Tuesday, April 5, 2011

Lesson #11: Considering Incubators or Accelerators For Your Startup

Posted By: George Deeb - 4/05/2011


& Comment

One way to help get your business off the ground, is to leverage the mentorship benefits of an incubator or an accelerator.  First of all, a quick definition of each.

An incubator is physically locating your business in one central work space with 10-20 other startup companies, typically all venture funded by the same investor group.  You can stay in the space as long as you need to, or until your business has grown to the scale it needs to relocate to its own space.  The mentorship is typically provided by proven entrepreneurial investors, and by shared learnings of your startup CEO peers.  Examples include Tech Nexus and Sandbox Industries here in Chicago.

An accelerator is very similar, but has some distinct differences.  Your time in the space is limited to a 3-4 month period, basically intended to jump start your business and then kick you out of the nest.  The cash investment into your business from the accelerator itself is very minimal (e.g., $20,000), but your time in the accelerator should largely improve your chances of raising venture capital from a third party entity on the back end of the program.  And, mentorship could be coming from 40-50 entrepreneurs that are affiliated with the accelerator (many of which are proven CEOs and investors looking for their next opportunity or simply helping the local startup community).  Examples include Excelerate Labs in Chicago, and the wildly successful Tech Stars, Y Combinator and 500 Startups in other cities.  Here is a great list of accelerators by city curated by Robert Shedd.

Deciding on whether or not you should pursue starting up your business via an incubator or accelerator largely comes down to your personal confidence in the defensibility of your business model, your execution skills and your fund raising skills.  If you have a credible story and your business is nicely progressing on your own, you probably don't need to be part of one of these programs.  But, if you need help fine tuning your business model or revenue model, or may be a first time CEO wanting to hone your skills from proven peers and entrepreneurs, then this type of mentorship could be perfect for you.

Here are the high level advantages and disadvantages of programs like this.  The plusses are: (i) shared learnings and mentorship (helping avoid typical startup pitfalls and speeding up your efforts); (ii) access to capital, either within an incubator or post an accelerator; and (iii) the PR value and exposure you get from these programs (not to be underestimated).  The minuses are:  (i) they can be distracting at times, with lots of related meetings and events with mentors and investors (getting in the way of focusing on your own project); (ii) they can be confusing at times (getting 10 different opinions from 10 different mentors), so you need a good "filter" on any advice; and (iii) sometimes, sharing space with other companies is not always a plus, especially in long term incubators that may be carrying dead weight of underperforming companies.

Overall, I think these programs are terrific for first time CEOs, that can quickly get up the learning curve with the help of mentors and investors that have "been there, and done that".  Plus, your odds of raising capital are vastly improved given the tight screening processes of these groups, that naturally raise the creme de la creme to the top, from the 1000's of applicants they receive each year.  Competition is naturally fierce to get one of these coveted spots, so make sure you have a fine tuned pitch and leverage your network to help pull some strings for you.

Good luck!

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