There is a big difference between startup incubators and startup accelerators. Both are important in any innovation hub, as are angel investors, and early stage venture capitalists. The differences are often not well-understood, and they are worth pointing out here.

Incubators have been around since the 1960’s. The Batavia Industrial Center, established in 1959 in Batavia, New York, is sometimes cited as being the first modern business incubator.

It provided short-term leases, shared office supplies and equipment, business advice, secretarial services (this was the 1950s), and assistance in getting a line of credit from the local bank. This has been the starting model for business incubators hence forth (minus the line of credit from a bank).

Today, government economic development agencies may also get involved in promoting incubators within their jurisdictions, because they are a potential source of new, high-growth businesses for the local economy. In localities where anchor companies have left the economy, repurposing abandoned buildings and land to create a startup incubator is a textbook practice.

Incubators are still physical places where startups can go to seek work space and professional services.

While incubators still exist, accelerators are becoming much more significant to the startup company and to the entrepreneur.

The first two accelerators are also the best known: Y Combinator, founded in 2005, and Techstars, founded in 2006. Their success spawned an increasing number of accelerators worldwide.

Startup accelerators support early-stage, growth-driven companies through education, mentorship, access to early customers, and financing.

The specific characteristics of accelerators are that they take in a cohort of companies for a fixed term, provide mentorship, and culminate in a “demo day” for investors.

Ian Hathaway provides a good description of what startup accelerators do in this paper in the March 2016 edition Harvard Business Review, plus a more detailed report in this paper from the Brookings Institution.

This table summarizes the key features that differ among angel investors, incubators, and accelerators.

Table 1: Comparison of incubators and accelerators, by Ian Hathaway

Confusion can arise because both incubators and accelerators can assume features of the other, creating a hybrid model. The clarity comes to the entrepreneur by knowing what the startup is paying for. Is it for rents (it’s an incubator), or for rapidly advancing the business plan materially (it’s an accelerator)?

The accelerator experience

All accelerators are different, but these are the common features.

1) The application is competitive

Among the most popular accelerators, the acceptance rate is 1% (Y Combinator) and 3% (Techstars). Like top universities and business schools, just getting accepted serves as a screen. Graduating from a top tier accelerator gets the attention of certain investors, and the accelerator provides access to top tier investors.

2) Startups entering the program all start together in a cohort or class

The program lasts about 6 months. Entrepreneurs need to be physically on-site. The program is a period of intense and immersive education directly focusing on the performance of each startup. Each company is challenged on their particular business model, marketing, product design, project planning, and prototyping. Finding contacts, doing a target number of cold calls, setting up agreements, building the prototype are all expected to progress materially week-to-week. Pitches are refined continuously and the entrepreneur’s presenting style is pushed to project confidence and professionalism. The program also includes relevant business concepts and industry-specific topics.

3) The accelerator provides access

Many accelerators have an ability to provide some type of access during the program. This can be to senior level executives who would be decision-makers in buying or partnering, or to key distributors, or to special expertise, or to special resources. It is important to find out what special access the accelerator offers.

4) There is a demo day

This is the day when each CEO or founder presents the company in a 10 to 15 minute pitch to an audience of investors and relevant industry people.

5) Investment by the accelerator (from some accelerators)

Companies graduating from a top tier accelerator usually receive an investment from the accelerator. This is a seed stage investment of about $100,000 to $200,000 depending on the industry and accelerator, in return for a certain percent of future equity in the company. This means the company issues convertible debt or contractually agrees to allow the accelerator to buy shares in the future using a predetermined mechanism.

The impact of accelerators on early stage financing

A noteworthy trend in the U.S. is that the proportion of startups that get a Series A investment round, who have graduated from an accelerator, has been increasing over the last twelve years. (Figure 1)

In 2007, 6% of Series A investments went to startups that came out of an accelerator.

In 2015, one third of Series A investments go to startups that come out of an accelerator, according to PitchBook.

Figure 1. Click to expand.

Sean O’Sullivan, Princeton-based founder of SOSV, a VC firm, believes that in the next few years, half of Series A investments will go to startups that come out of an accelerator.

For the early stage company and entrepreneur, the opportunity to raise seed stage and early stage financing is a motive for joining an accelerator program that is not available through an incubator.

Different examples of accelerators

O’Sullivan believes that accelerators are critical for successful startups and has modeled his VC firm along these lines. SOSV operates a series of accelerators worldwide. This includes two life science accelerators in San Francisco USA and Cork Ireland, a food accelerator in New York USA, and a hardware accelerator in Shenzhen China.

By going deep into verticals such as life sciences, food, and hardware, the SOSV accelerators can provide these start-ups with some of the infrastructure that would otherwise be too costly for them to finance on their own. Case in point is their hardware accelerator in Shenzhen. Shenzhen is the world’s hi-tech manufacturing hub where 90% of the world’s consumer electronics are made. Their accelerator taps into this expertise and manufacturing in the area by locating their design and prototyping facility in Shenzhen.

For biotech startups , SOSV’s accelerators in San Francisco and Cork have fully furnished facilities that would otherwise be too costly for an early stage company to afford.

How successful is this model for SOSV? According to Sean, SOSV is the #2 seed investor worldwide in terms of volume. While invested dollars is not large, they invest in a lot of companies: about $50 million a year, into about 40 companies. They are connected to well known VC’s such as Sequoia and Kleiner Perkins who have invested up to $250 million per year into the graduating cohorts from SOSV’s accelerators. An interesting fact is that 11% of Kickstarter products funded over $1 million come from SOSV-backed startups. This demonstrates one of the approaches of its accelerators: to get prototypes developed fast.

The Texas Medical Center accelerator (TMCx) in Houston USA specializes in health and medical technology startup companies. Texas Medical Center (TMC) is the largest medical complex in the world. It covers a 2.1 square mile high density medical district with over sixty medical institutions. The district hosts 10 million patient encounters annually, and has a gross domestic product of US$ 25 billion. The value add for startups is access to these institutions for pilot studies, patient and customer feedback, partnerships, and first sales.

In comparison to TMCx, DreamIt ventures is based in Philadelphia USA. It started as a health-tech-focused venture firm and accelerator and has been highly successful. Philadelphia has an esteemed and significant health care hub, though not as large as that offered by TMCx. The nuances responsible for DreamIt’s competitive success over TMCx has been their accelerator program and the access they got for their cohort companies. However, accelerators are also competitive against each other. I suspect competition from TMCx and other accelerators has been responsible for DreamIt’s more recent strategic decision to expand into the urban tech and secure tech spaces.

The above examples show that accelerators or accelerator programs tend to specialize in specific industries. This is important to get industry-specific mentoring and to tap the right networks.

The most general of accelerators that I know is Entrepreneurs Roundtable Accelerator (ERA) in New York, but even this is focused on NYC-centric industries.

ERA runs a 4-month program in a co-working space. Cohort companies have access to over 800 mentors with expertise in marketing, customer acquisition, sales, and other functions common to New York City-based industries. Companies also have the opportunity to lease desks in the co-working space after graduating. This accelerator assumes features of an incubator in a hybrid model.

An accelerator is an expensive operating model. Since accelerators are themselves a business, they need to reach a scale of profitability and growth. A common practice is for these accelerators to sell their program and service to other innovation hubs. Hence we see these accelerators expanding their brand to other cities and even to other countries.

Here is a list of accelerators worldwide that was surveyed in 2013 (appendix 2 in the link): Small Business Administration report.

Perspective from an investor

I have been an investor for the corporate venture arm of a large global company. We invest in the health tech space at the seed stage. Let’s say we invest in 3 to 5 companies a year. We need to be looking at over 500 investment opportunities a year. That’s over ten per week.

With such daunting metrics, deal flow is critical. In-bound investment opportunities of high quality are essential to an investor’s success.

In practice, about half of a fund’s portfolio of investments come from entrepreneurs and executives within an investor’s network. This is general across the VC community. This percentage is even higher as the fund is more specialized. Why is this?

For a corporate investor such as us, we have a very specific focus on startups solving certain problems in our industry. This usually means that only those who have worked in the industry are aware of the problem statement or unmet need and have developed a perspective and a solution for their venture. The outsider may exist, but it is rare and difficult to catch in any deal flow process with finite resources. As the previous post on networks show, investors need to get into those networks comprised of people with the right experience.

In practice, about a quarter of a fund’s portfolio of investments come from other investors. This is the channel that includes accelerators. For the entrepreneur and startup company, a top tier accelerator program is hence a means of accessing early stage investors.

The demo day is an effective use of time in seeing a set of prescreened, investment-ready opportunities. If I have a good relationship with the accelerator, I may even hear about the company before demo day and have an opportunity to work with that team during the program.

The rest of a fund’s portfolio of investments come from other sources, which may include ad hoc connections made at a business incubator.

The other advantage of an accelerator: boot camp for your startup

An accelerator program is not just about access to financing. For a young entrepreneur with a startup company, accelerators can provide the boot camp that is essential to young entrepreneurs with limited business experience. Years of learning are compressed into a few months, and entrepreneurs are pushed beyond their comfort zone all through that time.

I can endorse the need for this concept first hand.

Two years ago, I worked with four startup teams just refining their pitch deck week after week. It takes a lot of work to nail down the salient points in a short presentation that captures attention, connects the dots in an easy-to-understand logical sequence, and makes business sense.

Many years ago, I took a course in stand-up comedy. Each week, we came to the class with new material. We told our story, and then our instructor dissected the story line-by-line, word-by-word. It did not feel like a comedy class at all. It reminded me of high school grammar class. It had to be easy to understand. You had to choose the right word in the right order. The sequence of the story was changed again and again until it made sense, and until it led to the final punch line. You think a certain idea is brilliant to communicate, only to swallow your pride by accepting that the audience cannot connect with it, or they don’t care. It took weeks to work out a single, one-minute comedy sequence.

It’s the same for a good pitch. Where can you get that kind of training? You need a good mentor in some kind of accelerator. Some incubators may offer this type of mentoring, but they are offered in preset course times or paid à la carte through a service provider.

It is important to point out that the pitch is just a very small part of what a good accelerator helps to improve.

Here is another example. I had a startup company where it was time to get out there and do hard core business development. The VP of business development would ideally be a “seasoned” executive, but that’s rarely possible for an early stage company. The startup person has a Ph.D. in the relevant area, and he had also started up his own company prior, but he still needs a lot of guidance on all the different aspects of the job, and to be pushed beyond his comfort zone to get out there. Someone needs to provide this on-the-job training and coaching and motivating, putting together marketing materials, creating cold call lists, doing account management, and interacting with strong industry context. When new hires join a large corporation, there are plenty of experienced people to give industry-relevant coaching. This industry relevant coaching is not available to a start-up entrepreneur. These are on-the-job skills that a good accelerator can instill in its companies.

Final observations

1) Not all entrepreneurs need an accelerator program. I met one excellent entrepreneur who went through an accelerator and said the accelerator program was helpful, but it did not make a big impact. What was helpful was the cash investment he got from the accelerator, which he really needed at the time, to hire a key new person. In this way, the accelerator did help advance his business plan. Also, the accelerator did introduce me to him and we invested in his company!

2) Not all accelerators are helpful. There is one accelerator whose term sheet with their startup company was not made known to other investors in the seed round. This can cause problems later if we see some surprising clauses in the contract that the accelerator made with the startup company (which was set up as a prior round)  before we invested in the current round. At this early stage, detailed business due diligence is not always very thorough. We caught it, but we heard that this particular accelerator was known to do this. This may not be so ideal for the startup company. Y Combinator pioneered the “SAFE” to avoid this type of issue, but that is not a magic bullet as explained here. Every accelerator has its pros and cons. It is important to do significant diligence on the program and to interview past cohorts to determine what is right for you.

3) I have been noticing that some startup companies have been cycling through more than one accelerator program. They appear in one, then I see them again 18 months later in another one. While this is not a good sign to me, some of these companies did eventually close their Series A round. Persistence is a prime trait of a good entrepreneur!

One final point:

In an earlier post about Flagship Pioneering, I made the point that it is important to acknowledge that the nature of venture investing is changing. The speed and intense competition with which technologies are developed today requires much larger amounts of early stage investment.

One new group of VC’s, exemplified by Flagship Pioneering, are active venture capital firms that not just invest, but they conceive, create, and resource new ventures. They execute very fast and with very strong conviction.

This post introduces another group of VC’s, exemplified by SOSV, which operate accelerators worldwide to enable early stage entrepreneurs to advance their business plan very fast.

In this model of accelerator-based VC’s, even nonprofit organizations such as Texas Medical Center have set up an accelerator and venture arm as a way to enable innovation and transformation in healthcare.

Both of these new forms of venture investing exemplify the competitive nature, at a global level, of how investors are capturing early stage technologies with industry dominating potential.

They are changing the mindset of early stage investing from that of being high risk to being enablers of transformational change in the world.

Can you tell me who else is doing this?

The difference between startup incubators and accelerators
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