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July 25, 2011

Business Incubators and Business Accelerators

In the past few years there has been an explosion of business communities, governments and academic centers setting up business incubators. At the same time, the term business accelerator has also made a comeback. Although the terms are sometimes used interchangeably, for entrepreneurs, innovators and technology ventures it is important to know the difference between the two when seeking advisors or funding.

Definition of Business Incubator

The definition of a Business Incubator can be described as a set of programs set up by a government, business alliance or academic group though a variety of services/training. The intent is to help small companies in the incubator have a better chance of survival through the start-up phase. Services may include but not limited to:

  • Office space: Usually at a reduced rate.
  • Office services: Receptionist, conference rooms, computers, office equipment etc.
  • Entrepreneurial advice and mentoring: Entrepreneur advisor services can range from establishing a web presence to identifying IP licensing opportunities to raising capital.
  • Business planning and market adjustment consulting: Business plans are dynamic and constantly need to be adjusted to fit the market.
  • Contacts and Networking: The biggest advantage of a business incubator is its access to experienced entrepreneurs, innovators and professionals who can answer questions, provide guidance and resources.

Definition of Business Accelerator

A Business Accelerator is very similar to an incubator but differs in that they usually have a greater focus on companies entering or growing in a national or global market. Business accelerators are more likely to be financed by venture capitalist looking for an opportunity to finance growth potential through defined action plans.

Business accelerators will generally offer all of the services offered by a business incubator. The key difference is the level of hands-on involvement by accelerator management which should increase the chances of success.

Do Business Incubators and Business Accelerators Work?

The number of business incubators has grown from a dozen or so in the 1980’s to over 1,000 today. The NBIA estimates that they serve over 35,000 companies and over 19,000 companies successfully exited incubator programs. This would suggest that approximately half of business incubator companies survive 3-5 years.

“Seven out of ten new employer firms last at least two years, and about half survive five years. More specifically, according to new Census data, 69 percent of new employer establishments born to new firms in 2000 survived at least two years, and 51 percent survived five or more years.”

Source: SBA

The SBA estimated that in 2008 there were 627,200 new businesses opened and that 595,600 closed. Clearly, new ventures face challenging odds to survive. For this reason, gaining acceptance into a business incubator is likely to increase the chances of survival but is far from a guarantee of success.

Choosing a business incubator or accelerator is a process that must be thought through carefully as the quality of business incubators for entrepreneurs varies greatly. Our next post will take a look at why so many business incubators fail to do more with the resources available to them.

For your convenience these terms have been added to our Glossary for Entrepreneurs and Micro-enterprises.

Share with us your experiences with business incubators and accelerators. If you liked this article you may also want to read: