Accelerator or incubator — which of them will be more valuable for you?

Friday, July 19, 2019

At a certain step of the projects’ development practically all founders think about attracting external expertise and assistance. Many of them succeed to find mentors, who are ready to share experience and their own insights (sometimes even on an altruistic basis). But unfortunately, such mentors have quite narrow expertise.

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In search of more complex expertise founders sooner or later think about cooperation with incubators and/or accelerators. But the problem is that beginner entrepreneurs or entrepreneurs that have never worked with the venture market often consider such organizations practically identical (if they know about their existence in principle) by mistake. In this article we will try clarify remove this misperception.

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Incubators first

The first and main difference is connected with the stage of development of the projects accepted: incubators usually take startups at the idea stage, when founders of the project just start to discuss the future business model, to find their the team of like-minded persons, to study the market, to think over the architecture of the implemented solution. By contrast, accelerators take more mature startups — usually at the stage of a prototype or MVP or with the condition of having first users, preferably of the paying users, sure.

The majority of incubators are the spaces, where entrepreneurs get a working place for a monthly fee, mentor support, access to closed events and other valuable resources, with the help of which they learn how to build and develop business from the ground up.

As a rule, incubators don’t take shares in the startups for their services, but they also don’t provide them with any financing. Their main purpose is different: not only to give startups cheap office space, but also to help beginner entrepreneurs to avoid typical mistakes and by that to increase the survival rate of businesses at the early stages.

American IdeaLab, founded in 1996, was the first business incubator. During 23 years of its existence 45 IdeaLab graduates made an exit in one or another form. Among the most famous graduates — GoTo.com, Tickets.com.

Coming to an incubator founders usually start the creation of a prototype, formation of the team, and getting ready to enter the market with an MVP. As the company grows, the value of an incubator begins to diminish.

There isn’t any universal algorithm, allowing to understand if the project outgrew an incubator stage, — it’s all about the founders’ feelings. If you feel that the proposed space is already small for your growing company and the mentors’ advice seem to be more and more trivial, it is time for the next step — to move to your first own office and to start the free floating.

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Accelerators are the next step

If, having made this essential step, founder still feels like he needs mentor support and assistance in further development and promotion of the project, he should think about applying to acceleration programs: explore the local and international markets, choose the most attractive variants of the programs (as a rule these are either world-wide known accelerators or niche (narrowly specialized) accelerators, proposing very deep expertise in their fields).

Accelerators are the programs during which the company receives individual mentoring and access to partner network. Such programs last from 3 to 6 months, after which demo-day are organized, when startups pitch to investors this way announcing the beginning of their fundraising campaigns.

Classic equity-accelerators invest in the selected startups at the beginning or during the program (usually these investments vary from $50 to 100K) in exchange for a share (usually 3–10%). The exceptions are accelerators, working under a non-equity model, — they don’t finance the projects, they don’t take any shares either, but in most cases startups have to pay for an opportunity to participate in their programs (exceptions are non-equity accelerators funded by the government and/or universities).

In fact the main accelerator’s goal is to help the projects to find the points for explosive growth and to get prepares for the money of the institutional investors: to select the right and scalable business model, to test different attraction channels and to thoroughly plan their steps for exponential growth.

The largest and the most famous accelerators are:

Y Combinator (among its graduates one can mention — Reddit, Airbnb (attracted more than $4.4 billion), Dropbox (IPO estimated at $9.2 billion)
500 Startups (Twilio (IPO estimated at $ 1.2 billion, as of July 2019 the estimation is above $18 billion), Behance (was bought by Adobe for $150 billion)).
Techstars (Rover.com (estimated at $ 970 million) and SendGrid (was bought for $ 3 billion).

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It is harder to get into accelerator

Based on the fact that the majority of accelerators invest in their projects, it isn’t easy to join their programs (especially to the top accelerators) — one will have to to pass a complex procedure, including primary assessment of the application and one or several interviews. As an example, Y Combinator during each startup selection campaign screens out more than 95% of the applications. To get into an incubator is much easier.

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Conclusion

Incubators and accelerators can be valuable for startups at the different stages of development. For the projects at the idea stage incubator is a more suitable variant, as for a small monthly fee they can get an access to different resources, that will help to start doing business successfully.

After the creation and launch of the MVP on the market, it may be useful for a startup to pass an acceleration program which will help to find the points for explosive growth of project and will give access to a big partner network.

The majority of accelerators gives the projects their first equity-investments, that is why the process of applying to accelerators is more complex, the requirements for companies are more severe, what makes getting into accelerator much harder than into incubator.