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This article is written by Sivagnana Selvi, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions), from Lawsikho. Here he discusses “incubator and accelerator.”             

Business Incubator

Every Start-up would face problems like fierce competition, financial matters, decision making, gaining patronage of its customers etc. Here comes a business incubator to assist startups to grow by giving them necessary management training or office space.

Sherman and Chappell have defined “Business incubator as an economic development tool primarily designed to help create new businesses in a community.” Incubators provide various services in developing business, marketing, networking Business incubators help emerging businesses by providing various support services, such as assistance in developing business and marketing, networking with highly specialised professionals, providing office space and equipment.[i]

The National Business Incubation Association (NBIA) was established in 1985, they provide business incubator facilities like consultation, financing, technical support. They define Incubator as “a catalyst tool for either regional or national economic development.”[ii] They also provide area wise assistance like women and minority – owned businesses, software or medical application. Incubators are supported by both Government and non profit bodies. These incubators focus on creation of jobs, expansion of tax base, and to expand the economy. Some incubators work with universities, they encourage faculties and students to indulge in research in business activities and funding. The Ministry of Electronic and Information Technology has recognised 4 Incubators, one of the incubators that work with Delhi University, by establishing Electropreneur Park for development of Product and IP creation in the ESDM sector at a total estimated cost of Rs. 21.10 Crores implemented by Software Technology Parks of India (STPI), New Delhi in association with Delhi University (DU) and India Electronics & Semiconductor Association (IESA) with state-of-the-art facilities at South Campus, Delhi University. The project aims to support 50 start-ups over a period of 5 years.[iii] There is also a huge expansion of profit incubators due to the growth of e-commerce.

Stages of Business Incubators

 

First Generation

Second Generation

Third Generation

Offering theoretical rationale

Office Space and Shared Resources Economic of scale

Coaching and training support Accelerating the learning curve

Access to technological, professional and financial networks, Access to external resources, knowledge and legitimacy.

Period

1950s- 1980s

Mid 1980s- mid 1990

Mid 1990s -2000s

Source: The Evolution of Business Incubators: Comparing demand and supply of business incubation services across different incubator generations.[iv]

According to Bruneel, Ratinho, Clarysse, Groen, business incubation can be classified into 3 stages:

  1. Physical facility: This is the characteristics of a first generation business incubator by providing space for business to function, like an office, warehouse etc. Since physical space is crucial for any business entity, providing business space at an affordable price was very beneficial to the start-up.
  2. Business support service: The second generation evolved when the business incubator was at peak, now the incubators expanded its function by providing essential support to business like finance, transport, technical support etc.
  3. Networks’ perspective”[v]: The third generation of incubation concentrates more on development and innovation rather than sustain, this type of generation is also called “virtual or online incubation”. The third generation incubation provides for Access to professionals who help to develop the business, e.g. Lawyers, financial network, intellectual property expert, marketing, IT services.

Incubator Funding

Incubator does not generally provide investment, they are funded by universities or economic organisation because they focus on formation of the Company, which may not necessarily require investment in the initial stage[vi]. But the third generation Incubator provides access to an external network, which allows interacting with various investors, like angel networks and venture capitalists.  Venture capital plays a crucial role, apart from providing funds. They also control the start-up companies to safeguard their interest. They provide financial needs and managerial processes.[vii] The start-up companies require a huge amount of money to acquire knowledge in various fields like technology development, strategy consultation, and patent attorney, which would cost a fortune. But collaborating with various organisations offers the opportunity to acquire new knowledge and develop new capabilities.[viii]

Case Study of CEI Navarra

This is a success story of CEI Navarra an incubator located in Spain established in 1988 by the Government of Navarra, a non- profit association. Its aim was to diversify the economic activity and to stimulate entrepreneurship. They have incubator space at 3 places in Spain by providing space for IT small medium enterprise, agro food companies and pre- incubation space for students and researchers at the University of Navarra. They also have an incubator business club which promotes growth and competitive attitude, by providing a networking platform. This incubator provides for 18 tenants incubator with 142 employers of the tenants, 11 start- ups created during 2018, 1716 start- ups created since beginning. This incubator helps the economy of Spain to grow and the survival rate of enterprise under this incubator is 72%.[ix]

Accelerator

They provide start-up to build up their initial product, to find potential customers, procure resources; to be precise Accelerator is limited duration assistance. They give a small working capital, working space and networking support.

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Startup Accelerator Business Model

The origin of the seed accelerator can be traced back to 2005, it originated from Silicon Valley. Seed Accelerator provides a platform for start-ups and entrepreneurs to interact and connect and to develop their business. The accelerator is similar to that of an incubator. The term incubator became famous after 1959 to create an environment which helps start-up companies to grow by providing expertise.  After the 2000 IT bubble many incubators came into existence. In 2005, Paul Graham started Y Combinator in Silicon Valley, which is distinct from traditional incubators, this kind of model later known as accelerator, they focus on the first three months of the start-up.[x]

The general features of an accelerator are according are:

  • It is open and highly competitive.
  • They provide for seed investment for exchange of equity.
  • Instead of individuals they focus on small team
  • Start-up supported in cohort batches or ‘classes’.[xi]

Incubator and Accelerator in India

Indian Government encourages Incubators and Accelerators through various schemes and programmes to motivate start-up companies after the Make in India initiative. The Ministry of Micro, Small and Medium Enterprises (MSME) provides for the Incubator scheme. The background of the scheme is to “Support for Entrepreneurial and Managerial Development of MSMEs through Incubators”. The main objective of the scheme is to promote & support untapped creativity of individual and to promote adoption of latest technologies in manufacturing as well as knowledge based innovative MSMEs (ventures) that seek the validation of their ideas at the proof of concept level[xii]. The scheme promotes the incubators who will assist the MSMEs in expansion of the business by providing them with design, strategy and execution.

India Start -Up Hub also provides an incubation centre for startup companies. The incubation centres provide, meeting space, sector specific expertise/ adequate research and development, technology plus machine plug and play facility and assist to raise fund and provide support in marketing[xiii]. They also provide for sector specific incubation in the field of:

  1. Advertising
  2. Energy
  3. Agriculture
  4. Artificial intelligence
  5. Fashion technology
  6. Arts
  7. Internet of things
  8. Marketing
  9. Food and beverages
  10. Chemicals etc.

Indian government has recognised many incubators and accelerators for development of start-up companies.

Difference between Incubators and Accelerators[xiv]

Characteristics

Incubators

Accelerators

Clients

Science based business (biotech, medical devices, nanotechnology ) etc.

Mostly IT based, like web designing, cloud computing.

Selection process

Competitive selection, mostly from the same region.

Competitive selection of firms from wide regions or even nationally (or globally).

Term of assistance

Ranges from 1 to 5 years.

Short term assistance from 1-3 months.

Services

They provide services like consultation, specialised advice in IPR, skill development.

Give ideas, procure resources and investments, find customers.

Investment

 They do not have funds to invest directly, create a network to expand the business, they do not take equity.

They invest money in companies and take equity.

Case Study of Y Combinator

Y Combinator is a well known seed accelerator situated in California, US in 2005. They invest in start-ups who need funding in the initial stages of the business, in return for small stakes in the start-up. They promote various programmes like YC fellowship which targets companies in their early stage, YC Fund which invests in their alumni company whose value is less than $300 million. They have also established Research Labs and Start-up  School for the benefits of start-up. Their successful clients are airbnb, stripe, dropbox, etc.[xv]

Which is better for a Startup?

To analyse the better suited model for start- up let us see the characteristics of incubator and accelerator.

The characteristics of incubator are:

  1. It is not for profit and regularly associated with colleges and universities.
  2. Office space will be provided at reasonable rates.
  3. Focus on local start-up companies.

The characteristics of accelerators are: 

  1. It is open and highly competitive.
  2. They provide for seed investment for exchange of equity.
  3. Instead of individuals they focus on small team
  4. Start-ups supported in cohort batches or ‘classes’.[xvi]

Basically the accelerator and incubator help the start-up to develop and grow. As we discussed, the accelerator and incubators are not the same, they are different in many aspects. The start-up accelerator gives a time framework to develop and the incubator promotes innovative ideas and creates such an environment for the incubator to grow. To select an appropriate model for the business development we need to analyse the pros and cons of incubators and accelerators.

ADVANTAGES OF INCUBATOR

  1. Incubators provide for infrastructure which is very expensive for the start-up to afford in the early stage of the business. Incubators also provide for shared space for start-up which helps the start-up to interact with people who are in the same field and experiencing the same challenge.
  2. Availability of mentors saves time and effort.

DISADVANTAGES OF INCUBATOR

  1. There is no time frame to meet the goals, lack of motivation.
  2. The start-up should also give up a certain percentage of equity to the incubator.

Incubator model is suitable for the company which is smaller in size and there is no pressurising timeline to grow.

ADVANTAGES OF ACCELERATOR

  1. Since there is a predefined time frame set for the start-up, and there is a certainty for return from the investment, many investors provide funds for start-up.
  2. The limited time period will help the start-up in the right track and goal oriented. The start-up will be more focused.

DISADVANTAGES OF ACCELERATOR

  1. The time constrained will be pressurizing.
  2. Giving up the start-up equity, unlike incubator, a large percentage of equity should be given by the start-up under accelerator

This model is best suited for the start-up who needs a huge investment and not inclined towards long term goals and more focused on short term development

Both the incubator and accelerator are best suited for a start-up, based on the purpose, duration, application process, investment etc., start-up can decide their best suited model for development of their business.

References

[i] Available on https://worldbusinessincubation.wordpress.com/2012/12/10/business-incubation-and-business-incubator-defined/ last visited on 19-03-2020

[ii] Available on https://www.inc.com/encyclopedia/national-business-incubation-association-nbia.html last visited on 19-03-2020

[iii] Available on https://www.meity.gov.in/esdm/incubators visited on 19-03-2020

[iv] Available on https://ris.utwente.nl/ws/files/6809752/evolution.pdf last visited on 19-03-2020

[v] Supra 1

[vi] Available on https://www.entrepreneur.com/article/294798 last visited on 19-03-2020

[vii] Thomas Hellman and Manju Puri, Venture Capital and the Professionalization of Start-up Firms: Empirical Evidence, The Journal of Finance Vol. 57, No. 1 (Feb., 2002), pp. 169-19, available on https://www.jstor.org/stable/pdf/2697837.pdf?refreqid=excelsior%3A5d0de56d899c42d6ac6e5282a94bafab last  visited on 19-03-2020.

[viii] Bruneel, Johan & Ratinho, Tiago & Clarysse, (2012). The Evolution of Business Incubators: Comparing demand supply of business incubation service across different incubator generation. Technovation 32 (2012) 110-121. Available on https://ris.utwente.nl/ws/files/6809752/evolution.pdf last visited on 19-03-2020.

[ix] Available at https://ec.europa.eu/regional_policy/sources/docoffic/2007/working/innovation_incubator_case.pdf.

[x] Lisa, Alexander, Gustav.. Accelerating Success: A study of seed accelerators and their defining characteristics, Department of Technologyy Management and Economics, Chalmers University and Management. Available on https://odr.chalmers.se/bitstream/20.500.12380/161790/1/161790.pdf last visited on 20/03/2020.

[xi]  C. Scott Dempwolf, Jennifer Auer and Michelle D’Ippolito, Innovation Accelerators: Defining Characteristics Among Startup Assistance Organization. Available on file:///C:/Users/DELL/Downloads/rs425-Innovation-Accelerators-Report-FINAL.pdf last visited on 20/03/2020

[xii] Available on https://my.msme.gov.in/inc/Giudeline.aspx last visited 20/03/2020.

[xiii] Available on http://indiastartuphub.com/Incubators.aspx last visited on 20/03/2020

[xiv] Atkins, D. 2011. What are the new seed or venture accelerators? Available at http://www.nbia.org/resource_library/review_archive/0611_01.php

[xv] Available at https://www.ycombinator.com/

[xvi] Available on file:///C:/Users/DELL/Downloads/rs425-Innovation-Accelerators-Report-FINAL.pdf last visited on 20/03/2020


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