Other than the money you already have, how else are you going to fund your startup? While pondering options, you might have come across incubators and accelerators. Although similar in many ways, they are also not the same. So, which one is more suitable for you?
Overview of Business Incubators and Startup Accelerators
On far too many occasions, startups focus on the money aspect as they seek funding. In doing so, they overlook business incubators and startup accelerators. Among the most common sources of capital they look at are:
- Banks and moneylenders
- Angel investors
Although those are viable sources, startups can only receive money from them. In exchange, they either have to pay loan interest or offer equity ownership.
Business incubators and startup accelerators are different. They mentor startups, provide resources and connect them with big-time investors and capitalists.
On the surface, accelerators and incubators may appear the same. But they differ by their purpose.
At this point, it is best to know what each one is so you can choose which one is best for your startup.
What Is a Business Incubator Program?
Incubators exist for one purpose – to help entrepreneurs and startups develop their businesses.
Business incubators are organizations sponsored or funded by:
- Universities, colleges, and other public institutions
- Government entities
- Private companies (usually venture capital firms)
Incubators provide a full range of services that startups need to get started. Instead of hastening the growth of very early-stage companies, they help as needed. But one thing they make sure of is mentoring the entrepreneurs.
At the start of the program, the startups are in the business idea stage. Much of their focus during this time is determining product-market fit. As they progress along, incubators help them turn concepts into viable products.
Being a part of an incubator program comes with valuable benefits and experiences:
- World-class mentors and industry leaders provide guidance and training. Startups can then go on to develop products and business plans. At the same time, they also receive advice on building a successful team.
- Many startups run into technical and design issues during product development. Incubators can help them get through those problems.
- Incubators can provide co-working office space, equipment, and other resources and services.
- Sharing office space means meeting other entrepreneurs. It is a chance for all the startups in the program to share ideas and knowledge. A collaborative environment can help boost business development.
- Incubators can introduce startups to potential investors and venture capitalists.
With these benefits and guidance, becoming self-sufficient becomes an attainable goal. Startups, too, can be ready for venture capital investment.
Although incubator programs provide many benefits, it is not an intensive environment. Startup accelerator programs, in this regard, can be intense. At any rate, a typical incubation period may last up to five years.
While most startups take at least one or more years, some other companies could wrap things up in six months.
Applying for a slot in a startup accelerator program is brutal. Hence, it is a good thing that incubator programs are much less competitive.
Getting accepted into a program, for sure, depends on many factors. Among the most important ones are the local economy and ecosystem. Much of this also has to do with which entity is sponsoring the incubator.
Government entities, for instance, favor startups that can improve the business ecosystem. A hospital sponsoring an incubator will likely favor health products or technology startups.
In the United States, there is an estimated 1,400 business incubators. As each one may have specific requirements, it is best to refer to local incubators. Here is a list of small business incubators in the United States.
Business incubators, in general, do not provide funds to startups. As such, they do not take a stake in equity ownership.
For funding, they can do one thing during the incubation period. Prepare startups to stand on their feet. By that time, they should be attractive to venture capitalists and other investors.
What Is a Startup Accelerator Program?
Startup accelerator programs share similarities with incubation, such as providing services and resources. But they differ in implementation and purpose.
Startups in this program already have a Minimum Viable Product (MVP). Not only that, but they also have a viable business model. Hence, accelerators focus on hastening the growth of the startups.
In essence, startups can shorten the time it takes for them to build a stable business. Instead of several years, it could be as quick as only a few months.
Accelerators provide many similar benefits startups can get from incubators and then more. Also, the environment during acceleration is fast-faced.
- Early-stage startups benefit from accessing a large pool of mentors comprising capitalists, investors, industry experts, and executives. Apart from learning and guidance, it is an opportunity to network and build connections.
- Startups receive personalized guidance from industry leaders to hasten company growth. Many of these influential people are also angel investors and venture capitalists. Hence, they may even provide funding after completion of the acceleration program.
- Depending on the accelerator, many of them provide startups with seed investment. Although the amount is not that large, recipients do have to give an equity stake.
- Being with other startups is an opportunity to share business ideas, knowledge, and experience. Collaboration makes it easier to overcome common challenges and issues. Usually, these relate to difficulties in customer acquisition or managing the business.
Startup accelerator programs last between 3 to 6 months. One factor making it possible is that the startups already have viable products. To do that, the mentoring and training they provide are much more intense. It is, after all, in the best interest of vested parties to get the company ready for market as soon as possible.
Getting accepted into an accelerator program is very challenging. Once received, early-stage startups enter the market within six months instead of years. As expected, the number of applicants is staggering. And, only 1% to 2% of applicants succeed on average.
The application process of most accelerators comprises five stages:
- Application Stage. Startups submit their application, which includes information on their products and business model. On average, there are 3,000 applicants.
- Assessment Stage. A team of evaluators picks the most promising startups. Their criteria include product strength and marketability. They also place immense importance on revenue potential and degree of investor interest.
- Interview Stage. The accelerator interviews promising startups. They want to know who they are, their products, and what traction they already have. A typical session lasts only 20 to 25 minutes.
- Evaluation Stage. Accelerators ask promising startups to submit documents on revenue, legal claims, and others.
- Acceptance Stage. Only 45 to 90 startups get accepted. Out of these promising companies, only 30% to 60% will receive seed investment.
Funding is one of the benefits of joining an accelerator program. In most cases, startups receive anywhere from $20,000 to $80,000 at the end of the program.
Remember, too, that one of the reasons why an accelerator chose them is investability. In other words, graduates of the program are more likely to get funding.
Accelerated startups have a 44% higher chance of successfully raising Series A round. They are also 91% more likely to raise Series B round. Although the discrepancy is less than Series A and B, the same pattern holds for Series C and D rounds.
Incubator vs Accelerator: Which Is Better?
Is an incubator better than an accelerator, or vice versa? It is a fair question to ask, considering that there appears to be a perception that both are the same.
But incubation is not the same as acceleration. As you see in the following infographic, both have marked differences.
So, between an incubator and accelerator program, which one is better?
Although they may share some similarities, such as providing co-working space and mentorship, they each have different purposes. Even the conduct of business development is not the same. Hence, none is better than the other.
The key differences between accelerators and incubators are distinct enough. Still, there are instances when some startups may have trouble choosing. Usually, these are existing companies that are on the verge of having an MVP or lack confidence.
Understanding the fundamental differences between the two programs will be helpful:
1. Startup Stage
Incubators and accelerators differ in the stage of the startups they support.
Incubators tend to focus on early-stage startups that have yet to develop a business plan. For sure, they are still working on transforming disruptive ideas into an MVP. For some companies, it may take up to five years to graduate from incubation.
Accelerators, on the other hand, choose early-stage startups that already have an MVP. Usually, these are existing companies with traction and established product-market fit. Their primary focus is the startup’s rapid growth, finishing the program within 3 to 6 months.
2. Seed Funding
It is rare for an incubator to provide even a small seed investment. While many do offer services and resources for free, some may ask for a fee. Others may ask for an equity stake.
In the case of accelerators, they may provide the most promising startups with a seed investment in exchange for an equity stake.
Final Words on Startup Incubator and Accelerator Programs
No doubt funding is necessary to take a business to the next level. But before that can happen, a startup has to be ready to enter the market with a marketable product.
Much of the focus, during this time, is on developing a viable product. At the same time, startups should also fine-tune their business model. These processes, as expected, costs money.
How do startups get the capital they need?
Apart from savings, some may borrow money from family and friends. Others may take out a personal or business loan. These funding sources, while workable, only provide cash. Not only do startups need to return the money, they even have to pay interest. Given these points, incubator and accelerator programs are a much better option.
Keep these things in mind when choosing which one is better for you:
- Incubators are for new startups with an established business model and product.
- Startups that could use the help in business development and do not need capital investment can join an incubator program.
- Accelerators are for early-stage startups that are ready for scaling up.
There is no timeline for incubation. But once a startup already has a viable product and business model, accelerators can cut down the time it takes to enter the market.
Thus far, what do you think of these two programs? Feel free to leave comments, or ask questions.