The past several years have witnessed an explosion of accelerators, incubators and co-working spaces. The terms are sometimes used interchangably, but they are distinctly different:
Accelerator: As the name suggests, these programs are designed to turbocharge early stage growth companies. These intensive programs include substantial mentoring and peer support, and often last just 3-6 months. Accelerators typically make an equity investment for 6% to 15% or the company, and the programs culminate in a demo day, where startups pitch their ventures to an audience of investors. Y Combinator, for example, invests $120,000 in each company it accepts into the program in exchange for a 7% equity stake.
In addition to Y Combinator, other well known accelerators include Tech Stars and 500 Startups. These programs are very selective and focus on tech. But accelerators have expanded to target other types of businesses, such as food, fashion and civic startups.
Incubator: A physical space for startups, incubators typically offer resources such as mentoring and peer support. But these programs are more low key and often longer term than accelerators. Some incubators may make a small investment.
Co-working space: Shared office space for rent, usually with common facilities such as conference rooms and reception. Coworking spaces typically do not involve a formal program or investment of any kind.
- These programs can confer status and open doors for startups
- The mentoring and resources offered by incubators and accelerators can help entrepreneurs avoid pitfalls and learn from experienced mentors
- Equity infusions, even modest ones, can give startups some runway. And most accelerator participants are able to attract follow-on funding after the demo day
- The focus on peer-sharing encourages camaraderie and builds beneficial relationships that last long after the program
- Some programs take an equity stake for very little investment
- Companies may be required to relocate to the city that the accelerator is in
- Loss of focus: entrepreneurs may receive contradicting advice from different mentors and may be pushed to diverge from their initial vision
- Some programs are more self-directed, so entrepreneurs need to be disciplined