Incubators vs. Accelerators

We launched Founderfuel, our accelerator program, last week. As I scanned through the launch¬†coverage I noticed many references to the program being an “incubator”. There is a big difference between incubators and accelerators both in terms of experience and results (returns). Here is how we see it at Real Ventures:

The Accelerator Experience

When I first got into tech startups in the late nineties incubators were all the rage. Bill Gross was getting going with Idealab and there were 100s of others. When the bubble burst, incubators were among the 1st casualties and the term “incubator” quickly became a dirty word. Why? Incubated companies had little or no capital and were not able to stand on their own so they were quick to die off.

Most incubators offer a protected, nurturing environment, usually under the same roof where you bring your idea in or are recruited to execute a home-grown idea. Many offer common services from back office to marketing, UX, etc. So you can focus on your core product and leverage outside resources.

Accelerators are not protected or nurturing. They bring together entrepreneurs and mentors / advisors and leave it to the entrepreneurs to figure out how to best take advantage of that opportunity. There are no internal resources. No back office you can use. No internal marketing expert. It’s sink or swim.

Talking to people who have come through programs like YCombinator or Techstars, one of the main benefits they cite is peer exposure. You learn as much from the other founders as you do from the mentors. And peer pressure plays a big part too. You don’t really get that as much in an incubator because there is less time pressure and no demo day at the end. Most accelerator programs have a similar construct: 12 weeks followed by a demo day. The best companies at the end of that 12 weeks will go on to raise follow on funding. The others? Who knows…

What about results?

While the data is incomplete, I think it’s safe to say that incubators have largely not delivered results. Idealab has withstood the test of time, but most others are long gone.

The results for accelerators are harder to measure as they are a newer phenomenon. Paul Graham from YC recently published some numbers. Highlights:

25 out of 316 companies (7.9%) have exited

5 exited for > $10M

Estimated value per company: $22M

Portfolio value: $ 4.7B

Techstars publishes results by cohort. 7 out of its 70 companies have been acquired. Almost all of its exits required less than $1m of additional capital to achieve. Those are likely not big $ exits, but likely are great returns on an $18K investment!

We think that accelerators are here to stay. Yes, there may be too many of them. But from an investor standpoint they are a great way to find and test talent that might not be ready for a larger round. And from an entrepreneur standpoint, they are a great vehicle for bringing exposure, connections, mentorship and future funding to your company in a hurry.

If you are interested in being part of the 1st Founderfuel cohort, apply here.