Startup incubators and accelerators are two types of programs that support new companies in their early stages of development through mentoring, networking, resources, and funding. We’ll explore the differences between the two and their pros and cons.
What is a Startup Incubator?
An incubator provides support in the very early stages of a startup, and they are designed for those in the beginning stages of product development, or even for those that only have a product idea.
Typical perks that they offer include mentoring, legal and tax help, co-working spaces, pitch practicing, and funding opportunities. Founders are expected to participate in the incubator program for usually at least a few months, although most last for a year or more.
Being in an incubator program is a lot like going to college. There is a lengthy application process, you must meet specific application criteria, and if accepted you will need to relocate for a considerable amount of time.
Incubator programs want to help founders develop a solid product idea and business model. An incubator program wants to help new businesses be profitable and successful. They also help startups to network with funding sources like angel investors.
Incubator programs are run by a whole bunch of different organizations, including non-profits and universities, as well as corporations, local development organizations, and venture capital firms.
Although some incubators may invest in your product, most incubators do not directly invest, and instead they will introduce you to potential investors. Either way, many will require equity in your company in exchange for the help and resources they are providing you.
Many incubators continue to support their graduates in various ways. One of the most well-known programs, Y Combinator, for example, offers free office space in San Francisco to all its graduates even after they leave the incubator program. They have an online platform just for graduates to connect with one another.
Startup accelerators provide similar mentorship and business support as incubators, but they target startups that are further along in the development process. Before applying to an accelerator, you should have a working business plan, a Minimum-Viable Product (MVP), and customers.
Although accelerators offer a lot of the same benefits as do incubators, the big difference is they are focused on helping you scale your startup instead of just helping you get started.
An accelerator provides you with resources and investments that are required to grow a startup, all in exchange for a sizable amount of equity in your young company.
The line between incubators and accelerators can become rather blurred, but in general accelerators are for further along businesses who already have generated sales and need to ramp up production.
Accelerator programs are usually much shorter in duration than startup incubators, and 3-6 months is typical for an accelerator program. They commonly offer a seed investment in exchange for equity stakes in your company. Accelerator funding is more likely to come from private organizations.
Which One is Right for You?
Accelerators and incubators target entrepreneurs in different stages of their business development.
Here are a few questions to ask yourself when deciding if you should apply to an accelerator or incubator program.
Are you still refining your actual product idea? Then go with an incubator.
Do you already have an MVP (minimum viable product)? Then you probably are far enough along to apply for an accelerator program, which is ideal for existing companies already poised for growth.
What are your funding needs? If you are ready for capital investment, then you should go for an accelerator. It’s common practice for accelerators to provide seed investments in exchange for equity in your company.
Do you need money and support to get your business off the ground? Then go with an incubator program.
What’s the timeline of your business? Are you looking for long term support, one to two years, to get your startup running properly? Then you should seek out an incubator program.
Are you already running a functioning business, but need help scaling up? Then you should apply for an accelerator program.
Choosing the Best Program
You want to thoroughly research any programs that you apply to. Picking an incubator or accelerator is a big decision since you will be devoting a lot of time and business equity in exchange for the expertise and resources provided.
Start off by listing all the benefits of each program. Do their resources match your needs? Do the advisors and or mentors have experience in your type of business?
This is especially true for hardware startups, which require very specialized knowledge.
What does the curriculum or weekly schedule look like? Are you able to meet the in-person training requirements? Can you manage the daily operations of your company alongside the daily obligations of a startup program?
Be sure that any program you apply for has experience in your specific industry. Obviously, as a hardware startup, you won’t apply to an incubator that specializes in restaurant concepts.
But you might be considering tech related programs where you should absolutely check to see how many successful hardware startups they have launched.
If a particular program has only funded software platforms, and never hardware, then you should keep looking for a better fit.
Keep in mind the vast differences between a software and hardware company. A company building an app doesn’t have to deal with producing much of anything physically. If your business includes hardware, you need to make sure that your mentoring team has experience outside of the digital or app world.
Some popular programs, like Y Combinator, accept pitches from every type of business imaginable. These accelerators have more applicants, and more competition. Other popular programs include Techstars and 500 Startups.
You may have better chances applying for programs that only fund hardware startups like your own. One such popular option is Hax which is a hardware incubator based in Shenzhen, China.
However, relocating to China is not a feasible option for most startup founders. Unfortunately, there are very few programs available anywhere specifically for hardware startups.
Incubator/Accelerator Track Record
Be sure to research what kind of track record a program has. Have they launched successful hardware companies that are similar to your own?
Be sure to talk to incubator graduates to learn about their experiences, good and bad. Ask them about their experience as an alumnus, and if they are still networking with other graduates or mentors.
Not all programs are created equal, so be clear on the costs and benefits of each program you consider.
Who Do They Select?
Accelerators and incubator programs are looking for innovative thinkers who can clearly communicate their product idea and describe the problem that it solves. So be straightforward and clear when describing your product.
Most programs are just as interested in the founder as the product idea. Of its application process, Y Combinator says, “we’re not looking for the sort of obedient, middle-of-the-road people that big companies tend to hire.”
But they are “looking for people who like to beat the system” which is why they ask all applicants this wild card question – “Please tell us about the time you most successfully hacked some (non-computer) system to your advantage.”
Of course, the entry requirements for an accelerator are more stringent than for an incubator, since you must show that you already have considerable traction with customers.
Be Ready to Give Away Equity
Most incubators and nearly all accelerators take an equity stake in your business in exchange for all their offered benefits. That’s how they make money – they invest upfront in promising business ideas with the hope of a good return on their investment.
The exceptions are incubator programs offered by non-profit organizations such as universities and government agencies.
The starting point, therefore, when participating in almost any incubator or accelerator, involves relinquishing equity in your company.
Giving away equity is something that most founders avoid at all costs. However, always remember it’s better to have a small piece of a big pie, than no pie at all.
That being said, I encourage you to get as far as you can and get as much traction as possible before you consider giving out equity in your company.
If funding is your only goal, then there are also various types of funding available that do not require giving away equity. Some of these no-equity funding options include manufacturer financing, purchase order financing, and invoice factoring.
Also, although the mentoring and networking aspects of an incubator or accelerator program can be extremely helpful, there are plenty of ways to get this expert mentoring that don’t require giving away part of your company.
Applicant Competition is Fierce
Competition amongst applicants is fierce. Most programs will require you to submit a detailed business plan.
With most programs, you need to stay, or relocate, to the city that is offering the program. If you apply in a city like San Francisco – a free office space is great, but can you afford that area’s residential rent?
You need to commit for a year or more for most incubator programs. The program will also have a strict schedule with trainings and commitments. Ask yourself if you have a year to devote to growing your business in this specific way and environment.
For most entrepreneurs, due to work and family requirements, it simply is not possible to relocate to another city for such a long period of time.
Being in an incubator or accelerator program is kind of like having a boss who is there to help you become successful.
If you participate in one you will be held accountable by someone other than yourself. The program is investing in your success, but that comes with expectations for your time and work. You need to honestly assess if this is the best work environment for you specifically.
Some people thrive under close supervision or with a Monday through Friday work schedule. Others do best when working on their own free time, without the constraints of an office setting and regular meetings, trainings, or mentorship sessions.
Be honest with yourself when assessing your preferred and most beneficial work environment.
Some of these perks don’t seem all that special in the post COVID-19 world where pretty much anything and everything can be accomplished online from home.
Websites like LegalZoom.com make applying for a business license easy to do on your own, and there is plenty of software for tracking expenses and filing your business taxes.
So, if you are self-motivated, and are the type of person who can figure out how to accomplish most tasks without someone watching over you, then you may not need an incubator program.
Some people might feel downright distracted by obligatory meetings, working dinners, meetups, and deadlines imposed on participants in these programs.
An accelerator program is different because they focus on helping you scale, and a big part of that is getting equity funding from professional investors.
How Much Do They Cost?
Be sure you properly assess the long-term cost of participation in an incubator or accelerator program. What type of loan terms are offered, or what percentage of equity in your company will you give up in exchange for the program benefits?
Does sacrificing this equity align with your long-term goals? Are you comfortable sacrificing this amount of money to achieve your long-term business goals?
For incubators especially, some entrepreneurs may decide that giving up equity is not worth mentoring and some free office space.
Are you already successfully working from a home office space? Or do you absolutely need a daily, in person schedule to stay on task?
Or can you find mentoring opportunities that don’t require you to relocate and give away equity in your business?
Do you work better virtually anyway? Thanks to Covid-19, pretty much everyone has experience working from home, and connecting via technologies like Zoom.
An in-person office setting may not be so appealing now that you have learned to do everything from home anyways due to the pandemic.
Many of these programs have transitioned to a completely virtual setting due to the Covid-19 pandemic.
Are you comfortable giving up equity for what may be a 100% online experience? Y Combinator, for example, announced that their summer 2022 session will be 100% online.
On the flip side, if a program has gone temporarily virtual, maybe it’s your only way to participate, since you cannot relocate under normal circumstances.
Location, Location, Location
Where you live, and where a program is located, is a big factor in deciding where to apply. Remember, being in a program is like going to college. You will have an in-person, weekly -if not daily – schedule to adhere to.
For many entrepreneurs, relocating is simply out of the question. If you don’t live in a city with a hardware incubator or accelerator program, and you are not able to relocate temporarily, then your options are quite limited.
For example, if you have school age kids, a full-time job and don’t live anywhere near a city with an incubator program, then don’t waste your time applying for a program that you can never realistically attend.
Traditional incubator and accelerator programs are definitely more appealing for young entrepreneurs who can easily decamp to a new city and spend all their free time building their business and networking with like-minded individuals while living out of their car.
Be honest about where you physically can work and about what type of worker you are. Are you self-motivated and stay on task without outside help? Or do you need a 9 to 5 schedule to stay on task and move forward.
If the expert mentoring, networking, and resources that you get inside an incubator sound appealing, but you have no realistic way to participate in person, then you should consider our Hardware Academy virtual incubator program. You get most of the benefits of a hardware incubator without the need to relocate or give away equity in your startup.
This article was written by Jessica Teel.
Other content you may like:
- Comparison of the Top 5 Startup Incubator and Accelerator Programs
- The Importance of Finding Advisors for Your Hardware Startup
- Lesson 2: The Strategic Way to Develop and Sell Your New Electronic Hardware Product
- 12 Ways to Fund Your Hardware Startup
- How to Get Investors and Co-Founders for Your Hardware Startup