Many founders dream of weighing up incubators vs accelerators as an option for their start-ups. But when the opportunity arises, it can morph into a perplexing and time-consuming challenge. All too often the terms incubators and accelerators are used interchangeably. This can leave founders unsure of the important differences between incubators and accelerators and wondering what each organisation offers their business. So we’re taking a look at what incubators and accelerators are and how they can benefit early-stage ventures. Equipped with this information, you’ll be able to better identify the fit of incubators and accelerators for your company. And how joining either one of these organisations could help or hinder your start-up’s capital stack.
Incubators and accelerators are both designed to help start-ups grow. While they certainly share common features, such as access to mentors and co-working spaces, they also have unique features that set them apart. Broadly speaking, incubators help entrepreneurs hone concepts and build a business from square one, while accelerators give early-stage businesses with potential the resources to fast-track their growth trajectories.
What is an incubator?
Start-up incubators focus on innovation and work with very early-stage businesses. They provide resources in the form of mentorship, office space and access to networks so founders can shape disruptive ideas, establish product/market fit and develop business plans. Incubator enrolments are typically flexible and open-ended. Start-ups can stay in incubators for as long as they reasonably need to transition into a growth-ready venture. So a start-up’s tenure with an Incubator can range from months to years. Since innovation comes in all shapes and sizes, incubators usually accept enrolments from a wide range of nascent businesses. But some specialise in specific verticals, for example, Radium Capital’s start-up incubator partner Cicada Innovations focuses on deep tech. Incubators can operate on a not-for-profit or for-profit basis and have affiliations with entities, such as universities and government bodies. Notably, most incubators don’t provide funding or take equity shares in the businesses they support.
What is an accelerator?
Start-up accelerators work with early-stage ventures that already have their product/fit, business model and founding team in place. Crucially, accelerators seek start-ups that have an MVP and the potential for strong, short-term growth. In exchange, accelerators offer these promising early-stage ventures access to intense mentorship, business partners and investors such as Venture Capitalists. Accelerators also tend to provide start-ups with a modest amount of seed funding to help fast-track their growth in exchange for a small amount of equity. Unlike incubators, accelerators work to a fixed time window, ranging between three and six months. During this period, they compress in a few months what would take the start-up founding team two or three years to accomplish on their own. The end goal of accelerators is to get promising start-ups ready to scale up and attract investor capital. Accelerators can be publicly-owned and funded, for example, the Melbourne Accelerator Program or privately funded entities such as Blue Chilli, based in Sydney.
Upsides and downsides
The stage your start-up has reached is the determining factor for whether an incubator or accelerator is best for your venture. Let’s start by considering the main advantages and disadvantages of incubators.
Advantages of incubators
- Help start-ups and entrepreneurs find the product/market fit for innovative concepts and disruptive ideas.
- Provide mentorship to help start-ups identify a business model and develop a business plan.
- Joining an incubator is often easier than joining an accelerator because they accept a wider range of companies and don’t fund or take equity shares in them.
- Their flexible, open-ended timelines allow businesses to remain in the incubator for months or years while they fine-tune their concept.
- Provide start-ups with opportunities to access networks and connect with stakeholders that could help them succeed.
Disadvantages of incubators
- Funding and investment capital are usually not offered.
- A co-working environment could be unsuitable or distracting for some businesses and founders.
- Not suitable for businesses that already have an MVP and are ready to scale up.
Key takeaway: If you’re still fine-tuning your product/market fit, business model and founding team, then an incubator could be a great option. The incubator’s mentorship and networks will help guide you and your venture through the initial stages of the start-up process.
Let’s turn to the pluses and minuses of accelerators.
Advantages of accelerators
- Accelerators offer an intense fast-track to help businesses prepare to take on investor capital and begin scaling up.
- Start-ups on accelerator programs can receive $20,000 – $80,000 in funding to help them develop their products or grow their teams.
- Compared with their non-accelerated counterparts, accelerated start-ups are more likely to have successful Series A, B, C and D funding rounds.¹
Disadvantages of accelerators
- High barriers to entry — accelerators recruit for accelerator programs in cohorts and only accept a small percentage of start-ups that apply.
- Start-ups usually give up 5-10 % equity share in their business to join an accelerator and receive seed funding.
- Accelerator programs may not meet a start-up’s needs, for example, the funding may not be sufficient, or an accelerator’s timelines may be too short for some start-ups.
- Not suitable for solo founders or businesses that haven’t developed a solid MVP yet.
Key takeaway: If you have a robust MVP and founding team but are short on the capital you need to scale, consider an accelerator program for your start-up.
Incubators, accelerators and your start-up’s capital stack
Start-ups often overlook accelerators as a funding source, along with the non-capital resources and support both accelerators and incubators offer different types of early-stage businesses. If you have a strong proof of concept and founding team to match, you may want to consider accelerator funding as part of a diverse capital stack and funding strategy for your start-up. Whether you build accelerator funding into your capital stack or not, if you’re an innovation business undertaking research and development, don’t overlook the non-dilutionary funding R&D financing offers. R&D finance, including Radium Advances, complements debt and equity capital and can be used in combination with both. Radium Advances offer early access to your next R&D tax refund. So if you want to increase your R&D budget and accelerate your speed to market without giving up equity or limiting your borrowing power, contact our R&D finance specialists today.
¹ Medium (2017) Yannick: Graduation Rates for Accelerated Startups [online] available at: https://medium.com/@xky/graduation-rates-for-accelerated-startups-78a1898d57f5