Accelerators and Incubators

Accelerators and incubators have rapidly gained momentum over the past decade. Yet, despite the growing role that these new entrants play in the journey of early-stage companies, their features and value remain in part a black box.

Accelerators

Accelerators, put simply, are boot camps for start-ups.  They can be thought of as a start-up school, on a super-quick timeframe — often a three-month program with fixed start and end dates designed to get a group of startups from a nascent idea stage to a point where investors will be interested to fund them — with education, introductions, and funding provided in exchange for the accelerator taking a small percentage of equity.

Beginning with a highly competitive application process (notable accelerators accept as few as 1-3% of applications), accelerators enroll a new cohort of companies for each session.  Y Combinator’s most recently cohort was 68 companies while TechStars tends to onboard smaller batches of 10-15 companies.

With many companies going through the process at once, each can take advantage of peer support, networking, and feedback potential.  The accelerator programs themselves include educational components, often covering a range of aspects of running and growing a startup, as well as mentorship from industry professionals and the accelerator leadership.

Accelerators structure themselves around a “demo day” at the end of the session — a pitch event where accredited individual investors and venture capitalists will gather together and each company will have a chance to convince them to invest.  In leading up to demo day, there is a heavy emphasis on the pitch book and the company’s overall messaging.  The demo day itself is a pressure-packed chance for startups to meet the investors who can make or break their business. Y Combinator hosts two demo days annually with over 800 spectators each while TechStars hosts five demo days annually – one at each of its locations – and draws more than 500 spectators.

As the accelerator trend has expanded beyond the early entrants like Y Combinator and TechStars (started in 2005 and 2006, respectively), industry-specific accelerators have emerged, such as Imagine K12 (education), RockHealth (healthcare), Tech Wildcatters (business-to-business), Heavybit (big data), and Highway1 (hardware), as well as university-based accelerators at Stanford (StartX), Berkeley (Skydeck) and other schools.

[su_heading size=”14″ class=”.home .page-header “]“The exact number is unknown, but f6s.com, a website that provides services to accelerators and similar startup programmes, lists more than 2,000 worldwide. Some have already become big brands, such as Y Combinator, the first accelerator, founded in 2005. Others have set up international networks, such as TechStars and Startupbootcamp. Yet others are sponsored by governments (Startup Chile, Startup Wise Guys in Estonia and Oasis500 in Jordan) or big companies. Telefónica, a telecoms giant, operates a chain of 14 “academies” worldwide. Microsoft, too, is building a chain.”The Economist, January 2014[/su_heading]

While the accelerator phenomenon has taken off, it is challenging to assess the value of these programs. Data is limited due to both the nature of these lean and privately held organizations as well as the short time horizon that many have been in existence. Researchers across the industry are attempting to overcome these hurdles.

Table I

Professors Yael Hochberg of Massachusetts Institute of Technology and Susan Cohen of the University of Richmond have developed the Seed Accelerator Rankings Project based on a propriety database that covers program features, subsequent financings/valuations and exits, and interviews with participants and investors. In 2013, three accelerators – Y Combinator, TechStars, and AngelPad – were awarded gold status.

An analysis of all companies included in the 2012 Seed Accelerator Rankings shows that 41% of graduates – although there is a wide range – received subsequent financing of $350,000 or more within one year of graduation (see Table I) and roughly 90% of companies Hochberg and Cohen surveyed said they would repeat the accelerator experience. Exit information is challenging to assess as the average accelerator is only 3.1 years old.

Another notable database, Seed-DB, uses the CrunchBase API to provide up-to-date information on accelerators and the companies that have gone through their programs (see Table II, caveats of crowdsourced data apply). In terms of total exit value and average funding, Y Combinator, AngelPad, and TechStars once again take the lead. 500 Startups and Seedcamp join the top rankings when looking at total number of companies funded.

Table II

A quick look at Y Combinator – the oldest and arguably most successful accelerator – shows that of the 649 startups it has funded, 75 have experienced exits (for a total exit value of $1.3 billion) and 85 are confirmed dead. The remaining 489 are either self-sustaining or on path to a potential exit. Notable companies, such as Dropbox, AirBnb, and Stripe, have had their start at Y Combinator (see Table III, again caveats of crowdsourced data apply).

Table III

Thus, while the jury is still out, accelerators – at least the top ones – are funding (be it by skill or luck, correlation or causation) some of the more notable ventures in today’s venture capital landscape.

Incubators

Incubators, as a general rule, are less formal than accelerators. They focus on providing a place to work — and some (often optional) mentorship and collaboration opportunities. As opposed to the three-month accelerator classes, companies often stay in incubators for as long as 1-5 years.

While accelerators are designed to speed up the pace of a company’s development to make them attractive to investors as quickly as possible, incubators are about sheltering companies from the outside world, giving them a place to grow at their own pace. Both types of setting can provide helpful advantages to startups, even if the incubator environment tends to be less focused on a specific outcome — a Demo Day and the chance to impress investors — than an accelerator.

The differences between accelerators and incubators run along four dimensions: duration, as already discussed; cohorts (incubators don’t have regular cohorts of companies all starting at once, but instead tend to be more flexible about when a particular startup joins and how long it stays); funding (incubators generally do not provide funding as accelerators do, and although some incubators do take a small bit of equity, not all do); and the more informal nature of the educational and mentorship programs (see Table IV).

Table IV

The collaborative environment, with other young, growing companies, can be a huge help to founders just starting out — and for some companies, a three-month accelerator program simply isn’t the right fit as the business can’t grow quickly enough to be attractive to investors in just 90 days.

Drawbacks to Accelerators and Incubators

These programs tend to give a big boost to young companies, as far as refining their marketing pitches and developing their networks.  However, the price paid in terms of equity is often steep and careful consideration needs to be given to whether it is truly worth it. There is no doubt that the leaders of these programs enjoy giving back to early-stage entrepreneurs and have some altruistic motives, but ultimately these are in many cases for-profit businesses — and very attractive ones, given the opportunity to obtain large chunks of equity in young companies at a very low cost.

The companies involved must also remember that for all of the opportunities in terms of networking and mentorship, each company is competing against the others in the accelerator or incubator for a slice of attention from the big names.  It is hard to stand out in a crowd of standouts, and easy to end up disappointed if your company is not ‘the chosen one’ in a particular cohort or group of startups.

Companies that Don’t Participate in Accelerators or Incubators

Are companies automatically worse for having either not been chosen for accelerators or incubators, or deciding not to take part in the first place?  Not necessarily.  There are many great companies out there, and less than 10% of all companies go through an accelerator program or spend time in an incubator.

It’s also the case that from an investor perspective, there may be more and better opportunities with companies that have not taken part in these types of programs — companies that take part in these programs have been picked over by all of the major venture capital firms, and the ones deemed to be the best investments are often swept up directly into the venture capital pipeline — shutting out investors from the outside. In many cases, companies that haven’t gone through these programs have had to work harder to find early success — and have spent their time (and money) actually building the core business rather than building their marketing pitch.

In addition, less youthful, more experienced entrepreneurs often shy away from the fraternity-like camaraderie and social elements intrinsic to these programs.  Finally, confident founders will in some cases be reluctant to give away a chunk of their equity for questionable benefits.

Non-Incubator Hosting Sites

Co-working spaces have popped up throughout the Bay Area, as well as in other cities (though the $850/desk monthly fee seen in San Francisco is hard to command elsewhere).  These spaces can end up serving as unofficial incubators, providing space, high-speed Internet, conference rooms, networking events, collaboration, and even free beer — in other words, many of the benefits of accelerators and incubators with none of the equity cost.

As the industry matures, it is becoming more of a continuum — there are co-working spaces that are also incubators, there are spaces that share some incubator characteristics, and there are others that merely provide workspace and no additional benefits.  Each company simply needs to find the situation right for its business.

Citations

1. Hochberg, Yael and Cohen, Susan. “Seed Accelerator Rankings Project.” Seedrankings.com. Accessed 7 August 2014.
2. Hochberg, Yael and Cohen, Susan. “Accelerating Startups: The Seed Accelerator Phenomenon.” March 2014.
3. Christiansen, Jed. “Accelerators.” Seed-DB.com. Accessed 7 August 2014.