Posted by Neha De
May 14, 2020 | 5-minute read (940 words)
As an entrepreneur, you must have heard the words “incubators” and “accelerators” while talking to other founders. Both startup incubators and startup accelerators help early-stage businesses grow and scale. It’s no surprise, then, that these terms are often used interchangeably, even though they accept different types of startups, serve different purposes and have different outcomes.
In simple terms, a startup incubator nurtures innovative business ideas and sets up conditions in which a startup can thrive. On the other hand, a startup accelerator helps grow, or accelerate, a business in its early stages over a predefined frame of time.
Here is what you need to know about startup accelerators and incubators if you’re planning on signing up with one.
What Is A Startup Incubator?
The idea behind a startup incubator is to create an ideal environment for early-stage startups, where they can develop a minimum viable product (MVP) and a foundational business model. An incubator often provides entrepreneurs with an office space, seed money, training, mentorship and discounted or free professional services (such as accounting and legal help). An incubator is not limited to one industry, market or vertical.
A startup incubator is typically a nonprofit organization run by both public and private entities, and can often be associated with universities. Some business schools also allow their students and alumni to take part in such programs. However, there are many incubators that are formed by other startups, successful entrepreneurs, governments and civic groups.
Here are some common benefits of enrolling in a startup incubator:
- Being mentored by experts and seeing other entrepreneurs experience the same challenges can be a great motivator.
- More networking opportunities are available within a startup incubator structure.
- Mentoring and training can help prevent some of the most obvious mistakes that come with starting a new business, thus cutting the learning time in half.
Now, some potential drawbacks:
- In absence of a predefined timeframe to meet goals, an incubator environment can sometimes feel overly relaxed.
- Investors usually ask for some equity in exchange for training, so you end up losing part of the ownership and control over your company.
- You might have to relocate to where the incubator is located.
What Is A Startup Accelerator?
A startup accelerator offers capital, mentorship and connections to investors and business partners. It chooses startups with promising founders and MVPs, in order to scale rapidly.
Most accelerators work on defined timelines. The goal here is to get the startup off the ground as quickly as possible. Startup accelerators have a thorough application process, and one typical prerequisite is that your business must have an MVP.
An accelerator program usually lasts only a few months (usually three), and investors offer investment capital and act as mentors in exchange for a key percentage of equity in the company.
Some advantages of signing up with a startup accelerator are:
- Because accelerator programs are looking for rapid growth, investors are usually willing to pay for results. Many startup accelerators offer seed capital to help startups get off the ground in a hurry.
- With a limited timeline, an accelerator program acts as an extremely useful crash course in running a business.
- Just like an incubator, a startup accelerator offers a wide network of connections in the startup community, including vendors and mentors.
The disadvantages are:
- Significant funding means giving up equity in many cases.
- For many business leaders, it may seem like accelerators are working with too many businesses, making them seem like cookie cutter operations.
- The application process can be a bit stringent for many businesses.
Which Is Better for You: Incubator or Accelerator?
Figure out your business’ current stage before choosing a program. If you have a really small team, are more flexible, have a less-defined timeline for your long-term goals and are still working through important details such as product development or market fit, then an incubator may be the better option for you. A startup incubator often works better for those founders who want to build lifelong skills and learn things they wouldn’t otherwise have access to in an independent environment.
But if you already have an MVP, a solid financial plan and are looking for expert mentorship and support on how to get to the next stage of your company’s growth, an accelerator might be the better choice of the two. A startup accelerator can be a great motivator because some of the top programs use incentives and will reward you when you hit certain milestones.
How Can You Apply?
Getting accepted to a top incubator or accelerator such as Y Combinator, Techstars or 500 Startups, can be quite a challenge. These organizations reject hundreds of applications each year. Here are four things you can do to increase your chances of getting selected:
- At the idea level, you should be able to answer what problem your product or service solves, why your team is the right one to solve it and why now is the time to do so.
- Have the foundation of your business in order. Consult with a trusted advisor regarding your legal needs, and put necessary agreements with investors or potential customers in place, if possible.
- While it might not be feasible to understand the financials of your company early on, it is a good practice to have a basic understanding of how your business operates from a financial standpoint. This way, you will be able to utilize the incubator or accelerator’s resources in order to really grow your business.
- The ability to explain how you will gain traction for your product or service is crucial when applying to a top incubator or accelerator.