Recently, the NSW government announced its new offer for $190 million Jobs for NSW. As part of that, I noticed a growing trend to use the terms ‘incubator’ and ‘accelerator’ interchangeably. Although I can understand why people do get them confused, I recently presented to senior members of major Australian and New Zealand universities on the distinct differences between the programs, as well as some tips on how to measure their success. Here are the key points from that presentation.
The startup lifecycle
Before you can go deep into understanding the variances between an incubator and an accelerator, it is important to understand the lifecycle that a startup founder tends to go through. I’m a big fan of the Startup Commons diagram listed below:
At the early Formation stages, there is normally one person with an idea – hunting around to find Problem/Solution Fit (do people have the problem and how could you solve it?) There is also an element of identifying and recruiting the missing team members they need to build out their initial idea.
Next we look at the Validation stage where Lean Startup methodologies squarely fit. This is where the focus largely relies on locking in Product/Market Fit (building the right product for the right customer.)
Only once the Formation and Validation stages have been completed is a startup ready for growth or to Scale Up. This is when they take the early traction they have to date and look at applying it in new markets or geographies to reach rapid scale. From then on it’s all world domination!
So with those stages in mind, let’s look at the differences between an incubator and an accelerator…
The first concept of a business incubator was in the 1950s in New York. Since then the idea has spread globally and there are over 7000 of them worldwide. Often they are indistinguishable from a co-working space – except you know it will be filled with other startup founders!
Some key aspects:
- Low cost rental shared space and admin assistance
- Not time based (stay as long as you need/lease allows!)
- No set start/end date
- Often based around a theme (such as Women in Tech, Fashion, Manufacturing)
- Strong community element, often guest speaker sessions (unstructured)
- Dependent on mentors (often volunteers, including CEOs giving back)
What are the benefits of being located in an incubator?
- Being selected is often seen as an element of validation of your idea
- Sharing the workspaces means reduced outgoings for rent, services etc.
- Shared learnings from other founders who either are going through the same challenges or have been through it before and can share their stories
- Connections to industry mentors, investors and guest speakers
- The incubator can often provide a pre-qualified deal flow as the incubator has done some element of early due diligence on the founder as part of the selection criteria.
- They can help many founders across varying challenges. This often suits ‘Entrepreneur in Residence’ style roles.
As incubator startup spaces aren’t new, there has been a large amount of research into what makes a good incubator space. Researches agree on several key components:
- Selection process for tenants
- Strong community support
- Professional/admin support
- Tie to a university
- Strong entrepreneurial alumni & connections
- Connections to industry
- Passionate, entrepreneurial staff
- Risk friendly/fail friendly ecosystem
Considering those key elements, an incubator works well if you have space, mentors, community and ties to a strategic goal.
It particularly suits long-term projects that will spend months/years in the early Formation & somewhat into the Validation stages of the startup lifecycle.
But what happens when you need to get to Product/Market Fit sooner? When 3 years is too long to prove that people want what the startup is trying to create? In tech startups in particular, 3 years is a really long time. What happens when you want to fast track the learnings to fail fast, rapidly experiment and scale globally?
That is when you need to Accelerate a business.
In 2005, Paul Graham launched Y Combinator, probably the most popular and certainly one of the most prolific startup accelerator programs.
Y Combinator’s origin, like many startups’ origin stories, was born from solving a different challenge – they wanted to do seed funding with standardised terms. What they found was that funding startups in a bunch, instead of one at a time, was a much better way to support, grow and fund startups.
As of 2016, Y Combinator has invested in ~940 companies including Dropbox, Airbnb, Coinbase, Stripe, Reddit, Zenefits, BuildZoom, Instacart, Twitch.tv, Machine Zone, Weebly, and Chinese startup Raven Tech, with the combined market capitalisation of YC companies at over $65B.
So what does an accelerator program look like?
Accelerators are specifically designed programs to accelerate a startup success (or failure.) The key things that differentiate an accelerator program from an incubator are:
- Highly competitive application process
- It is a structured program, normally 3-6 months in duration with a focus on teaching the participants (called a cohort) business skills and product management skills. There tends to be a very heavy focus on Lean Validation
- There is investment for equity taken. In comparison to most incubators, in an accelerator you give up equity in your business for a small cash injection. The cash is meant to give you runway to focus on your startup during the accelerator program
- There is a demo day or graduation. A chance to present your learnings to mentors, investors, advisors, alumni and your fellow cohort members
Accelerators are predominantly focused on helping teams in the validation stage.
What are the benefits of being located in an accelerator?
- Validation from being accepted – particularly into the high profile accelerators
- Some cash to help you get up and running, and focus on your startup
- Shared learnings from other founders who are going through the same challenges at the same time
- Intense mentoring support
- Tight deadlines to drive increased performance and focus
- Connections to high profile industry mentors, investors and guest speakers
- An accelerator is seen as a source of qualified deal flow. The accelerator has done a lot of the work in the pre-selection but also throughout the program
- An interesting place to scout for new technologies and trends
- Can focus on higher quality founders, and scale their advisory services from one to many
Do accelerators work?
Stats to date say YES!
- 64% of startups survive more than 5 years (in comparison to the 90% of startups that fail in the wild!)
- 35% are funded more than 750K within months of leaving the program
BlueChilli is interesting because we have both – an accelerator program (called the 156) and we also have incubator spaces in Sydney, Melbourne and Brisbane.
We also have a digital agency and a venture arm, but let’s talk about how they are different another time.