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Often entrepreneurs entering the startup arena are exposed to a completely new business vernacular. Unless these brave souls peddling their new ideas have a background in finance, they find themselves lost in conversations with people throwing around terms like angel investor, crowdfunding, seed funding, VC (venture capital) -- and the list continues to grow daily. Another misconception from early entrepreneurs is the use of accelerator and incubator interchangeably as synonyms, which is understandable but incorrect.
Sure, both programs provide guidance to startups, as well as advance their business models and strategies, and the main goal is to groom the startup to become valuable in the eyes of investors. However, key differences exist between accelerators and incubators. When examining the selection and investment process, the differentiation between the two becomes more apparent.
Incubators support startups entering the beginning stages of building their company. The startups possess an idea to bring to the marketplace, but no business model and direction to transition from innovative idea to reality.
Accelerators advance the growth of existing companies with an idea and business model in place. These programs build upon the startups’ foundations to catapult them forward to investors and key influencers.
Incubators operate on an open-ended timeline. They focus more on the longevity of a startup and are less concerned with how quickly the company grows. It is not uncommon for incubators to mentor startups for more than a year and a half.
Accelerators operate on a set timeframe, which usually lasts three to four months. During this period, startups build out their business with the support of mentors and capital provided by the accelerator. At the end of the program, startups receive the opportunity to pitch their businesses to investors.
Incubators invest time and resources into advancing local startups; they are generally tasked with creating jobs or finding ways to license intellectual property. Startups are a conduit to accomplish both. Incubators have less pressure to deliver startups that can grow fast, as fostering and supporting local startups is part of their charter. Therefore, even a slow growing or less scalable business constitutes a good incubator candidate.
Accelerators use a more traditional and formal model for entry into their program. Participants must apply for a select number of slots in the program. These programs are extremely competitive as the accelerator must select the top startups from across the country, which are scalable, investable and have to show an ability to grow rapidly within months.
Both incubators and accelerators offer an environment of collaboration and mentorship. This enables the startups to share a space, as well as have access to a multitude of resources and peer feedback. Both also provide mentorship from seasoned entrepreneurs and business experts.
Incubators do not traditionally provide capital to startups and are often funded by universities or economic development organizations. They also don’t usually take an equity stake in the companies they support.
Accelerators do invest a specific amount of capital in startups in exchange for a predetermined percentage of equity. Due to this investment, the accelerators bear a greater responsibility in the success of the startup.
When deciding which program is right for their startup, entrepreneurs should look for the right fit. Most startups could benefit from being in an incubator, but fewer are a fit for an accelerator.
Incubators tend to take on startups which are still in formation, may not necessarily require investment capital and tend to be part of the local startup community already. The timeline to commercialization may be longer, or they are so early that some of the basics have not been addressed yet.
Accelerators have national calls to apply and pick from among hundreds of pre-vetted applicants. These startups must be able to demonstrate they are investible and rapidly scalable businesses willing to relocate to the town where the accelerator is housed for at least the duration of the program. The accelerator fund will be the startup’s first outside investor in most cases. While both programs provide significant benefits to startups, they are not to be consider one in the same. Through careful self-reflection, entrepreneurs will be able to determine which is the right fit for their business at that moment.
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