Accelerators and Incubators Explained: Part 1

In the hype of media coverage on the latest startups launched, or the latest funding raised by a startup, one can easily lose distinction between accelerators and incubators. We do know that they’re somehow involved in preparing startups for growth and hoped-for success.  While they are different, there does exist an overlap between them.

Both help guide new businesses with tools like mentorship, office space, and networking opportunities through a program, which startups apply to in the hopes of gaining resources and support in order to get to the next stage – be it scaling their business model or increasing sales.

There are a wide range of accelerators and incubators with different specialties, which make defining the differences difficult, but there are some universal distinctions.  Incubators have been in existence longer than accelerators.  The first incubator was formed in 1959 in New York called The Batavia Industrial Center, which still exists today.  Their focus is on providing space for business tenants and assisting them with “shared services and consultation.”

Incubators are normally structured as nonprofit organizations, while accelerators are typically for-profit enterprises.  According to the National Business Incubation Association (NBIA), “The most common goals of incubation programs are creating jobs in a community, enhancing a community’s entrepreneurial climate, retaining businesses in a community, building or accelerating growth in a local industry, and diversifying local economies.”

Incubators take on startups still in their infant stage.  They provide a startup company with a longer process of devising a business plan in order to gain footing – thus giving critical extra time for the startup management to instill and hone its business operations, to become more focused on the critical goal of scaling up the business and increasing revenues.  While incubators can last for years,  accelerator programs typically last for only a few months per cohort.  Yet incubators are less structured than accelerators, who have a limited time to fast track a business to the growth phase.  Incubators are there for the long haul and take their portfolio businesses through all stages of their lifecycle.

The early incubator programs concentrated their focus on the tech sector, but since then they have branched out into various industries such as “food processing, medical technologies, space and ceramics technologies, arts and crafts, and software development,” according to the NBIA.  Incubators such as BMW i Ventures focuses on “future mobility and clean tech,” while the CFDA Fashion Incubator focuses on fashion designers.

The first accelerator, Y Combinator, focuses on tech startups and was formed in 2005 by Paul Graham.  It has churned out some highly successful startups, such as Reddit and Dropbox.  Wired has called it “the most prestigious program for budding digital entrepreneurs.”  Since Y Combinator came onto the scene, other accelerators have been created in its wake.  TechStars and 500 Startups offer similar programs for budding entrepreneur teams. And each year new accelerators are launched, with focus on different industries. For example, 1776 was founded as recently as 2013.

Accelerators, just as they sound, accelerate a startup with a quicker and more intense program through which many resources are available.  Accelerators are typically for businesses that already have a business plan and are further along in the development of their company.  Fernando Sepulveda in his article, “The Difference Between Business Accelerators and Business Incubators?” said, “It can be understood as a holistic business advisory service, often bearing strong resemblance to traditional management consulting practices, but adjusted to fit small and medium sized organizations.”

There are differences in how these two provide funding to allow for the development of the startups, but these are not uniform.  It is normal for accelerators to provide seed funding and then also to take in equity.  In contrast, incubators typically offer only rent-based working spaces.

While incubators guide a company through each stage of its lifecycle and through the grind of the day-to-day operations (which can sometimes be the downfall for some companies), accelerators have equity in the company, which means it has a vested interest (or so called “skin in the game”) in eventually making it successful company. So even though accelerators may have a quicker process, the company is still very much involved in the startup even after it leaves the cohort program – both financially and operationally.

This past year has been instrumental for the edtech startup industry due to the number of accelerator and incubator programs aimed at edtech innovation.  Until 2013, there was only one accelerator focused on the edtech industry, ImagineK-12.   Just this year, Pearson launched an EdTech Incubator called the Pearson Catalyst, which aims to “match startups with Pearson brands to deliver pilot programmes and offer access to Pearson resources and product experts,” according to their press release.  This was on the heels of Kaplan’s accelerator program that was announced just days before in collaboration with TechStars.  LearnLaunchX launched its first accelerator program in 2013, while the New York based edtech accelerator, Socratic Labs was put in motion in 2012.  Investments in Edtech have tripled in the last decade, according to the National Venture Capital Association, and the trend continues to grow.

Whether the startup is edtech related or not, it is important to do a lot of due diligence before applying to one of these programs.  Some things to consider would be the other companies that have gone through the process and analyze where they are now, or better yet, contact the companies to get their feedback on the experience.  It’s also important to review how much equity the accelerator is requiring and if relocation is necessary. It is well advised that the founders/executive management of a startup considering applying to a program first seek advice/feedback from a well-placed industry insider who has solid experience in the startup ecosystem.  This person can be invited to be on board of advisors, further boosting the startup’s chances.

Both incubators and accelerators provide the crucial crutch to the companies needing the necessary bridge to the next stage of their lifecycle – scaling up the business mode, expanding the consumer base, and increasing the revenues/sales – before getting to the following stage of actually becoming a candidate for IPO or acquisition. But there are other players in the game besides incubators and accelerators – stay tuned for the next piece in our series!

 

Additional Reporting by Yevgeny Ioffe

Photo by Robert Scoble,
Y Combinator’s startup school
Cropped

Michelle Harven

Michelle Harven

Michelle is a current graduate student at Emerson College and an intern at Boston's public radio station. She enjoys exploring the world of educational technology and writing about the ever-changing sector and its potential.