Startup Accelerator vs Incubator: Differences and Things to Consider
Let's pretend you're really excited to plant an exotic fruit tree. You have the rare seeds and know a thing or two about cultivating this species to bring the tasty fruit you're craving. Yet there's so much beyond your knowledge scope if you haven't done anything like this before. By deciding to figure it all out on your own through trial and error, you'll probably risk killing the fragile sprout. Instead, there's an option of turning to the experts for help who'll give potting tips, recommend the needed soil, fertilizer, and light, and assist you with care, so the sprout grows to be big and healthy.
The thing is that making a startup sink to failure is just as easy as killing a sprout. In fact, the current startup failure rate is as big as 90%. That's why many founders go to the startup "gurus" and support institutions if they seek advice and guidance. On this page, we'll compare an incubator vs accelerator, two very popular startup words. We'll define the peculiarities of each to help you see the difference and maybe choose one to aid your business.
In a general sense, an incubator is an apparatus in which people place, for instance, bird eggs or prematurely born babies to help them develop. But how does it work with startups?
What Is a Startup Incubator?
An incubator is an organization whose aim is to support early-stage startups, usually at the idea initiation stage. This is when the startup founders are just beginning their project. They have tech business ideas and are discussing the future business model, studying the market, looking for a team, etc.
Incubators provide such entrepreneurs with a nurturing environment, giving guidance and support in exchange for a small monthly fee. Importantly, they're focused on helping a startup take its first steps, avoid common startup mistakes, and build a sturdy foundation for the business, increasing its chances for further stable growth. Perhaps, this is the major difference between an incubator and accelerator.
Various incubator programs have been around for quite some time. Based on an estimate by the International Business Innovation Association (InBIA), more than 7,000 business incubators exist today. Many run on a non-profit basis and can even be academic institutions or government agencies. Alternatively, some for-profit corporations and venture companies sometimes also establish incubators, seeing them as potential investments.
Which services do incubators provide young startups? Some of the most common ones include:
- workspace (an office or affordable coworking for teams);
- mentorship and training with coaches;
- learning materials, resources, workshops, and startup tools;
- legal advice and other business consultations (accounting, finance, marketing, etc.);
- help in choosing a tech stack and other technical aspects;
- networking opportunities and social events;
- among other things.
Duration of Startup Incubators
As a rule, such specially designed programs for innovators don't have a fixed time frame. A startup can stay in the incubator "environment" while it is necessary. For instance, the duration can be 6 months, a year, or even more. In other words, as long as it takes the startup to grow to sustain itself.
This is good news for those companies who don't want to be rushed or put into strict time frames. A startup can thus smoothly progress from proof of concept (POC) to MVP development, form a team, and prepare for product launch during this pre-seed time. As the company grows, the startup's need to stay in the incubator program goes down, signaling that it can move on to its own unescorted "voyage".
Applying to reputable business incubators is usually relatively easy. Numerous incubators accept companies at early startup stages to their programs individually (or, on rare occasions, as cohorts). But what they're usually looking for are fresh ideas that have the potential to become something great. Plus, some incubators cover a specific field, such as fintech, so they might not accept a startup from a different vertical.
The application process is generally as follows:
- A startup signs up for an incubator program by filling out a form and answering questions about the business to pitch the idea.
- After the application gets reviewed, the startup founder is invited to an interview (often via a video call) for both parties to get acquainted.
- Then the incubator notifies the startup about their decision to accept or decline the application (this can take a couple of weeks).
- Both parties sign a contract in the event of admission.
Typically, incubators don't serve the purpose of providing startup funding. But they might aid in networking and finding potential investors to raise funds like founder communities do. Customarily, incubators charge startups a modest monthly fee for participating in the program.
It's also worth noting that incubators working in exchange for startup equity is a very rare scenario. Yet if this is the case, the equity percentage is very low.
Benefits of a Startup Incubator
Opting for an incubator makes sense when an early-stage company or startup is in two minds about how to approach its business. Whether the founder lacks knowledge, experience, a network of connections, or anything else, an incubator can be the "mentor" that'll set things straight.
The main advantages of joining an incubator for a startup are:
- obtaining knowledge;
- getting mentoring and advice from experts;
- cutting costs on rent;
- refining the idea, determining the target audience, forming a team, finding product-market fit, etc.;
- improving the business strategy and plan;
- developing a product from the ground up;
- stimulating business growth;
- expanding the network of connections;
- possibly finding funding opportunities.
As shortly aforementioned, incubators can be non-profit organizations or enterprise-based ones. Some renowned incubators include:
Bringing up a specific example of an incubator and its successful "graduate companies", we'd mention Idealab. It helped many projects grow, including Picasa (which was bought by Google), GoTo.com (currently known as Yahoo! Search Marketing), CitySearch, and many others.
Acceleration is all about speeding things up. Let's unveil how an accelerator can help a startup and when this path is appropriate.
What Is a Startup Accelerator?
Suppose a startup feels that it needs support after MVP or product launch, additional funding, and assistance in the project's further development or promotion. In that case, choosing an acceleration program can be a neat way out.
Numerous accelerators are available for companies ready to take the scaling leap. But what unites all accelerators is that such programs are intensive and short-term.
We need to note another difference between an accelerator and incubator: accelerators are interested in more mature startups. That is, startups at a more advanced lifecycle stage or with a product that has already received traction. For instance, there's a team, a launched minimum viable product, and first users (preferably paying ones).
In essence, accelerators look for inspiring projects and select only those they believe have the most chances for success. Plus, accelerators often invest their own money in the product, so the interest in scaling the startup becomes mutual.
What do startups get from accelerators? Their primary goals are to:
- help a startup find its growth area (that'll skyrocket the project in a short period of time);
- provide startups with individual mentorship, early investment, and access to a network of partners;
- prepare it for the "big money".
Nevertheless, accelerators control the startups' work more. Because money is at stake and they have a direct interest in "harvesting" future profit, accelerators demand more from such projects. Mentorship may be much more intense, for instance, requesting timely reports on the progress.
Duration of Startup Accelerators
The duration of accelerator programs is narrower and has fixed deadlines if we compare an incubator vs accelerator. On average, they last 3 to 6 months and can take place in cohorts or batches, sometimes even once or twice a year. Hence, a startup that gets chosen for the program might have to wait.
However, the valuable knowledge and growth gained throughout this relatively short period can be compared to what a startup might have gotten on its own in several years.
As a rule, accelerators make initial investments in the chosen projects in exchange for equity. Such shares can fall somewhere between 3 to 10%. For instance, the well-known accelerator Y Combinator usually agrees on about 7%, while shares in Techstars can go up to 10%.
Surely, this may become a touchy subject for startups some time down the road when they'll have to split profit according to the investors' and accelerator's equity shares. But accelerators hardly ever offer partnerships based on a non-equity model (that is, when they do not provide startups with funding nor have a share in the project). In rare cases, if they do, startups have to pay for participation in the program.
Nonetheless, accelerator programs often end with a demo day, during which startups present the project by pitching to investors as one of the rounds of funding for startups. And the chance to find investors is among the main motivators for many startups to join such programs.
Accelerators bring many attractive opportunities to the table. And thousands of startups wish to take a shorter route in obtaining funding quicker, getting noticed, and having access to a network of partners. However, because most accelerators invest their own resources in projects, it's tough to make the cut.
The application process and selection mechanism in accelerators are very complicated. In fact, it's very common that less than 3% of the applicants get selected for the program. Hence, the number of available spots is highly limited, which is another point differentiating an accelerator vs incubator.
Accelerator programs have various application processes, but in most cases, screening works the following way:
- Startups apply for the program by introducing their project (for example, it can be a presentation).
- Accelerators review the application for several weeks, assessing the project. They need "proof of traction", so they evaluate various MVP validation criteria like analytics, product performance metrics, demand, product stability, team competence, signs of product-market fit, current revenue, and overall business performance.
- If the startup makes it past this "funnel", it gets interviewed. The accelerator may be asked to provide more business information and possibly documentation for final screening during this step.
- The small percentage of those chosen then sign a contract with the accelerator company.
Benefits of a Startup Accelerator
Exponential business growth is key for those who consider applying to an accelerator program. In turn, accelerators assist the selected startups in various ways. The most common accelerator program advantages include:
- possibility for initial seed investment in the startup;
- targeted training aimed at rapid growth;
- mentoring with top experts in the field;
- creating a plan for startup scaling;
- fine-tuning the business model;
- helping with feature prioritization;
- finding appropriate sales channels;
- driving new clients;
- introducing the startup to big-name investors.
There are hundreds of accelerator programs to choose from and apply to. Below we list several well-known ones with their "alumni":
- Y Combinator (that helped Twitch, Webflow, Stripe, Zapier, Jasper, and many others);
- 500 Startups (assisted Canva, Algolia, Twilio, Behance, and Udemy with their growth);
- Techstars (moved DigitalOcean, Contently, PillPack, and SendGrid towards success);
- MassChallenge (has companies like Localytics and EverTrue in its portfolio);
- Startupbootcamp (Koibanx, Curacel);
- Plug and Play (Cargo, Flutterwave, Swiftly).
Based on the data provided by Statista, numerous accelerators actively invest in startups. For example, as of mid-2021, Y Combinator made over 3,700 investments, with Techstars (3,200+) and 500 Startups (2,600+) closely behind. Interestingly, these accelerators can also boast of having the highest number of exits (over 350 in Y Combinator, more than 300 in Techstars, and over 280 in 500 Startups), meaning that such products passed the tech due diligence audits and the companies or their shares have been successfully sold for a good profit.
When comparing a startup incubator vs accelerator, we have to understand that these are not competing mechanisms. They each serve various purposes, accept startups at different stages of development, differ in duration, and bring different results and value. So which path is more appropriate for you, an incubator or accelerator?
Business incubation is all about the very beginning of a startup's journey. So, if you're a "newbie" founder with an idea or concept but without experience or a team, then such long-term, non-profit programs can provide you with all the needed knowledge and guidance to get the product off the ground.
- Incubators offer early-stage startups mentorship, business and legal advice, and office space.
- They can help form and nurture your product as you go through the project discovery phase and possibly even aid in building an MVP.
- The program duration isn't fixed and you won't receive funding (these are the major differences between an incubator vs accelerator). But you'll have to pay a fee for the program if you get accepted.
World-class business accelerators are noted for being effective in helping startups scale very quickly (usually in about 3-6 months).
- Accelerators are usually for-profit organizations and can invest in your product in exchange for equity.
- They offer networking opportunities and ways to attract investors, top-class mentorship programs, and supply a startup with lots of practical skills that could have otherwise been obtained in several years.
Therefore, if you are a startup at a later development phase, already have a promising validated MVP, and are seeking ways for rapid startup growth and getting funding, you can take a shot at getting admitted to a selective accelerator program. Note that the competition is high, and the acceptance rate is super low, meaning that most startup applicants won't make it.
Summing up, a startup can get many gains from joining both an incubator and accelerator, and it doesn't only go down to money. The most suitable path depends on where you currently stand and what you're trying to achieve: starting a startup business or quickly growing it.
Regardless of where you consider applying based on the startup's lifecycle stage and needs, a founder must understand the reasons why this is a necessary step, how it'll help the project, and whether the startup is ready to give away equity. The bottom line is that an accelerator and incubator can't guarantee success. Yet if a startup is proactive and makes the most of such assistance, the chances of thriving go up.
If you seek advice on how to get your project going or need a hand with taking your project to the next level, Upsilon has years of experience in providing MVP development services for startups and team augmentation services for growth-stage businesses. So, feel free to browse our dedicated team pricing and contact us to discuss your ideas!