Start-up lingo can be really confusing. And very often, a lot of the terms are misunderstood or used in the wrong way. As I mentioned in my previous posts about the need for start-up investors and how funding works, incubators and accelerators may be a first point of contact to receive funding. As soon as you tap into the start-up world, you will discover tons of programmes promising you a bright future as part of their start-up network. But what actually are incubators? Is it the same as accelerators? What is the difference beween them? Let’s explore them together:
Probably the most important distinction between the two is the stage of your company. Incubators target start-ups in their very early stages. Very often, these start-ups are working on their Minimum Viable Product (MVP) or prototypes. An incubator may offer mentorship, legal counsel, trainings and, in some cases, office space or even seed money. Incubators are sometimes referred to as “start-up schools” as they teach their participants founding skills.
Most of the time, there is a formal application process and the incubators take a small amount of equity in the start-ups. There is no fixed percentage, I came across 8-10% of equity. The timeframe usually ranges from a few weeks up to six months.
If you decide to join an incubator, I recommend assessing their programme very carefully. What do they offer in exchange for what? Moreover, try to talk with some graduates of the programme and do some online research: What happened to companies which participated in the programme? I personally think that 8-10% of equity for mentoring, legal advice etc. is a bit on the high side. You need to assess how much of your pie you are willing to give away. (Read more about how you can assess this here.) However, if it is a reputable programme in your industry, you may want to look into it.
Furthermore, you need to ask yourself if you need to be told and taught how to run your start-up. So far, I personally have not been eager to join these types of programmes because of this educational part. And frankly, I am not sure if founders in general are people who need to be told what to do. But I guess it is a personal and case-by-case decision.
While incubators are taking care of start-ups in their “childhood stages”, accelerators target the “teenage start-ups”. Most of the companies who join accelerators have already proven their case – they have launched their MVP, tested their business case or even have their first customers.
The name “accelerator” already hints at the mission of the programmes: achieve fast growth. A lot of accelerators are structured in a way that you can boost your company within a few months to somewhere you may have only arrived after two or three years of operation without their support.
Timing is very important – I think that accelerators are most useful once you have reached a certain stage with your company – your team is already set, your product is up and running and you have a good knowledge about your customers and the market. As the aim is to grow quickly, there will not be time to have fundamental discussions about your product or to find a co-founder. Think about it like children grow up: before they can stand up and walk on their own, they need to learn how to crawl. Once they can walk, they can learn how to run.
Another big difference to incubators is that accelerators have more structured programmes to achieve that steep growth curve. The programmes usually are around three to six months. Some of the best known accelerators are Y Combinator (Airbnb is one of their most famous graduates) and 500 Startups (with graduates such as the online design platform Canva).
Both incubators and accelerators can be run by venture capital companies, family offices, companies, private individuals or even governments. It usually depends on the niche and country. In general, accelerators take equity in exchange for their programme. Similar to incubators, the percentage depends on the programme. I came across accelerators with an equity claim ranging from 10-25%.
Have you participated in an incubator or accelerator programme? Please share your experience below, I am eager to here about it! Also, please let me know if you have further questions.