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Business Incubators and Accelerators: Here's the Big Difference

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The general public may not yet know the difference between business incubators and accelerators, which have both become vital resources for startups.

Despite often getting lumped together, the two concepts have several important factors that differentiate them. Here is a quick guide to navigating these increasingly popular concepts.

What is an incubator?

According to the National Business Incubator Association (NBIA), an incubator is "a business support process that accelerates the successful development of startup and fledgling companies by providing entrepreneurs with an array of targeted resources and services. These services are usually developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts."   

In short, these programs exist to help improve the odds of success for startups.

[Incubators Heat Up Chances of Small Business Survival]

"One of the ways to think about incubation and entrepreneurship is that they help increase entrepreneurial success, opportunity and are able to strengthen communities," said Micah Kotch, director of innovation and entrepreneurship at Polytechnic Institute of New York University, which runs the Varick St., NYC ACRE and DUMBO incubators.

Those programs improve the odds of success by offering things like office space, professional services and business advice. Generally, businesses pay a small monthly fee to participate in the program. Those fees can range from a few hundred to a few thousand dollars.

Incubators do not generally have a strict focus on the amount of time a business will spend in the program. For example, companies at the NYU Poly incubators generally spend 18 months in the program, but other incubators may have a longer time frame.

Thanks to the recent interest in incubators, programs are now offered for companies from all different industries, ranging from tech and retail to restaurants and media, among many others.  

What is a business accelerator?

Accelerators are interested in achieving the same overall goal of helping to improve the odds of success for startups, but these programs go about achieving that goal in a very different way. First and foremost, accelerators generally make an investment in the companies enrolled in their programs.  

"We are very early-stage investors," said Jonathan Axelrod, managing director of the Entrepreneurs Roundtable Accelerator (ERA). "We are not creating the company per se, but we are investing in very early teams — oftentimes, the first money in — and we are helping them to build their company. As an accelerator, we are looking to accelerate the trajectory and path of the business."

The ERA, which was launched in 2011, offers $40,000 in exchange for an 8 percent equity stake in the startup business. Though thousands of businesses apply for the program, the ERA admits just 10 businesses into its summer and winter sessions.

"We are here and will help them as investors, generally around key events of the company funding events and major business developments," said Axelrod. "We still talk to companies from two years ago all the time. They come to us for advice, and they are common stock holders like we areso our intentions are completely aligned with the founders'."

In addition to making an investment in the company, accelerators also differ from incubators in the time companies spend in the program. Accelerator programs are designed to be concise and generally take three to four months to complete. The ERA is a four-month program to companies. Like incubators, accelerators exist for all different industries and interests.

How do they help businesses?

Despite their differences, incubators and accelerators can both help businesses tremendously.  

"Incubators can help any entrepreneur who wants to get bigger faster or fail faster," Kotch said. "We are really trying to create a more efficient market and help our startups achieve escape velocity. As a result of being in the incubator for 18 months you will know if you have a business model that is scalable and repeatable versus others who will go along for two to five years plugging along, but not getting any traction."  

Kotch says that being in a structured environment with peer supports solves some of the biggest problems that startups and entrepreneurs face.

"There is no place to hide in an incubator and there are people there to help and you are in a community of your peers, people who  want to see you succeed and know what you are going through," Kotch said.

Similarly, accelerators offer hands-on assistance to companies, but they take it one step further by offering financing to companies. However, these programs also put companies through a program aimed at helping them finetune the most crucial areas of need fortheir businesses.

"Being an entrepreneur can be lonely," said Axelrod. "You get a lot of great help from folks that would be difficult to round up on your own. One of the key things for a startup is how to access all the people you meet in a tight time frame. Whether it's focused on building your product or building the relationships it takes to grow your business, I think that in the course of an accelerator, you can get things that may take a year or more in four months."

Additionally, companies that go through incubator and accelerator programs are also able to benefit from the reputation of those programs and the previous companies that have gone through those programs. 

"It puts a spotlight on companies," Axelrod said. "Coming out of an accelerator with a good reputation is like a vetting process, and investors tend to take you more seriously."  

Are there more incubators and accelerators than there used to be?

Though some of the earlier incubators and accelerators were founded in the mid- to late 1990s  and 2000s — for example, Idealab, an incubator founded in 1996, and Y Combinator, an accelerator founded in 2005 — there has undoubtedly been an uptick in recent years. The incubators at NYU Poly, which were founded in 2009, were a part of a handful of incubators in New York City upon opening. Kotch says today, there are more than 100 in New York alone and new ones opening frequently.

The growth of these programs has been far from coincidental, though. 

"Entrepreneurship has entered the mainstream consciousness in a very real way," Kotch said. "Starting a company is a lot cheaper and faster than it was 10 years ago. There are some really great measurable tools to help in the process."  

The same is true of accelerators. However, today, companies are able to benefit much more from outside investments — namely, in helping to get businesses off the ground.

"When you used to need $2 million and several years to build a product, the idea of a three- or four-month program making a difference didn’t make a lot of sense," said Axelrod. "When you look at what a couple engineers can do in a few months, now it is a completely different world. Four months and $40,000 didn’t help very much when you needed $2 million [to build something], but when that can get you a fully working product, it changes."

Follow David Mielach on Twitter @D_M89 . Follow us @bndarticlesFacebook or Google+. Originally published on BusinessNewsDaily.

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