What’s the difference between business incubators and seed accelerators? Which is more suitable for entrepreneurs to look at?
That startups fail is a fact of startup ecosystems. Most entrepreneurial ventures, 75 per cent in fact, fail within two to five years, according to a 2006 study. Startups fail when their firm’s value fall below the opportunity cost of staying in business. However, joining a seed accelerator or business incubator improves these odds considerably. They create a space to network, learn and launch a business, though operating in different ways.
Past research shows incubation reduced small business failure risks considerably. Comparatively, 66 per cent of new businesses survive at least two years, while 44 per cent survive at least four years, based on data from the USA’s Small Business Administration’s (SBA) Office of Advocacy in 2007.
Alpesh Patel, UKTIs Senior Dealmaker for South Asia, noted that most companies selected by UKTI are at least three years old, given 90 per cent of startups fold within three years. So which is the best launchpad for entrepreneurs to start their business? Both, incubator and accelerator, offer resources, guidance and opportunities, so what should an entrepreneur choose?
Accelerators and incubators compared
Entrepreneur blogs like Startup Owl and Your Capital Edge have compared accelerators and incubators, noting the different models and approaches. Both help grow nascent ventures. But incubators tend towards growing ventures by buffering them while they mature. Roland Turner, a Mentor at Singapore-based business accelerator JFDI.Asia (Joyful Frog Digital Incubator Asia) explained, “They’re different animals. An accelerator is a programme with specific amounts of time, designed to achieve specific goals. Incubation is a much broader sphere.”
Wong Meng Weng, Co-founder and Social Engineer at JFDI added, “The incubator model had been around for decades. They come from the era of the science park – very 20th century. I mean, a car park is where you put your car when you’re not using it. What does that make a science park? Anyway, co-working spaces have sort of taken over the incubation role. And ever since Y Combinator showed us how to factor out the common challenges of early-stage startups, advantages of scale mean we can teach entrepreneurship en mass, one cohort at a time. Entrepreneurship doesn’t have to be a lonely mystery anymore.”
The five key differences
Accelerators accelerate market interactions, forcing startup ventures to adapt quickly and learn within a constrained period. In practical terms, accelerators and incubators differ in five key ways: duration, business model, selection, cohort, and training and education.
Paul Bricault, Co-founder of Amplify, a Los Angeles accelerator, explained in a feature by Inc that, “An accelerator takes single-digit chunks of equity in externally developed ideas in return for small amounts of capital and mentorship. They’re generally truncated into a three to four month programme at the end of which the startups ‘graduate’.”
Comparatively, incubators enlist external management teams to oversee internally-developed idea, in order to nurture them over longer periods of time, with greater equity share than accelerators.
Business incubators tend towards hosting science-based enterprises (e.g. nanotechnology, biotechnology, cleantech), as well as engaging in enterprise development of non-technology firms. Many, if not most, participants are professionals who have had previous industry or sector experience.
Many incubators are non-profit organisations, in the US context, or are part of a university (e.g. NUS Enterprise) or larger institution, with institutional sponsors. In the North American context, average incubation duration is 33 months. Sponsors also happen to be large organisations.
Accelerators host ventures for three months on an average. Other aspects of accelerators are that their startup clients are generally software-oriented, with a focus on digital ventures, though some focus on hardware (e.g. HAXLR8R).
Their startups do not require significant immediate investment or proof-of-concept, with their demographic being youthful and mostly male. Business models are profit-oriented, with sponsors usually being serial entrepreneurs and investors. This is combined with intense mentorship, coaching and competitive selection.
William Aulet, Managing Director of MIT’s Martin Trust Centre for MIT Entrepreneurship, noted that stagnation is an issue, at least in MIT’s experience. He is involved with the running of MIT’s Global Founders’ Skills Accelerator (GFSA) and the incubator programme, Beehive Cooperative. Both programmes have dedicated workspaces, with programme participants building strong communities with people of similar calibre. The main difference is educational structure.
The GFSA puts teams through twice-weekly seminars, mentor meetups and monthly board meetings, with accountability for milestones established at the programmes’ beginning. By contrast, the Beehive Cooperative offered unstructured seminars, with participants needing to take the initiative in meeting mentors.
The expectation was that both groups would make good progress, due to extensive peer support, combined with dedicated workspace allowing them to focus. The overall success rate was higher for accelerator teams than the incubated ones, as incubator graduates’ progress and drive to achieve “escape velocity” — the MIT term for moving out of the “MIT bubble” and establishing a standalone company — was lower.
It was found that teams didn’t wish to leave the community. Strong social bonds and support had positive effects, but with the negative effect of creating a comfortable environment. Fortunately, MIT had two forcing functions – participants were close to graduating, and the programme space was temporary.
Accelerator graduates were subject to greater accountability, had to meet milestones and sustain specific performance metrics. They operated under constraints and underwent intense coaching and mentoring. They were forced to get a fit product into the market by the forcing functions of their programme.
Alena Arens, who manages strategic partnerships for JFDI explained, “Accelerators have three months to make or break startups. Either you figure out a good business model or you fail, so you don’t waste time. Incubators can create zombie companies without viable business models.”
Two things determine business survival; validated market opportunities with paying customers and a product or service addressing that opportunity. Incubators and accelerators serve specific roles in startup ecosystems, with their own costs and benefits. It falls to entrepreneurs to decide which one best serves their needs.
Incubators provide greater financial resources, time and buffering. Entrepreneurs here need to take initiative and be disciplined about networking, learning and developing, given the lack of formal structure. Accelerators are short-term, focussed, highly-structured and intense. Entrepreneurs here need to be committed, disciplined and have the benefit of structured environments, external accountability and mentorship.
Forcing functions are required to grow a business and force entrepreneurs out of their comfort zone, and into the market. Time is a finite commodity, and it falls to entrepreneurs to make the most of the time and the resources available to them.