Key Differences for Startup Success

Startup founders who want to start their careers on the right foot often seek help from an accelerator or incubator.

The terms “accelerator” and “incubator” are often assumed to represent the same concept. However, there are a few key distinctions that first-time founders should be aware of if they plan on signing up.

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Accelerators and incubators both offer entrepreneurs good opportunities early on. Founders get help to quickly grow their business, and they often better their chances of attracting a top venture capital firm to invest in their startup at a later point. Still, the programs are different frameworks for startup success.

Let’s start by breaking down the goals of each of these types of programs. Accelerators “accelerate” the growth of an existing company, while incubators “incubate” disruptive ideas with the hope of building out a business model and company. So, accelerators focus on scaling a business, while incubators are often more focused on innovation.

While both types of programs were popularized in startup hubs like Silicon Valley, they can be found worldwide nowadays. Although most people associate these programs with tech startups, most of them accept companies from various verticals.

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Accelerators

One of the big differences between accelerators and incubators is in how the individual programs are structured. Accelerator programs usually have a set timeframe in which individual companies spend anywhere from a few weeks to a few months working with a group of mentors to build out their business and avoid problems along the way. Y Combinator, Techstars, 500 Global, Seedcamp, Startupbootcamp, and Plug and Play are some of the most well-known accelerators.

Accelerators start with an application process, but the top programs are typically very selective. For instance, Y Combinator only accepts about 2% of the applications it receives.

SEE: Launching and Building a Startup: A Founder’s Guide (Free PDF)

Early-stage companies are typically given a small seed investment and access to a large mentorship network in exchange for a small amount of equity. The mentor network — typically composed of startup executives, venture capitalists, industry experts, and other outside investors — is often the biggest value for prospective companies.

The mentor networks aren’t small, either. Techstars, for example, has hundreds of mentors in its program.

At the end of an accelerator program, you’re likely to see all the startups from a particular cohort pitch at some sort of demonstration day (often shortened and referred to as a demo day) attended by investors and media. At this point, the business has hopefully been further developed and vetted.

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Incubators

Startup incubators begin with companies or even single entrepreneurs who may be earlier in the process, and they do not operate on a set schedule. If an accelerator is a greenhouse for young plants to get the optimal conditions to grow, an incubator matches quality seeds with the best soil for sprouting and growth.

While there are some independent incubators, they can also be sponsored or run by VC firms, angel investors, government entities, and major corporations, among others. Some incubators have an application process, but others only work with companies and ideas that they come in contact with through trusted partners. Some good examples of incubators are Idealab, the Massachusetts Institute of Technology’s Dual-use Ventures Incubator, and Arts Startup Incubator.

More about Innovation

Depending on the sponsoring party, an incubator can be focused on a specific market or vertical. For example, an incubator sponsored by a hospital may only look for health technology startups.

In most cases, startups accepted into incubator programs relocate to a specific geographic area to work with other companies in the incubator. Within the incubator, a company refines its idea, builds out its business plan, works on product-market fit, and identifies intellectual property issues and networks in the startup ecosystem.

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A typical incubator has shared space in a co-working environment, a month-to-month lease program, additional mentoring, and some connection to the local community.

Co-working is a big part of the incubator experience and has been split off as a separate business offering nationwide. Co-working spaces charge rent for access to utilities. Some accelerators offer a co-working space, but most provide companies with private office space or let them find it on their own.

Both incubators and accelerators offer a great opportunity to help young companies and ideas for startups get headed in the right direction, but it’s up to you where you need to start.

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FAQs

How much equity do incubators take?
There is no definitive answer here. Some will expect no equity, while others might be looking for 2-10%.

Innovation network MassChallenge explains, “Incubators don’t traditionally offer capital to startups, instead offering office space, mentorship, and partner opportunities. Because no capital is given, incubators don’t ask for a cut of equity.”

Meanwhile, SaaS solution provider AdviceScout reckons the amount of equity an incubator typically takes “can vary widely, with some incubators taking as little as 2-3% equity, while others might demand up to 10% or more.”

How much equity do accelerators take?
A reasonable amount to expect is 3-10%.

Silicon Valley Bank reckons, “Accelerators generally take 5% to 10% of your equity in exchange for training and a relatively small amount of funding.”

Fund administration platform Carta shares this view: “Typically, accelerators ask for about 3-10% equity in exchange for their investment and support.”

SEE: The Dark Side of Venture Capital: 5 Things Startups Need to Know (TechRepublic Premium)

How can I tell if it’s a good incubator or accelerator?
Any decent incubator or accelerator is going to show off its portfolio and stats. Everything should be very easy to find and on the front page of the website. If you feel the data is impressive and the incubator or accelerator will work with your kind of business (e.g., fintech), then it’s time to move forward.

For instance, Idealab clearly displays the names of the firms it helps and explains, “Founded in 1996, Idealab is the longest-running technology incubator. We have created over 150 companies with more than 45 IPOs and acquisitions.”

Likewise, Y Combinator says it has funded 5,000 startups with a combined valuation of $600 billion. Some of its successes include Stripe, Reddit, Dropbox, and Zapier.