Entrepreneurs seeking investment in the early stages of their startup often turn to venture capitalists to support their fledgling business idea. Both accelerators and incubators offer sources of funding but there are some subtle differences between the two.
These types of program do have one thing in common - they both aim to create business growth. deliver value chain benefits or drive operational efficiency. But the way in which they achieve these objectives is where the difference lies.
The clue is in the name. While accelerators aim to increase the pace of business growth, incubators are more focused on innovation, helping to ‘incubate’ early stage ideas with the aim of establishing a formal business model.
Initially centered in Silicon Valley, both types of startup programs are now found across the world. We’ve highlighted the key differences you need to know.
Startup accelerators provide support on a fixed-term basis, ranging from a few weeks to a few months. That support includes connections, mentors and seed investment, as well as business and financial consulting and detailed product feedback.
The top three accelerators, ranked on the number of successful business exits from their programs, are Y Combinator, 500 Startups and Tech Stars. Acceptance rates for applications are highly selective and can be as low as 1.5% (as a comparison it’s easier to get into Stanford or Harvard).
At the culmination of the program, startups present their pitch at a ‘demo day’. Accelerators typically provide a level of seed investment in return for an equity stake, usually between 7-10%.
Y Combinator recently featured 9 companies from its summer batch of investments, ranging in variety from an augmented reality app that allows users to try on any tattoo to a startup that helps employers to protect their staff from online harassment and abuse.
The 2016 Global Accelerator Report from Gust revealed that 579 accelerator programs have made over $206 million in investments globally, incorporating 11,305 startups.
Incubators are more collaborative programs, generally sponsored by venture capitalists, government bodies, major corporations and angel investors. Most incubators provide access to shared vital resources, including office space and business expertise, mentors, events and guidance on how to successfully grow a new business, including the pitfalls to avoid.
Their support and resources are more broadly accessible compared to accelerators and they generally allow startup businesses to locate themselves within the incubator for several months - or in some cases, years. In return, investors may expect a larger amount of equity for the longer period of support.
A great example of an incubator is Pasadena based Idealab, the longest running tech startup incubator. Formed in 1996 it has created over 150 businesses. In the UK, Google Campus is one of several thriving tech incubators.
Survival rates for businesses emerging from incubators are reportedly as high as 92%.
Accelerator in Focus – Y Combinator
The first seed accelerator was San Francisco based Y Combinator, established in 2005 to provide early stage funding for startups, based on their expenses and set-up costs. To date, Y Combinator has supported over 1,700 startups. The company operates two three month funding cycles each year, January through March and June through August. Budding entrepreneurs are expected to relocate to the Bay Area during these funding cycles to maximize the support offered.
Some of the most high profile success stories originally funded by Y Combinator include AirBNB, Dropbox, Reddit, Stripe and Weebly.
The company more recently announced its upcoming launch of a startup incubator office in China after appointing former Microsoft and Baidu executive Qi Lu to develop a stand alone program based in Beijing. China’s startup sector is thriving. Approximately 80% of Asian startups that reached $1 billion between 2012-2017 are based there. Beijing startups attracted $72 billion in funding during that period, in second place behind Silicon Valley’s $140 billion.
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