Startup Incubators and Startup Accelerators – Know the Difference
Startup Incubators and Accelerators – Know the Difference
In today’s market, more and more young professionals are leaving high paying jobs to try their hand at running a business. This is not surprising, as entrepreneurs today have easy access to a wide range of non-conventional and ancillary means of funding that combine to make entrepreneurship a much more attractive and challenging proposition than a typical desk job. Ready access to funds and services and a strong network of support also diminishes some of the fear naturally involved in going it on your own, and strengthens the resolve of those willing to take the plunge. It gives them confidence in beginning a new venture as they see there are many individuals willing to invest in solid ideas. They need to only worry about coming up with marketable and innovative products and services for which significant demand exists and all the capital and other needs will be provided by independent individuals and institutions set up for that end. Two of these are startup incubators and startup accelerators.
Startup Incubators are an increasingly popular means of arranging for funding and other business needs that entrepreneurs face in the primary stages, they provide businesses with capital requirements and other ancillary services required for successful operations on the condition that they meet certain criteria and prove attractive to investors.
Unlike many business assistance programs, business incubators do not serve any and all companies. Entrepreneurs who wish to enter a business incubation program must apply for admission. Acceptance criteria vary from program to program, but in general only those with feasible business ideas and a workable business plan are admitted. It is this factor that makes it difficult to compare the success rates of incubated companies against general business survival statistics.
Although most incubators offer their clients office space and shared administrative services, the heart of a true business incubation program is the services it provides to startup companies. Many business incubation programs support not only clients proximate to their own location but increasingly try to serve customers anywhere around the globe, even on most remote locations. They report that they also served affiliate or virtual clients. These companies do not reside in the incubator facility. Affiliate clients may be home-based businesses or early-stage companies that have their own premises but can benefit from incubator services. Virtual clients may be too remote from an incubation facility to participate on site, and so receive counseling and other assistance electronically.
The amount of time a company spends in an incubation program can vary widely depending on a number of factors, including the type of business and the entrepreneur’s level of business expertise. Life science and other firms with long research and development cycles require more time in an incubation program than manufacturing or service companies that can immediately produce and bring a product or service to market. On average, incubator clients spend 33 months in a program. Many incubation programs set graduation requirements by development benchmarks, such as company revenues or staffing levels, and other such credible parameters by which to gauge a candidate worth investing in.
Usefulness of Startup Incubators
The utility of incubation to the general society has been identified as a means of meeting a variety of economic and socioeconomic policy needs, which include but are not limited to:
- Creating jobs and wealth and spurring talented individuals to start their own businesses
- Fostering a community’s or country’s work ethic and entrepreneurial culture
- Technology commercialization and other rapid innovation
- Building or accelerating growth of local industry clusters
- Business creation and retention and ongoing support
- Encouraging women or minority entrepreneurship
- Identifying potential spin-in or spin-out business opportunities
- Community revitalization and ready capital access
Giving up an Equity Stake
It is one of the eternally debated merits of Equity over Debt financing – debt has many advantages, including tax deductibility, but principally that it does not relinquish control over a portion of the business’ stake and therefore over all profits. On the other hand, Equity is preferable for a variety of reasons, is a more sound means of finance and unlike debt which is associated by new businesses with such negative possibilities as legal consequences, bankruptcy suits, and seizure of collateral in the case that the business does badly, in the case of Equity, the partner is a joint entrepreneur with you, not entitled to certain returns, and will also share losses if any with you. So it is clear that much more thought must be put into choosing an investor over a creditor. When you find an investor who is ready to share your business and has a real stake in its success, you create a partner who will have to be with you all the way, so make sure you understand each other well, especially during momentary difficulties, the investor must not act like a loan shark, but be willing to support and help you gradually to come out of it and return to operational profitability and full functionality.
Startup accelerators are a later development than startup incubators which preceded them. They are a more consolidated program designed to weed out unworthy ideas from those that have a higher probability of success. They includementorship and educational components and culminate in a public pitch event or demo day. While traditional business incubators are often government-funded, generally take no equity, and focus on biotech, medical technology, clean tech or product-centric companies, accelerators can be either privately or publicly funded and focus on a wide range of industries.
The primary value to the entrepreneur is derived from the mentoring, connections, and the recognition of being chosen to be a part of the accelerator. The business model is based on generating venture style returns, not rent, or fees for services.
Seed accelerators do not necessarily need to include a physical space, but many do. The process that startups go through in the accelerator can be separated into five distinct phases: awareness, application, program, demo day, post demo day.
Differences between Startup Incubators and Startup Accelerators
This brief overview should provide an insight into some of the similarities that exist between incubators and accelerators. The main differences between business incubators and accelerators are as follows:
For startup accelerators, the application process is generally open to all but highly competitive. The ratio of applications accepted for applications submitted is typically under 5%. This makes accelerators significantly more competitive than their incubator counterparts, which is part of the reason some companies prefer the latter. But there are advantages and disadvantages to each. An accelerator investment in the startups is usually made in exchange for equity. The typical investment can vary from as little as a few lakh to as much as 1 or 2 Crore depending on the quality of the proposal.
The focus is on small teams, not on individual founders. Accelerators consider that one person is insufficient to handle all the work associated with a startup. Typically, the startups must graduate by a given deadline, typically after 3 months. During this time, they receive intensive mentoring and training, and are typically expected to iterate rapidly. Virtually all accelerators end their programs with some kind of a Demo Day, where the start-ups actually present to investors.
Startups are accepted and supported in cohort batches or classes (the accelerator isn’t an on-demand resource). The peer support and feedback that the classes provide is an important advantage. If the accelerator doesn’t offer a common workspace, the teams will meet periodically.
In starting any business, it is very important as to have a solid idea of what you’re going to do, an explanation of how you’re going to do it better than competitors or other prospective entrants and a clear vision of how you’re going to grow, but all this combined is not enough without a very clear and written plan for yourself and for others detailing how your vision is going to become a reality.
Many businesses report one of the advantages of incubators and accelerators alike is that, even if not successful in applying the first time, still they provide a mentoring network of highly successful and professional individuals that can be tapped into for life.
As Investors go through hundreds of business plans, your idea must stand out, it must be innovative and creative, it must be solidly backed by good research, it must conform to reality and not include impractical expectations and it must outline a clear path of how you intend to accomplish your targets and give your investors a good return on their capital. If these are present and in order, many investors today would be ready, willing and able to provide you with all the funds, cooperation, consulting advice and all other required services and support that you require.