Accelerators and Incubators

6 minutes, 19 links

Accelerators and Incubators

Many founders don’t start companies with pre-existing networks of venture capitalists and a wealth of knowledge on how to hire a team, build a product, get customers, and raise capital. Accelerators and incubators aim to fill this gap in network, knowledge, and skills. Accelerators and incubators have nuanced differences. Some invest small sums of money in exchange for equity, while others are just physical spaces that offer discounted or free space for founders to work while in the early stages of their businesses. If you’re a first-time founder, accelerators and incubators are worth considering.

caution When considering an accelerator or incubator, be wary. Most accelerators ask for 2–10% of your company in exchange for capital and connections. Make sure the connections will actually be worth 2–10% of your company! The amount of equity you sign over to an accelerator or incubator is literally a price you are paying for a service. Treat it as such.

Accelerators

Definition An accelerator is an institution that offers typically fixed-term, cohort-based programs for early-stage, growth-driven companies, investing capital in and offering services to these companies in exchange for an ownership stake.* Common services include offering access to investor networks, mentorship, office space, and an opportunity to pitch directly to investors at the end of the program. Accelerators differ from traditional venture capital firms in that they focus on investing in very early-stage teams.* Paul Graham and Jessica Livingston pioneered the accelerator model with Y Combinator.*

danger Some accelerators charge companies fees for the office space and other services they provide. Founders should read accelerator term sheets carefully, as a $50K investment may only actually give you $30K of capital after you fulfill your obligation to the investor.

There are hundreds of accelerators out there that all flaunt the power of their networks, but the quality of these networks ranges widely. Almost every accelerator will tell you they can give you access to a network of investors and mentors. You’ll hear about how the mentors in the network have built and sold successful companies, and they’ll tie that back to those individuals being able to help you build yours. In an ideal world, accelerators can offer you access to expertise via mentorship in go-to-market strategy, sales, product development, recruiting, fundraising, and more. In reality, few accelerators have networks strong enough to be very helpful. One thing to be wary of with accelerator mentor networks is the applicability of mentors’ experiences to yours. Someone who built a business in a different industry 20 years ago will definitely be able to draw upon a successful career for generalized coaching, but their tactical experience may simply be out of date.

Accelerators also vary in the amount of funding they offer and size of the ownership stake they take. According to the 2017 Seed Accelerator Rankings Project Report, the average cash investment is $39,500 in exchange for a 6% ownership stake.

Companies apply to accelerators via online applications and are accepted into rolling batches that are usually broken up by year, quarter, or season. Many accelerators accept applications via AngelList or F6S.

The Corporate Accelerator Database regularly updates a full list of startup accelerators.

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Most accelerators invest in companies in a wide variety of areas (hardware, software, energy, and so on), but a few choose to focus on one specific area such as:

Others focus on supporting specific groups of founders:

Seed Accelerator Rankings

As of October of 2018, the Seed Accelerator Rankings Project has analyzed data on outcomes and ranked accelerators on a scale from Silver to Platinum Plus.

The Seed Accelerator Rankings Project is based on valuation, qualified exits, qualified fundraising, survival rates, and alumni network data.

Incubators

Definition An incubator is an institution that offers some combination of office space, cash, and expertise to new companies. Some incubators offer these things in exchange for equity, some for a fee, and some for free. Incubators almost always offer coworking spaces, where entrepreneurs can rent a desk to begin hatching plans for a new company.

An important distinction between accelerators and incubators is that accelerators have a graduation date or demo day after a short period (usually under three months), whereas incubators can work with companies for much longer periods of time.

Some incubators are willing to invest in the companies they provide office space to, but terms from incubators are often convoluted, unsophisticated, and disguised as competitive with accelerators like Y Combinator.

cautionFounders should beware of incubators touting expertise and mentorship as a benefit, especially if the incubator is charging a significant fee or asking for equity. Ask specific questions about who the mentors are, research them online, and make your own assessment as to whether you believe they could add significant value to your company. Many incubators around the country have a standing group of well-intentioned “mentors” who have had some minor business success but offer little to no value when advising companies interested in solving large problems. Make sure the mentors in an incubator’s network are actually qualified to help you out.

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