Introduction to Business Incubators / Accelerators
We are currently living in an era of the small business and entrepreneurial spirit. Part of this enthusiasm is driven by business incubators and accelerators, which are popping up almost at the same rate as the businesses themselves.
This guide will look at what business incubators and accelerators are and the business models these organizations use to operate. This guide will also analyse the role incubators and accelerators have on helping start-ups and help you better understand the operational side of incubators, as well as their importance in the current climate.
WHAT IS A BUSINESS INCUBATOR / ACCELERATOR?
According to entrepreneur, a business incubator is:
“An organisation designed to accelerate the growth and success of entrepreneurial companies through an array of business support resources and services that could include physical space, capital, coaching, common services, and networking connections.”
Essentially these incubators are about helping start-ups and small businesses grow. Business incubators have existed in different forms for decades, but the first surge of business incubators came about a little over a decade ago. They have since become a central part of the business world and there are a number of incubators across the globe looking to boost entrepreneurialism.
As business incubators developed, they started taking on different approaches to aiding businesses and utilizing new ways of operating. Part of this change led to the birth of a business accelerator. A business accelerator is similar to an incubator in its definition – there to help a business to get started and grow – yet there are some slight differences in how it operates.
The difference between a business incubator and accelerator
There are generally two differences between these two organizations. Primarily, a business accelerator makes an investment in the company involved in its program in exchange for a stake in the company. This means accelerators mainly deal as a venture capitalists.
Furthermore, the duration companies spend under the guidance of accelerators differs between incubators. Whereas a business incubator often offers a yearlong program, an accelerator program tends to be much shorter. A typical business accelerator offers usually three to four months under its wings.
In addition, many business accelerators tend to look for companies with bigger growth potential. Accelerators are often focused on finding companies looking to grow either nationally or globally. Business incubators naturally work with companies looking to go global as well, but there are also many localized incubators around the world.
Throughout the rest of the guide, business incubators and accelerators are sometimes talked as one type of organization. Therefore, you want to remember these slight differences between the two. While the differences aren’t anything too drastic, it is good to remember the two words don’t mean exactly the same thing.
Examples of incubators and accelerators
Organizations, similar to today’s business accelerators and incubators, existed already in the 1980s in small numbers. If you look at the US, there were perhaps around a dozen organizations to help set up your business back then, while there are now over 1,000 different incubators and accelerators in the country, according to the National Business Incubation Association.
There are plenty of examples of successful incubators and accelerators, but here are few you can look up for a closer look.
- Y Combinator – the famous accelerator kick-started the trend in 2005. It is a typical seed accelerator and Y Combinator is considered the most commercially successful accelerator. Some of the businesses that have gone through its programs include CodeAcademy and AirBnB
- Massachusetts Biomedical Initiatives (MBI) – MBI’s roots go all the way back to 1985 and the organization has helped around 50 companies during the years. Some of the medical companies it has helped include GenToros and ZATA Pharmaceuticals.
- ATP Innovations – the Australian company is the country’s largest business incubator and highly respected in its field. The incubator is focused on technology and pharmaceutical companies and the businesses that have gone through the ranks include Clarity Pharmaceuticals and Elastagen.
Watch the below YouTube video for an introduction to one US-based business incubator:
THE BUSINESS MODELS OF INCUBATORS/ACCELERATORS
As mentioned above, the explosion of incubators and accelerators has led to different ways these organisations operate. In this section, we will take a closer look at the different business models of incubators and accelerators.
Four common business models
While there are a number of ways an incubator or an accelerator can set up, there’s a tendency to follow one of these four common approaches. Each model has its own benefits, as well as disadvantages, and they target different sorts of industries.
The four models are often associated with Rahul Patwardan’s essay Best Practices for Managing Incubators. Below is a short summary of each model.
Local economic development incubators
As the name suggests, local economic development incubators target small businesses, often working in the service or craft industry. It can spring larger businesses as well, but this doesn’t necessarily happen on purpose.
These incubators can provide different services from hosting to administrative tasks. They also provide different consulting and coaching options, as well as help the businesses to gain access to financing. The incubators often don’t provide direct financing, but rather help businesses access external financing.
These local incubators tend to be relatively small and can often have problems with the stability of available resources. In certain instances, the quality of services can also be hindered.
Academic and scientific incubators
Academic and scientific incubators are quite popular, with many famous universities offering a business incubator as part of their operational activity. They mostly target internal projects at the university and you often need to be a student at the institution in order to get involved.
Academic and scientific incubators can offer plenty of technical advice, as well as the possibility to test different concepts. Furthermore, you can learn about intellectual property rights and most incubators offer seed capital to fund the projects.
As the project matures, academic and scientific incubators can provide further access to funding and provide a route to industrial networks.
The problem with this model is the inflexibility, as it operates as part of an established institution. This can mean that access is limited and the operational flexibility is restricted. The ability to access external resources and networks can also be somewhat limited.
Academic and scientific institutions aren’t the only organizations that can set up incubators. In some instances, corporations themselves can launch incubators for both external and internal projects. The businesses, which are part of these incubators, only need to be related to the main activity of the company.
Corporate incubators are good at offering financial resources, as well as conduct things such as prototype and market testing. The resources available for these actions are multiple and companies participating in these programs can enjoy great access to commercial markets.
On the other hand, there can sometimes be conflicts of interest in terms of the management and the start-up companies. Furthermore, while corporate incubators have plenty of resources, the ability to mobilize these can sometimes be limited due to bureaucracy.
Private investors’ incubators
Finally, there is the model of private investors’ incubators and accelerators. These are aimed at start-ups in a variety of fields, but many have ICT and biotechnology focus.
These models provide companies advice in terms of management and strategy, as well as boost personal networks for the companies. Furthermore, they are aimed at providing financing for the business and often have several types of financing arrangements available. Private investors’ incubators can also offer administrative and hosting services, as well as provide legal assistance to new companies.
The disadvantages are often related to the conditions of providing the service. While companies can receive plenty of financing, the terms of financing might not be as lucrative for the business as they are for the incubator. Furthermore, on the incubator’s point of view, sourcing quality projects can sometimes be a difficult task.
If you want to learn more on business incubators and accelerators, then read this longer guide.
Non-profit and for-profit models
Incubators and accelerators can operate either as a non-profit or a for-profit business. If you look at the above four models, the local economic development incubators and the academic and scientific incubators tend to operate as non-profit entities. On the other hand, the other two – corporate and private investors’ incubators – are generally for-profit organizations.
Non-profit incubators don’t expect much in return of a place in the program. For them, the promotional benefit of generating successful businesses is often enough. For example, for an academic organization, a company that creates a ground-breaking new product will always be linked with the institution and thus boost the institution’s ability to fundraise.
On the other hand, the for-profit model is especially big in the technology world. For-profit organizations tend to operate through the accelerator model. These accelerators take a specific percentage of the start-up, as they enter the program. This portion is later sold or bought back by the start-up and the accelerator often makes a profit for doing so.
Two successful models have emerged
As the above shows, there are many ways to model an incubator or an accelerator. Some of the models out there have proven to be more successful than others. While incubators and accelerators can execute these in different ways, the two below business models have proven successful in finding companies with high growth potential.
The seed model
The seed fund model is among the most common in the incubator industry. Y Combinator, as well as many of the other most successful incubators, successfully uses this model, and accelerators rely on this approach.
The seed fund model is a combination of high-quality filter and broad portfolio approach to finding the right companies. The high-quality filter means the incubator is focused on attracting only the brightest of talent. These incubators and accelerators often have a vetting process – the first stage lasts for a while after which only the best ideas and companies continue.
In addition, the seed fund model also utilizes the broad portfolio approach. Under this approach, the incubator would accept multiple companies of which only a handful might become a huge success for the organization.
The constant pivot model
Then there is the constant pivot model, which is similar to the academic and scientific approach. Under this model, incubators aren’t looking for start-ups or companies. Instead, they attract talent in a specific field and these people start coming up with ideas under the guidance of the incubator.
These ideas are developed and tested with the help of the incubator. If they aren’t proven successful, the person can move on to a new idea. If the idea gains traction, the incubator then can help finance it and provide the new start-up the building blocks for future.
THE ROLE OF A BUSINESS INCUBATOR / ACCELERATOR
As the definition of an incubator and accelerator suggests, they are all about boosting a start-up’s chances of success. With nearly 90% of start-ups failing in the first few months, an organization that can guide it through the starting hurdles can be vital for many venturing into the world of entrepreneurialism for the first time.
Helping the business or the idea to grow into something bigger
The sole focus of incubators and accelerators is to help a business or an idea to grow. The way these organizations go about dealing with these can vary greatly. In essence, there are two different ways incubators and accelerators can assist a start-up: with direct and indirect help.
Direct assistance involves things such as the physical space to do business. Many start-ups don’t have the money to invest in an office and all the other equipment and therefore, incubators often offer free space for companies in their programs. This type of help can also include things such as office materials, labs to test products and so on.
Furthermore, direct assistance can also come in terms of management. Incubators can provide high-quality management for start-ups and other such mentoring help. There can be lessons and workshops in running a business. Start-ups can even enjoy access to in-house legal staff.
Incubators and accelerators can also provide indirect assistance. This could be in terms of creating networks by meeting other companies and entrepreneurs through the programs. The company can also create new networks within the industry simply by belonging to one of these organizations.
While the incubators or accelerator might not offer direct office space, they might be able to help the start-up find such space at discounted prices, for example. Furthermore, the legal, as well as business connections, the incubator can direct the company towards can be vital.
Being part of a well-known incubator and accelerator program can also enhance the company’s prospects once the program ends. Many of these programs have a good reputation in the business world and it can enhance the company’s future to simply be able to say it’s been through one of these courses.
Finally, indirect and direct assistance is also available in terms of funding. Some incubators can offer direct access to funding, with accelerators mainly operating under this financing model. On the other hand, even if direct financing isn’t available, incubators can generally help companies gain access to funds.
The two key things for business accelerator or incubator success
The success of some of the incubators and accelerators has meant many have tried setting up their own organizations. Incubators and accelerators can now be found everywhere; many universities offer them and many cities have their own incubators looking to find the next big firm.
Yet, quantity hardly equals to quality. There are business incubators out there who are not only failing the companies entering their programs, but are also failing themselves as an organization.
Sramana Mitra has studied the problems incubators and accelerators have. According to Mitra, in order for a business incubator or accelerator to succeed, it must provide focus on these two things: the ability to add real value and measuring success more than through a funding metric.
#1: Adding real value
A business incubator can only succeed if it provides real value for the company. Offering a place to work and a list of different financing options doesn’t constitute as real value.
The incubator must help the business or the entrepreneur achieve two things. First, the incubator must help the start-up find out, if there is a validated market opportunity where people are willing to pay for a specific service or product. Second, the incubator should help the start-up develop the product and service to address this market.
This means a successful incubator must be able to offer tangible advice and mentoring for the business. The role of an incubator is to see what are the weaker points of the start-up and help to address these.
#2: Measuring success as more than funding numbers
Another point Mitra makes deals with the way incubators measure success. Success shouldn’t be only about the level of funding the company receives. In the end, a successful business is an entity that can grow organically and operate as a self-sustaining company. If you consider this, the amount of funding the company receives should be less relevant.
Whilst incubators should provide funding to companies, if it is relevant and appropriate, it should also help the business grow in a manner that doesn’t require outside funding to succeed.
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