How Tech Incubators Work


Tech Incubators vs. Tech Accelerators
Tech incubators are worldwide. Nairobi, Kenya's innovation hub, iHub, is part open community workspace, part vector for investors and VCs and part incubator.
Tech incubators are worldwide. Nairobi, Kenya's innovation hub, iHub, is part open community workspace, part vector for investors and VCs and part incubator.
© Guillaume Bonn/Corbis

Tech incubators are a great way for fledgling tech companies to develop their business plan and connect with investors. But there's also something called a tech accelerator. In both tech incubators and tech accelerators, small teams of founders are mentored by experienced tech entrepreneurs and provided with critical services.

The terms "incubator" and "accelerator" are often used interchangeably, but the two business development models are actually significantly different.

Let's start with the clients served by incubators and accelerators. An important characteristic of tech incubators is that they are open to companies in all stages of growth and development, from the earliest-stage ideas to established companies looking to rebrand or develop a new product or service.

For example, one of the biggest success stories at Innovation Depot is Atlas RFID Solutions, an established company that moved its offices there after taking a hit during the Great Recession. With the help of Innovation Depot's in-house legal and accounting resources, plus its connections to investors, Atlas RFID Solutions re-emerged stronger than ever, boosting revenue from $200,000 in 2007 to $7.2 million in 2012 [source: NBIA].

Tech accelerators, on the other hand, target only the earliest stage companies, often nothing more than a pair of smart 20-somethings with a bright idea. Y Combinator, one of the most successful tech accelerators, puts more weight on the talent of the founders than the actual idea, which it expects will change considerably during the accelerator process. You also don't need a business plan to apply to Y Combinator.

The next big difference is the length of the development process. In an incubator, member companies expect to spend several years with the organization and treat the space like a permanent office. With most tech accelerator programs, prospective members compete for a limited amount of residencies that last only three to five months.

The final, and perhaps most important difference between tech incubators and tech accelerators is the overall mission of the organization. Incubators are mostly nonprofit ventures with a goal of kick-starting innovation in the regional economy. Incubators rarely provide upfront seed money to member companies, and they don't take a percentage of profits earned by companies they help to launch.

Accelerators, on the other hand, are often for-profit businesses founded by teams of venture capitalists and angel investors. They award $100,000 or more upfront to founders in exchange for an equity stake — between 6 to 10 percent — in their companies [source: TechStars].

That said, there are plenty of examples of hybrid incubators/accelerators. There are three-month accelerator programs run by nonprofit universities. Some incubators award money upfront. And certain companies that started out as incubators switched to an accelerator model, all adding to the confusion. In fact, Innovation Depot is launching an in-house accelerator program with the goal of providing funding to participants in key sectors.

Author's Note: How Tech Incubators Work

I can get behind business incubators, especially the nonprofit variety that are created by partnerships between regional business development organizations, universities and corporate sponsors. It just makes sense — provide entrepreneurs with a ready-made network of resources to turn brilliant ideas into profitable businesses. It brings jobs to the region, pumps billions of dollars into the local economy, and encourages the kind of educated risk-taking that often leads to breakthrough technologies. Maybe I'll start a freelance writing incubator in my basement. On second thought, who needs the competition?

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Sources

  • Bortolot, Lana. "Incubators Aren't Only for Tech Startups." Entrepreneur. Jan. 12, 2015 (May 8, 2015) http://www.entrepreneur.com/article/241709
  • Carpenter, John. "Healthtech incubator Matter announces $4.4 million in private funding." Chicago Tribune. Nov. 19. 2014 (May 8, 2015) http://www.chicagotribune.com/bluesky/originals/chi-matter-private-funding-bsi-20141118-story.html
  • Innovation Depot. "About Us." (May 8, 2015) http://innovationdepot.net/information/
  • Innovation Depot. "Innovation Depot Annual Report 2014." (May 8, 2015) http://issuu.com/innovationdepot/docs/id_annualreport_issuu
  • NBIA. "2013 Outstanding Incubator Client: Atlas RFID Solutions." (May 8, 2015) http://www.nbia.org/success_stories/awards/2013/atlas.php
  • NBIA. "Business Incubation FAQ." (May 8, 2015) http://www.nbia.org/resource_library/faq/index.php
  • NBIA. "The History of Business Incubation." (May 8, 2015) http://www.nbia.org/resource_library/history/index.php
  • Rice Alliance for Technology and Entrepreneurship. "KiLife Tech from BYU wins 2015 Rice Business Plan Competition." April 18, 2015 (May 8, 2015) http://alliance.rice.edu/RA2011_2Column.aspx?id=2147485086
  • Strauss, Karsten. "Tech Hotspot Alert: Alabama?" Forbes, Sept. 9, 2013 (May 15, 2015) http://www.forbes.com/sites/karstenstrauss/2013/09/09/tech-hotspot-alert-alabama/

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