Incubator:
an organization or place that aids the development of new business ventures especially by providing low-cost commercial space, management assistance, or shared services.
Accelerator:
a program that gives developing companies access to mentorship, investors, and other support that help them become stable, self-sufficient businesses.
The terms "incubator" and "accelerator" are often used interchangeably and assumed to represent the same concept, however there are a few key distinctions. And while most people associate these programs with tech startups, most of them accept companies from a wide variety of industries.
Purpose:
Incubators support startups entering the beginning stages of building their company. The startups possess an idea to bring to the marketplace, but no business model and direction to transition from innovative idea to reality.
Accelerators advance the growth of existing companies with an idea and business model in place. These programs build upon the startups’ foundations to catapult them forward to investors and key influencers.
Duration:
Incubators operate on an open-ended timeline. They focus more on the longevity of a startup and are less concerned with how quickly the company grows. It is not uncommon for incubators to mentor startups for more than a year and a half.
Accelerators operate on a set timeframe, which usually lasts three to four months. During this period, startups build out their business with the support of mentors and capital provided by the accelerator. At the end of the program, startups receive the opportunity to pitch their businesses to investors.
Application Process:
Incubators invest time and resources into advancing local startups; they are generally tasked with creating jobs or finding ways to license intellectual property. Incubators have less pressure to deliver startups that can grow fast, as fostering and supporting local startups is part of their charter. Therefore, even a slow growing or less scalable business constitutes a good incubator candidate.
Accelerators use a more traditional and formal model for entry into their program beginning with a rigorous application process. Top accelerators like Y Combinator and Techstars are highly selective, accepting less than 2% of applicants into their programs. Typically, the accepted companies have already demonstrated fast growth and a minimum viable product (MVP). The goal of the accelerator is primarily networking, mentorship, and resource allocation to skyrocket the success of proven business ideas.
Investment Capital:
Incubators do not traditionally provide capital to startups and are often funded by universities or economic development organizations. They also don’t usually take an equity stake in the companies they support.
Accelerators do invest a specific amount of capital in startups in exchange for a predetermined percentage of equity. Most incubators will give founders $25,000-$150,000 in seed funding for 5-10 % of their startup. Due to this investment, the accelerators bear a greater responsibility in the success of the startup.
Besides the investment, accelerators typically offer their startups access to investors in the form of a demo day. The businesses in these incubators/accelerators and that angels invest in are typically less than 3 years old, have little or no "traction" and are trying to find product/market fit.
Top Incubators and Accelerators as determined by Forbes:
As you can see, many of the top incubators and accelerators are located in and around Silicon Valley. Over the past fifty years, Silicon Valley has emerged as the driving force in technology, media, transportation, advertising, health, and lodging. No region in the world drives more societal change right now than Silicon Valley with the likes of Google, LinkedIn, Facebook, eBay, PayPal, Cisco, Apple, Twitter, Netflix, Uber, Airbnb, and Tesla (now headquartered in Austin, TX). So if you want to succeed in the angel investing world, it would be wise to get involved with companies that are located in this area, in the world capital of innovation.
It has been said that if you want to make a country album--go to Nashville. If you want to make a movie--go to Hollywood. If you want to build a startup--you've got to be in Silicon Valley or have connections to it. To be a successful angel investor, you need to invest in dozens of companies and you need to do it in the hottest market in the world: Silicon Valley.
Since Y Combinator (YC) is by far the most successful incubator of all time, let's take a look at it a little closer.
What happens at Y Combinator?
There are two cohorts per year each lasting three months – one from January through March and one from June through August. Over 10,000 startups apply during each cycle with only 1.5-2% of those being accepted. During those three months, founders participate in group office hours and can meet with partners as often as needed. While at YC, the companies work on their ideas, get incorporated properly, establish relationships with attorneys, investors, and acquirers, work on hiring their first employees, and work on filing patents to protect intellectual property. On a weekly basis, there is an expert in some aspect of startups that is invited to speak. Typically, speakers include startup founders, venture capitalists, and executives from well-known technology companies.
The goal of Y Combinator is to get these companies through the first phase which usually means getting to the point where the companies have built something impressive enough to raise money on a larger scale. In addition to working with these companies very closely over a three month period, YC also invests $125,000 of seed funding on a post-money SAFE in return for 7% of the company. The biggest value of the program now, though, may not be the programs, advising, or even introductions the firm makes--it's the network. Y Combinator now has thousands of founders in its tight network who are known to go to bat for other Y Combinator companies.
The 12-week program culminates in a Demo Day hosted by YC where all the startups can present their products and services to a specially selected audience of Silicon Valley's top angel investors, Venture Capital firms, and the press. With the documented success of companies coming out of YC, gaining access to Demo Day and the deals from these private companies is very difficult and highly competitive--we have access and in many instances we are able to invest in these companies prior to Demo Day when the valuations run up quickly.
You may recognize some of the top companies that have come out of YC including Airbnb ($130 Billion market cap), Doordash ($83 Billion market cap), Coinbase ($74 Billion market cap), Dropbox ($10.5 Billion market cap), Stripe, Instacart, Reddit, and Twitch among many other huge successes. The majority of these came out of YC with a valuation of around $10 Million. Click on the link below to see a list of the top companies as of January 2023.
YC has more than 160 companies valued at $150 Million+ and more than 25 companies valued at over $1 Billion.
The combined valuation of YC's top companies is over $400 Billion.
64% of the companies are headquartered in the Bay Area. 15% of the companies are headquartered in the U.S. but outside of the Bay Area. 14% of the companies are headquartered outside of the U.S. 7% of the companies are remote.
Quotes from those that have been involved with YC:
Founders:
"I doubt that Stripe would have worked without YC. It's that simple. Acquiring early customers, figuring out who to hire, closing deals with banks, raising money -- YC's partners were closely involved and crucially helpful." Patrick Collison, Founder, Stripe (YC S09)
"Y Combinator was a gamechanger for us. We entered the program with an idea and, 3 months later, left as a launched company with seed funding from the best investors in Silicon Valley. The network of friends, mentors, advisors and investors that we have gained through our association with Y Combinator have provided us with incredible advice, support and introductions over the last 3 years and have been instrumental in the success Science Exchange has had to date." Elizabeth Iorns, Founder, Science Exchange (YC S11)
Investors:
"Several of our best investments have come from Y Combinator. Y Combinator is the best program for creating top-end entrepreneurs that has ever existed." Marc Andreessen, General Partner, Andreessen Horowitz
"Y Combinator is the best startup accelerator in the world, and we pay close attention to their companies--many of our best investments have come through YC. YC helps their companies a LOT, and the YC community is a huge asset for the companies that go through the program." Ron Conway, Founder, Super Angel
Press:
"The opportunity is unparalleled." Newsweek
"The real story here for founders is that it looks like being in YC gives you better odds of success than if you go it alone." TechCrunch
Both Sequoia Capital and Andreessen Horowitz, two of the most successful and influential Venture Capital firms ever, provide $150,000 in conjunction with Super Angels Ron Conway and Yuri Milner in guaranteed funding to every new Y Combinator startup as part of the Start Fund. Some have asked if it is really a good idea to invest blindly in a group of companies without any vetting. “What you have with YC is a special situation,” explains Andreessen. “It is a very high quality set. Paul [Graham of YC] just impresses the hell out of us in terms of quality and the results he has had. Our view is he is running such a good selection process that an investment in this group is a good idea.”
Sequoia Capital invested in Y Combinator’s funds, and later, Yuri Milner, Ron Conway and Andreessen Horowitz provided $150,000 in guaranteed funding to each startup. The biggest value of the program now, though, may not be the programs, advising or even introductions the firm makes. It’s the network. Y Combinator now has hundreds of founders in its tight network who are known to go to bat for other Y Combinator companies.
Great news! We have opportunities to invest in a collection of private companies--even better, many of the companies from these opportunities will be companies that are enrolled in the world renowned and most successful incubator of all time, Y Combinator, and will be pitching at upcoming Demo Days for their particular cohort. We are fortunate that we will have access to investing in these companies at a low valuation before they graduate from YC and use all of the knowledge and connections gained to turn those start-up companies into full fledged companies with soaring valuations. If you already know that you want to participate in these investments, reach out to us to learn how to get enrolled and be involved in the next quarter and have access to all of these Y Combinator companies!
Lastly, if this information interests you, don't be the person who sits at home watching Shark Tank, secretly wishing for a seat at the investor table. This is your chance to get in the game--the longer you sit on the sidelines, the harder it is to get in the game.
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