There is great interest in venture creation these days and many are wondering about the opportunities and differences between accelerators and incubators. Let me share some recent history and some specific comparisons from my direct experience.
The new generation of accelerators was spurred on by the USA President’s “Start Up America” initiative a few years ago when he called upon Michael Dell, the Kaufman Foundation, TechStars and others, and asked them to replicating their efforts across the country. The goal was to stimulate start-ups to help the economy based on the understanding that two-thirds of all new jobs in the USA are created by small businesses.
Other players, the Angels and Venture Capitalists (VCs), who earn money from financing successful novel and risky technologies and business models, view accelerator programs as an answer to addressing the constant challenge of the VC system – which is how to find and effectively evaluate the most innovative and promising teams and technologies.
In places like New York City, Mayor Bloomberg and the Angel and VC communities support the accelerator concept as one method to ramp up innovation across NYC’s fashion, media, finance and other sectors and to position the City to compete head to head with the long standing venture creation ecosystems of Silicon Valley, CA and Boston, MA.
In the past 18 months the buzz and momentum for accelerator programs in NYC and across the country has exploded – with some franchises expanding globally. It is an extremely exciting era – again!
So now, here is my view of the key differences between Accelerators and Incubators:
- Mostly private, profit-driven, and private equity/venture capital owned
- Offer short term programs of about 90 days
- Each program has few participants (typically 10 to 12 teams/companies)
- A few participants may have funding before they start the program, but most participants do not have funding when they start
- Offer cash (equity) for ownership in amounts of between US$6,000 to US$30,000 for equity ownership of between 4% to 10%
- Most suitable for IT, web, mobile businesses; emphasis is on building an app or prototype during the program; not necessarily to build a full business model
- Programs end with a demo day (the big test)
- After demo day – participants are out in the street (since only temporary space provided) but some programs continue to support alumni by introductions and with an accelerator alumni network – though activity levels and value vary by organization
- Most accelerators have a few lead service providers (sponsors) along with the sponsoring angels/VCS who have first pick of the talent and ventures
- Most have a list of mentors prepared by the Accelerator– who may or may not be investors, and who are matched up and then accepted, or not, by each participating venture based on fit, etc.
- Mentors are usually not compensated during the accelerator program
- Accelerators are criticized by some entrepreneurs for low valuation (example: $20,000 for 10% share = $200, 000 valuation – post money)
- Most are university or government agency run* (though some private sector models exist)
- Driver is economic development by Economic Development Agencies (for job creation benefit) or else technology transfer driven by Universities (for licensing revenue benefit) and the federal government agencies (about 700 in the US Federal Lab Consortium for Tech Transfer)
- Allow “slow development” incubation, and multi-year approach for technology commercialization
- EDA and University models usually offer a three (3) year tenancy/lease – though some tenants stay longer, if vacancy at the location, progress or other factors
- Usually suitable for highly engineered product or technology that requires long term R&D (5 to 20 years) and are capital intensive (i.e. life sciences, medical devices, engineered product or system, energy solution, etc.)
- Services and programs are typically provided by outside service providers on behalf of the incubator– some on paid basis, and some on pro bono basis
- Offer some introductions and guidance for transition from incubator to new location
- Criticized for being real estate driven
In my opinion the verdict is out about which model is the most successful for creating venture value. I predict a new model will emerge soon to displace both incubators and accelerators as they now exist. Until then I encourage entrepreneurs and investors to continue the beneficial community building through networking, meetups, incubator activities and accelerator programs. Through such cross-pollination we will inevitably create the next iteration.
I would love to hear your observations in the comments section.
Onward and upward!
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About the Author
Sylvester (Syl) Di Diego, Managing Partner, Strategy Dynamix, LLC is a venture consultant He has assisted hundreds of entrepreneurs and investors to successfully navigate the venture growth lifecycle. Syl also provides services through Incubators and Accelerators to their tenants and participants, managed an incubator fund, worked in an accelerator and is active forming new accelerators. Learn more about Syl and connect with him at http://www.strategydynamix.com/aboutus/executives.php.