed countries and are increasingly popular and thriving in developing countries.

Accelerator: Definition and Origins

In a study by Susa Cohen published by MIT Press, accelerators are fixed-term, cohort-based programs that include mentorship and educational components and culminate in a public pitch event or demo day. Unlike incubators that public funds typically fund, accelerators can be financed by both public and private funds. They cover a wide range of industries. Access to accelerators is open to anyone, but acceptance into one is highly competitive.

Attributes Of An Accelerator

  • The application process is open to anyone but highly competitive. Accelerator programs of Y Combinator and TechStars have application acceptance rates between 1% and 3%.
  • Seed investment in startups is usually made in exchange for equity. Typical investment ticket size range from $10,000 to $50,000.
  • The focus is on small teams, not on individual founders. Accelerators emphasize that one person is insufficient to handle all the work associated with a startup.
  • The startups must “graduate” by a given deadline, typically after three months. During this time, they receive intensive mentoring and training, and they are expected to iterate rapidly. Virtually all accelerators end their programs with a “Demo Day”, where the startups present to investors.
  • Startups are accepted and supported in cohort batches or classes. An accelerator isn’t an on-demand resource. The peer support and feedback that the classes provide is a significant advantage.

Impact Of Accelerators

The primary value comes from the mentoring, connections, and the recognition of being chosen to be a part of the accelerator. Accelerators bring a vast network of mentors and investors that being accepted into one often serves as a stamp of approval and validation in itself. The business model is based on generating venture style returns, not rent or fees for services. The aim is to hasten the growth of startups and shorten the process of scaleup. What usually would take two years can be achieved in 3 months via a good acceleration program.

Types of Accelerators

The popular accelerators are also referred to as seed accelerators. They can either be run by public or private institutions or as a partnership between both. Corporate accelerators are a growing subset of these accelerators. A corporate accelerator is a specific form of accelerator sponsored by an established for-profit corporation. They also support early-stage startup companies through mentorship. They often give capital as well as physical space. In contrast to regular programs, though, corporate accelerators derive their objectives from the sponsoring organization. These objectives can include staying close to emerging trends or establishing a funnel for corporate venture capital investments.

The Corporate Accelerator D.B. lists 70+ such programs in existence as of December 2016. Notable companies include Microsoft, Citrix, and Telefónica who were among the first companies to offer such programs in the early 2010s.

Origin Of Accelerators

The first seed accelerator was Y Combinator, started in Cambridge, Massachusetts, in 2005, and then later moved to Silicon Valley by Paul Graham. It was followed by TechStars (in 2006), Seedcamp (in 2007), AngelPad (in 2010), Startupbootcamp (in 2010), Tech Wildcatters (in 2011), several accelerators of SOSV, and Boomtown Boulder (2014).

In Europe, the first accelerator program was started by Accelerace in 2009 in followed by Startup Wise Guys in 2012 in Estonia. With the growing popularity of accelerator programs in the U.S., Europe has seen an increase in accelerators to support a growing startup ecosystem. Top-rated accelerator programs in Europe include Seedcamp (based in London), HighTechXL (based in Eindhoven), Startupbootcamp (pan European accelerator with program locations and office spaces based in Copenhagen, Amsterdam, Berlin, Israel, Eindhoven, Istanbul, and London) and Startup Wise Guys (Europe’s most experienced B2B startup accelerator).

In 2011 Matthew Clifford and Alice Bentinck, formerly management consultants at McKinsey & Company, co-founded Entrepreneur First, a London-based accelerator. Entrepreneur First guides promising tech graduates and those already working in technology firms to design and run their startups. Entrepreneur First differs from other accelerators because it works with individuals rather than companies.

With the emergence of the COVID-19 pandemic, many accelerators have shifted their approaches by running most of the programs and Demo Days virtually.

Incubators And Accelerators: How To Choose One?

What are your needs? The best incubator or accelerator should be based on your business needs. Consider short-term needs or broader goals. Choose one that can help you achieve these. Important factors to consider include the cost of joining, program track record and quality, success rates, business growth, and renowned alumni. Another important criterion, and for some, the most important one, is access to funding. Incubators and accelerators bring a large stable of investors and provide networking events that put participants in direct contact with investors. Graduates of programs somehow become more attractive to investors. Startups can consider graduating from an incubation program as a “stamp of approval” – a validation of their business’s worthiness.

The choice of an incubator or accelerator will also depend on the industry and, more specifically, the sector within that industry. For technology startups, incubators and accelerators have become more segmented that there are now specific programs catering to specific verticals. For example, France’s Station F, founded in 2017 and hailed as the world’s largest startup facility, has programs for particular sectors sponsored by industry stalwarts – Microsoft’s A.I. Factory, LVMH’s La Maison des Startups for luxury tech, Shakeup Factory for food tech, L’Oreal’s Beauty Tech Atelier for beauty tech and many others. There is generally no “one-size-fits-all”; it is worth considering going into these segmented programs rather than going for the general track if your business is in a clearly defined vertical.

Incubators vs Accelerators – The Key Differences

In our previous blog post about tech incubators, we included a side comparison on the key differences between an incubator and accelerator:

Feature

Incubator

Accelerator

Entry Requirements

Business idea or business plan

Established business model/MVP

Application

Competitive restricted based on industry and vertical/sector

Extremely competitive but open to all

Timeline

Flexible, typically 1-3 years

Rigorous, typically 3 – 6 months

Purpose

Building the foundation of a new startup

Accelerating the growth of an established startup

Support

Office space, administrative and legal assistance, business planning, product development and prototyping, networking, and learning opportunities

Seed funding, networking, and mentorship from industry experts

Financial obligation

Typically, monthly fees in exchange for physical space and access to program offerings.

Equity in exchange for seed funding/investment

Operational funding

Economic development organizations, non-profit and educational institutions

Private funds

Notable Incubators and Accelerators

Y Combinator is among the oldest and most established. It consistently ranks at the top of tech incubator lists, and it also is often classified as an accelerator. Well-known alumni include notable tech giants with mega valuations (Dropbox, Airbnb, etc.). Located in Palo Alto, Silicon Valley and founded in 2005, it receives around 13,000 startup applications via the internet alone every year. The company then picks out between 200 and 240 projects to back per year, adopting a rigorous selection process. It invests $125K in the early-stage startups admitted into the program. It rigorously prepares them for three months culminating in a Demo Day when they pitch to an invite-only audience.

Techstars is also based in Silicon Valley. Founded in 2007, it now has a presence in five cities in the U.S. – Boulder, Boston, New York, Seattle, and San Antonio. It hosts 12-weeks mentoring programs, keeping its batches small to focus on the startups. It also helps other incubators. The Alumni count now reaches over 2,300 companies that are 85.6% active or acquired. Notable alumni include Digital Ocean, SendGrid, and Remitly.

500 startups is a seed and early-stage venture capital fund that is also a seed accelerator; It consists of 4 significant funds and 13 micro funds invested in startups in at least 60 countries. Funded startups include Udemy and Credit Karma, and exits have included sales to Google and Rakuten.

AngelPad is a seed-stage accelerator program based in NYC and San Francisco. It has launched more than 150 companies since its foundation in 2010. Every six months, it selects about 15 teams from a vast pool of applicants of around 2000. AngelPad purposely makes their batch of participants small, and as such, they have been called the “anti- Y Combinator.” They spend three intense months with their participating companies.

Seedcamp is a U.K.-based known as Europe’s seed fund. It boasts of a global network of suitable advisors to allow startups to overcome all the common challenges in the fastest time possible. Seedcamp provides consultancy, training, and other services designed to help startups conquer their market. In the space of eight years, the incubator has provided funding for nearly 200 companies, raised an investment of over $350 million, and “created” one unicorn: Transferwise.

Axel Springer Plug and Play Accelerator is a joint venture between Axel Springer SE, a leading company in the German print business, and Plug and Play Tech Center, an international startup accelerator in California. Founded in 2013 and based in Berlin, Germany, it gives $30 k for 5% equity. It is industry agnostic and has funded over 100 companies with over $44M funding raised.

Station F is based in Paris, France, and is dubbed as the world’s most extensive startup campus. With more than 30 startup programs, 35 public administrations, 100 VC funds, four mentorship offices, and 600 events per year, Station F offers all these resources and knowledge to help entrepreneurs grow their companies. Established in 2017, it provides 3,000 desk spaces and private meeting facilities; the incubator also hosts a 370-seat auditorium and dining facilities open to the public. Notable corporate accelerator programs are hosted at Station F. For example, Facebook’s Startup Garage in the building will host up to 15 companies on a six-monthly cycle and represents the company’s first physical space dedicated to startups.

Notable Corporate Accelerators

The Corporate Accelerator D.B. tracks over 70 corporate accelerator programs. These corporate accelerator programs are either housed within the company or in startup campuses (i.e., Station F) or in partnership with a traditional accelerator. The following are among the most notable in the list:

Corporate accelerators run their programs in alignment with corporate goals and verticals. Cisco’s program, for example, brings together Cisco technologies, startups, and the partner community to deliver business-relevant end-to-end tech solutions. BNP Paribas’ Plug and Play specializes in startups in the fintech vertical.

The most glaring differences between corporate accelerators and the regular ones are the availability and amount of funding and the limitation on the verticals. Massive amounts of funding are poured into corporate accelerators, but they are limited on the verticals they can accept into the program.

Scaling Partners – Who We Are

At Scaling Partners, we are experienced at scaling startups. With our scaling as a service, we partner startups with processes and insights that they are missing and the people who have successfully scaled their businesses. As growth strategy consultants, we provide a tailor-made approach for your business. Our end-to-end fundraising service makes raising investment easier. We offer a mentoring service that pairs you with mentors who have already been there and scaled their businesses successfully. We can give you a Chief of Staff, who will ensure your ideas become actions and help you grow your business faster. We also have investor services that help investors scout for investment-worthy late-stage startups that are not visible in the press or scouting databases.

Photo by Austin Distel on Unsplash

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