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Does Your Startup Need An Incubator or Accelerator?

Startups need help, now more than ever...

Global Influencer

Global Influencer
Global Influencer

Farm Sanctuary & aramc via Flickr

Startups need support!

There has never been a better time to secure financing and training depending on where the new startup is in its stage of development.

The level at which a company seeks help from an outside supplier of programming and finance can be split up into two areas: early-stage and early-growth. An incubator offering support via mentorship/facility and training works for early-stage startups, while an accelerator works with early-growth startup and offers advanced workshops and specialty financing options like venture capital or in-house financing.

Typical Demographic/Persona

Two Distinct personas: The entrepreneur with some experience, has set up a business with a great idea but is lacking specific business knowledge and financing. He may or may not be a lone wolf in his company, has an innovative concept but that is not necessary. General workshops would appeal to the business owner who lacks significant business knowledge.

Secondly, the Founder and a small team, with an IP, sales, a strong market, good management and an exit strategy. These guys want to go big fast and sell the business for big money.

The National Research Council of Canada defines an incubator as a not-for-profit organization that offers similar services to accelerators, but tends to provide longer tenure for participating firms and a broader suite of services in terms of physical space and mentorship. Universities, colleges and economic development corporations often sponsor incubators.

Obviously an early-stage startup is going to need more hand holding, is riskier and the space for businesses is more limited than the accelerator. The business-client also generally pays a small fee for facility use and workshops but the mentoring and camaraderie of being in one of the incubators can be the difference between success and failure.

Training can turn the statistics of a 90% failure rate after one year in business to the opposite. In the first government-funded incubator I ran in 2002, we had a 93% success rate – meaning it was still in business after one year. Mentorship, comprehensive and relevant workshops and some financial help gave these businesses a good start to still being in business after five years.

The businesses going through my incubator were not what one would consider a ‘startup’ in terms of Silicon Valley parameters. Typical the 1000 businesses supported by my incubator workshop series over ten years included everything from a painting company, import/export businesses, wellness clinics, and even small airlines.

Like a chick in a poultry incubator, these entrepreneurs just need basic training, guidance and have small capital needs because they are so scalable.

I may be from the old school, but when you consider the small 1-3 person business needs help just as much as the Silicon Valley definition of a early-stage startup company, you can see how there needs to be different workshops and a financing option for both forms of startup.

There is a huge gap in the startup financing area. In Canada, there is a lack of early investment with micro loans from $15k, 20k up to $50k. Smaller funds that can handle early stage deals have been missing. These numbers may sound ridiculous to some business founders, but when a startup is bootstrapping, often they just need a small amount to get the ball rolling or develop a proof of concept before bringing in family and friends in a seed round.

The second demographic, accelerators, is the innovative business typically in high tech with gross sales of up to $500,000 in the past year. They need to be registered and headquartered in Canada; have been in existence for no longer than five years; have generated a minimum of $500,000 in revenue in the last fiscal year or have had 100% year-over-year revenue growth during the last fiscal year; have demonstrated a business innovation that represents a breakthrough from conventional ideas or methods in its field, going beyond incremental improvements to existing technologies, or that has had a wide impact in its field or other fields.

This may sound ominous to some startups, but these guys need more than basic workshops and a mentor. The will need strategic management help, HR strategies, connections to markets, exit strategies and financial planning.

These entrepreneurs may have gone to their friends and families or secured convertible loans to get their business to this point. While the incubator can utilize micro-financing to start their business, this type of business requires money for growth and may mean angel, VC or institutional finance from $500k to $2Million. In other words, this type of client requires an accelerator (or activator) form of support.

Accelerators are typically for-profit organizations owned and operated by venture capital investors, who intend to generate returns from equity-based investments in their client firms. There are many private accelerators in Canada (around 32 in Vancouver alone) that have different requirements and also provide small funding to the startup besides providing the requisite workspace as part of the package. The incubators will generally take a small equity position in the company in return for their expertise. Most of the accelerators I have seen provide an Entrepreneur-In-Residence that is, in itself, a strong reason to join an accelerator.

In Canada, we have an association for incubators/accelerators, the Canadian Association of Small Business Incubators. It’s mandate is to provide knowledge sharing, guiding incubators to the next level, administering a Canadian government initiative called Start-up Visa (SUV) where businesses join a Canadian accelerator and receive Canadian Visas to work here, and last but not least, government advocacy and leadership. The SUV is interesting because it provides up to five team visas (as long as they have at least 10% voting shares each) and it is contingent upon the business being accepted by an accelerator in Canada.

At the end of the day, both incubators and accelerators offer very similar options but are more robust in different areas.

They both provide:

  • A camaraderie of like-minded entrepreneurs- helps pump up the energy
  • Training and feedback from experts in their field
  • A place to test and develop their product and market
  • Experts to help in strategic planning
  • Seed funding in either cash or services

and both provide access to capital financing.

In theory, the lines are blurred between incubators and accelerators, but with these examples I’m sure you can see the differing needs and benefits of each.

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