Startups V: Business incubators and accelerators … which one does your startup need?
In general, the terms “accelerator” and “incubator” are used synonymously, although they refer to different concepts with distinct purposes and processes. In order to be able to understand the way in which an incubator or accelerator can contribute to the growth, development or promotion of a startup, we must first define and distinguish the two concepts, by detailing their most important aspects and then listing criteria which we consider useful when it comes to choosing between the two.
- Incubators provide support, advice and/or resources to projects that have still to get off the ground or which are at an initial stage. Put simply, it is where projects are “created”. Incubators can be involved through the provision of specialist advice, training services and functional infrastructure (such as office space, meeting rooms, office materials, internet connections, call center and correspondence services, among others).
The basic characteristic of an incubator is its appearance at a very early stage of the venture, cooperating in aspects such as the formation of the company, the validation of the product or service. It also provides a startup with a physical space (these tend to be open-plan areas where the different entrepreneurs share the same space), generating an ecosystem for the commencement of operations of the startup.
Unlike accelerators, as we will explain below, incubators do not, in principle, make any contribution to the capital stock of the startup, nor do they form part of the project as a partner and/or investor. These programs exist for the purposes of improving the alternatives available for startups to pursue their business.
- Accelerators, meanwhile, basically seek to accelerate the development of the project in question, in its startup phase (see post Startups III: Alternative financing channels (Part One)). Accelerators offer different types of acceleration programs and methodologies in order to optimize the startup’s potential and boost its performance.
It can be seen that accelerators act at slightly more advanced stages compared to incubators, with companies that have already been set up and that show growth potential, which accelerators help to reach a higher target level.
The main difference is that accelerators typically invest seed capital in exchange for a variable percentage of the value of the company in proportion to their investment.
In general terms, accelerators look for projects that are already off the ground, with specific characteristics (high growth potential, high returns on investment, high scalability) in order to expedite the project and foster its growth in a shorter time. In order words, accelerators seek to speed up the growth engine of the startup.
Having indicated the differences between incubators and accelerators, when it comes to making the right choice between one or the other, the situation and circumstances of each startup must be analyzed. Set out below are some points that may serve as a reference when choosing between the two options:
- Stage of the project. An incubator is recommended if the project is at a preliminary stage prior to the commencement of operations with limited access to resources. On the other hand, if the startup is at a more advanced stage or the product and/or service has been validated but is still in the start-up phase, an accelerator is recommended, since it will help to boost its development.
- Needs of the project. If what the project needs is a suitable place in which to commence its operations with training programs and technical and professional advice, then an incubator is the best option. However, if what is needed is to boost the project in order to meet new targets within the operations already commenced, with the support of development and fostering programs and methodologies, an accelerator is the right choice.
- Financing needs. Bearing in mind that accelerators tend to invest in the capital of the startup, this is the best option if seed capital investment is required.
In short, both accelerators and incubators can be options for the commencement, development or promotion of the project, depending on the needs of the startup at the time. Making the right decision between these options can be key to the success of the project. In the words of Peter Drucker: “Whenever you see a successful business, someone once made a courageous decision.”
Garrigues Corporate/Commercial Law Department