What Do Accelerators Do? Insights from Incubators and Angels

What do accelerators do? Broadly speaking, they help ventures define and build their initial products, identify promising customer segments, and secure resources, including capital and employees. More specifically, accelerator programs are programs of limited-duration—lasting about three months—that help cohorts of startups with the new venture process. They usually provide a small amount of seed capital, plus working space. They also offer a plethora of networking opportunities, with both peer ventures and mentors, who might be successful entrepreneurs, program graduates, venture capitalists, angel investors, or even corporate executives. Finally, most programs end with a grand event, a “demo day” where ventures pitch to a large audience of qualified investors.

You may think this all sounds familiar. After all, don’t incubators and angel investors help nascent ventures? Accelerators certainly are similar to incubators and angel investors. Like them, accelerators aim to help nascent ventures during the formation stage. Thus we might expect that many of the activities provided by accelerators would also be provided by angels and incubators. But accelerators differ in several ways. Perhaps the most fundamental difference is the limited duration of accelerator programs as compared to the continuous nature of incubators and angel investments. This one small difference leads to many other differences, as I discuss in more detail below. (See table 1 for a summary of the differences between incubators, angel investors, and accelerators.)

Incubators and Angel Investors

According to the National Business Incubation Association, incubators shelter vulnerable nascent businesses, allowing them to become stronger before becoming independent. According to the association’s website,¹ 93 percent of all incubators are nonprofit organizations focused on economic development, and roughly a third are affiliated with a university. While no two incubators are exactly the same, in general, incubators receive rent and fees from tenant firms in exchange for office space and administrative support services.² Several incubators also provide introductions to financiers, and connections to legal, technology transfer, and accounting consultants.³ When they are affiliated with a university, they may also provide services related to intellectual property; the university may also use them to transfer knowledge from faculty members to firms that are commercializing the university’s intellectual property.⁴

Table 1.

Key Differences between Incubators, Investors, and Accelerators

Some of what incubators provide to entrepreneurs, however, might not be consistent with what the nascent firms actually need. For example, ventures might develop in a way that allows them to survive inside of an incubator, but not outside of it, and thus in a manner that is not optimal for the market. Some firms may survive longer in an incubator than they would otherwise. Survival may seem attractive, but if the firm will inevitably fail, then the resources it is consuming might be better used by other, more fruitful endeavors. Moreover, if ventures are being shielded from market forces, they might be missing out on important feedback that could enable them to adapt. Early adaptation is critical for early-stage firms before they become more rigid with age, which occurs naturally.

Angel investors also aim to help fledging ventures. Angels are individual investors, or groups of individual investors, who provide seed capital and varying amounts of advice to young firms. According to the Center for Venture Research, 28,590 entrepreneurial ventures received $9.7 billion in investment during the first quarter of 2013.⁵ Clearly, angel investors are an important part of the entrepreneurial ecosystem. Often, but not always, they are entrepreneurs who want to help the next generation of entrepreneurs. They also may be friends or family members who provide financial investment.⁶ Angel investors help their portfolio firms in a unstructured manner, often providing advice and introductions as needed. The lack of structure often translates into limited involvement and mentorship.

Comparing Accelerators and Incubators

Accelerators also help fledging nascent ventures. Philosophically, incubators tend to nurture nascent ventures by buffering them from the environment to give them room to grow. In contrast, whereas accelerators speed up market interactions in order to help nascent ventures adapt quickly and learn...