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 This article is written by Sivagnana Selvi, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.

What are incubators

Every start-up would face problems like fierce competition, financial matters, decision making, gaining the 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 and 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.

 The National Business Incubation Association (NBIA) was established in 1985, they provide business incubator facilities like consultation, financing, technical support. They define Incubator asa catalyst tool for either regional or national economic development.” 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 the creation of a job, 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. There is also a huge expansion of profit incubators due to the growth of e-commerce. 

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

1)     Physical facility

2)     Business support service

3)    Networks’ perspective”

 

First Generation

Second Generation

Third Generation

Offering theoretical rationale 

Office Space and Shared Recourses Economic of scale 

Coaching and training support Accelerating the learning curve

Access to technological, professional and financial network, 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.

Incubator funding

Incubator does not generally provide investment, they are funded by universities or economic organisation because they focus on the formation of the Company, which may not necessarily require investment in the initial stage. But the third generation Incubator provides access to an external network, which allows interacting with various investors, like angle networks and venture capitalist. The venture capital plays a crucial role, apart from providing with funds. They also control the startup companies to safeguard their interest. They provide financial needs and managerial process. The startup 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 organisation offers the opportunity to acquire new knowledge and develop new capabilities.

What are accelerators

They provide startup 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. 

Startup accelerator business model

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

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 a small team
  • Startups supported in cohort batches or ‘classes’.”

Incubator and accelerator in India

Indian Government encourages Incubators and Accelerator through various schemes and programmes to motivate startup companies after make in India initiative. The Ministry of Micro, Small and Medium Enterprises (MSME) provides for 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. 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 for 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. 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.

The Indian government has recognised many incubators and accelerators for the development of startup companies.

Difference between incubator and accelerator

CHARACTERISTICS

INCUBATORS

ACCELERATORS

CLIENTS

Science based business (biotech, medical devices, nano technology ) 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 service like consultation, specialised advice in IPR, skill development.

Gives idea, procure resources and investments, find customers.

Investment

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

They invest money in companies and take equity.

Conclusion – which is better for a startup

“The general characteristics of the incubator are the following:

  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 startup companies.

Characteristics of accelerators: 

“• It is open and highly competitive.

  • They provide for seed investment for exchange of equity. 
  • Instead of individuals they focus on small team
  • Startups supported in cohort batches or ‘classes.”

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


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