Startup accelerators and incubators are organizations that support fledgling startups and help founding teams get off the ground, hone their product/service, pick up traction, and raise investment capital.
Accelerators and incubators can get involved at any stage of a startup’s development. However, most tend to focus on idea- and seed-stage startups, as this is when companies can typically benefit most from outside help.
Top-tier accelerators and incubators are incredibly competitive, with acceptance rates hovering around 1% – lower than the admissions rate at all Ivy League Universities.
Like angel investors and VCs, startup incubators and accelerators will sometimes invest according to a particular thesis, focused on a specific industry, market, technology, geography, or stage, while others take a more generalist approach.
However, while a handful of accelerators and incubators have been very successful in helping startups attain success, being admitted to a startup accelerator or incubator does not guarantee the startup’s success, and isn’t a reliable predictor of a sound investment.
Most accelerators admit a very small group of startups, commonly referred to as “batches”, and help those companies build out their businesses and develop their product within a set period of time, in preparation for demo day.
Most startups that work with accelerators will relocate to a specific area in order to work near the accelerator, but still must find their own office space.
Benefits Startup Accelerators Typically Offer:
Y Combinator is a top accelerator located in Silicon Valley, with a < 3% acceptance rate. YC accepts around 85 companies into each of their biannual “batches” (Winter and Spring).
Accepted startups move to Silicon Valley to work out of the YC office for three months. Throughout the program, startups periodically meet with a group of mentors and peers within their batch to talk about their progress, goals, and the roadblocks they’ve encountered along the way. Companies spend their time in YC gearing up for Demo Day, an opportunity to pitch to the VC community in hopes of securing funding.
Some YC portfolio hits include Airbnb, Dropbox, Stripe, Reddit, and yours truly, FundersClub. Often, YC will invest in promising startups that come through their program via their own in-house venture fund.
500 Startups is another great example of a top accelerator:
They run 3 annual batches, and offer startups $150,000 for 6% equity upon acceptance, and co-working space in either San Francisco or Mountain View, CA.
500 Startups connects portfolio companies with influential mentors and the 500 Startups worldwide network, affectionately known as #500STRONG. In addition, they offer startups the resources to help them grow and exposure to investors, the press, and more at events and conferences.
Startup Incubators offer startups many of the same benefits that accelerators offer, but generally cater more towards very early and idea-stage startups. To help these startups build their companies into viable businesses, startup incubators will often offer dedicated office space to founders that may still be building out their teams, and more flexible timelines to best serve each individual company.
There is a blurred line between what distinguishes a startup incubator from a startup accelerator, but the biggest differentiator is that incubators offer dedicated office space, whereas accelerators often do not. Incubators addressing hardware or hard sciences based startups may also offer wet lab space and equipment.
TechStars is one of the most prestigious and competitive startup incubators in the US, with main bases in four major cities – Boston, Boulder, NYC, and Seattle, and operations in the UK and Europe.
TechStars hosts 4 batches of 10 startups per year, and offers each founding team a $100,000 convertible note, in addition to $20,000 for 6% common stock, upon acceptance.
Participating startups also get access to the TechStars network of participating companies and alumni, dedicated office space for the duration of the 3 months, and the opportunity to pitch in front of VCs and investors on Demo Day – on average, companies will raise $1-2 million as a result of Demo Day.
TechStars focuses on tech companies with business models that support national or worldwide growth and expansion.
Some big hits within their portfolio include ClassPass, Kapost, and SendGrid.
Quite frequently, startup incubators and accelerators will operate in-house venture funds that invest in the startups they incubate/accelerate.
Most startup incubators and accelerators make modest equity investments, similar to a standard angel investment check (e.g. $20,000-$150,000).
Because startup incubators and accelerators are typically investing at fairly low valuations, often in idea-stage teams with no product, let alone users/customers, they will often invest smaller amounts into a wider variety of companies, as compared to a traditional VC firm.