If you own an early-stage startup company or have an idea for a startup business model, you may have come across startup incubators and startup accelerators. However, you may not be entirely sure what they are and how they differ from one another. This article will explain the difference between a startup accelerator and incubator, as well as the risks.
Overview
There is no hard and fast legal definition of either an accelerator or incubator. The terms can be used in various ways depending on the context, and both have grown in popularity.
In general, incubators tend to provide business support activities to nurture small businesses and help them develop and de-risk their business idea for later stages of growth.
Accelerators share many similarities with incubators, but they tend to have a financing element so the accelerator platform can share in the company’s growth. They are also more selective when choosing their partner businesses, often requiring businesses to apply as part of a cohort rather than on an unfixed basis.
We will now consider the two terms in more detail.
Startup Incubators
While startup incubators can provide various services depending on the platform, most tend to be physical spaces that provide early-stage companies with a supportive environment to grow a business model or business idea in exchange for paying the business incubator rent or a fee.
This fee also entitles your startup to access their network, including angel investors and corporate finance professionals with experience working with early-stage startups. There may be frequent conferences, seminars, and other networking events designed to inspire and excite startup owners.
Incubators generally do not limit the duration your business can access their services, so long as you pay your rent or associated fees.
Some incubators may provide special tools or facilities, such as labs or advanced computer hardware and software.
Startup Accelerators
The most distinguishing feature of accelerators is that they tend to be platforms created by or on behalf of investors to develop investment opportunities. As a condition of accepting a spot with an accelerator, you will usually have to sell equity in your company.
In this sense, accelerators are similar to venture capital (VC) funds in that they are professional investors seeking to acquire equity in seed-stage businesses. However, they differ because their structure resembles a course or competition. As a result, the platform’s selection criteria tend to be quite rigorous, with limited spots available.
Accelerators tend to be for a fixed period, and instead of paying a fee, your business will give up a portion of its equity. Your business may also receive additional cash during or at the end of the program.
Which One is Best for My Business?
This will depend on:
- the particulars of your business;
- the sector you operate in; and
- your business’s financial position.
That said, speaking generally, accelerators might be better suited to businesses actively prepared and looking for outside equity fundraising. Conversely, incubators might be more appropriate for businesses that do not intend to grow quickly soon or need third-party financing.
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Risks
As with any service provider, you should conduct appropriate due diligence to ensure the accelerator or incubator is above board.
Likewise, like all equity financings, you will be selling a portion of ownership in your company to a third party. This usually means you will lose some degree of control over your business. Therefore, you should weigh this against the benefits partnering with an incubator may bring.
Key Takeaways
Startup incubators and accelerators are platforms that provide different services depending on your business’s needs and growth phase. A startup incubator is more focused on providing services in exchange for rent or some other service fee, whereas an accelerator is more like a seed-stage venture capital fund because they usually look to acquire a portion of ownership in your company.
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Frequently Asked Questions
What is a startup accelerator?
A startup accelerator is a platform operated by professional investors that look to partner with seed-stage companies. In exchange for providing your business with advice, resources, and often seed funding (i.e., growth capital), they will look to obtain a portion of ownership in your business.
What is a startup incubator?
Incubators provide a suite of services for startup businesses designed to motivate and stimulate business growth. They commonly include on-site workspaces, resources and networking events for a service fee or rental payment.
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