What is a Startup Incubator?

In this blog, you'll learn about the differences between a startup incubator and an accelerator, the pros and cons of joining a startup incubator, the types of incubators, and more. After, find out more ways to raise money by reading How to Raise Money for your Business.

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What is a startup incubator?

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A startup incubator is a program for individuals to help them incubate new ideas into businesses. Traditionally, it is a physical space where entrepreneurs can work together and access resources, such as mentorship, funding, and networking opportunities. However, when COVID-19 changed how the world works, many new remote-first incubators formed and provided similar perks, benefits, and support to entrepreneurs.

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Startup incubators vs. accelerators

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The terms "startup incubators" and "accelerators" are often used interchangeably, but they have some key differences. The primary differences are:

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• Company stage: Startup incubators generally work with talented individuals, rather than formed companies, to help them incubate ideas, match with cofounders, and build an initial product. Accelerators work with early-stage companies downstream of incubators.

• Investment: Incubators offer founders many benefits and perks but only sometimes make investments. On the other hand, accelerators invest, on standard or preferred terms, into companies they accept.

• Time frame: Incubators provide lots of flexibility with how long you can participate to match the variability for a founder to find and validate a business idea. On the other hand, most accelerator programs are a fixed duration of 3 months or less.

• Structure: Incubators typically host different sessions each week to cater to the diverse needs of people in slightly different stages. For example, some founders may focus on finding an idea, while others focus on matching with a cofounder. On the other hand, the structure of accelerators helps to grow your business faster, with a demo day or fundraising event as the culmination of the work.

• Support: Incubators are typically hands-off and occasionally may open up spots for office hours to talk to experts. On the other hand, accelerators have full-time partners and visiting partners dedicated to supporting a set of companies in the cohort.

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Pros of joining a startup incubator

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• Access to resources: Startup incubators provide entrepreneurs with a range of resources such as office space, mentorship, funding, networking opportunities, and educational resources to help them grow their businesses.

• Supportive community: Working in a startup incubator can provide entrepreneurs access to a supportive community of peers and mentors who can offer guidance, support, and advice throughout the business.

• Increased visibility: Incubators often have a network of investors and industry contacts that can help startups improve their visibility and make valuable connections.

• Lower costs: Incubators often provide startups with access to affordable office space and other resources, which can help to lower the costs of starting and growing a business.

• Access to funding: Incubators may also provide startups with access to funding or help them to secure investment from venture capitalists, angel investors, or other sources.

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Cons of joining a startup incubator

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• Loss of ownership: In exchange for their support, resources, and investment, incubators may take a certain ownership percentage in your newly formed company.

• Required commitment: Incubators may require entrepreneurs to attend sessions in the program for a set period, which can limit their flexibility and ability to pursue other opportunities.

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Types of incubators

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There are several types of incubators, each with its unique focus and approach. While every incubator's north star is to support startups, they may have different incentives, so it's essential to understand their nuanced differences.

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Some common types of incubators that you can read about in-depth in the following sections include:

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• Startup incubators
• Industry-specific startup incubators
• University incubators
• Corporate incubators
• Non-profit incubators
• Government-funded incubators
• Small business incubators

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Startup incubators

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Startup incubators support startups from various industries and sectors. Startup incubators are commonly structured as for-profit ventures and almost always have some investment vehicle attached to them so they can align their interests with founders over the long term. So if the companies they support break out, the startup incubator makes a lot of money from the liquidity event, which they can funnel into more investments and resources to support the next generation of startups.

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Be careful of startup incubators that charge lots of upfront costs and provide no investment.

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First, most founders only have a little money when just starting, often working a part-time job to get by or living off of their savings. Therefore, upfront costs cut an entrepreneur's runway down, decreasing their chances of success. Less runway or time equals fewer shots on goal to be successful.

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Secondly, startup investing, especially if you have access to good deals and can invest early in the lifetime of a startup, has tremendous financial upside. For example, Initialized Capital made $2 billion on a $300K investment into Coinbase in 2012. The math on the investment is so obvious that it's basically dumb not to invest. So, suppose a startup incubator doesn't invest or has any plans to invest in startups coming out of the program in the future. In that case, it tells the market they have no long-term confidence in producing winners. This not only detracts promising entrepreneurs from applying to the incubator in the first place, but it will also hurt companies who do and launch from them because there will be adverse signaling which can impact their chances at raising money in the future.

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An example of a top startup incubator is the On Deck Founders (ODF). It provides world-class support in various verticals (fintech, climate-tech, crypto, etc.) by leveraging its community of 2500+ fellows with specific domain or industry expertise and its team's network of venture-backed founders, investors, and startup partners.

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Related Article: Top Startup Incubators of 2023

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Industry-specific startup incubators

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Not every industry needs an industry-specific startup incubator. However, the more unique the challenges are to a specific industry, the more it makes sense for an industry-specific startup incubator to exist. For example, many unique challenges come with building a biotech company compared to a software company. A biotech company may need lab space, support with the FDA approval process, and a significant amount of upfront capital to run the necessary experiments and studies before commercializing the product. In contrast, a software company needs none of that. 

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While industry-specific startup incubators may be able to meet an industry's specific challenges better than a regular startup incubator, there are things entrepreneurs need help with across the board – such as attracting funding, recruiting talent, and finding early customers. For example, while an industry-specific startup incubator may help the biotech company by providing cheap lab space, it may not have a network with enough liquidity to help you find a business cofounder. So, be sure to consider your most urgent needs, not just your needs, as it pertains to the industry you're building in. Sometimes, it may make sense for a business to try two programs to get the best of both worlds, simultaneously or one after another.

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One example of a top industry-specific startup incubator is Hardware Club, which has incubated companies including Voi, Proglove, Oura Ring, WayRay, Siren, and more. As the name suggests, they help entrepreneurs who want to build hardware startups. Hardware Club is structured as a selective community with a venture fund investing in companies from the community. Some industry-specific challenges that Hardware Club tackles include helping their companies find manufacturers, component suppliers, and distributors.

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University incubators

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University incubators, or academic incubators, are designed to support startups founded by students affiliated with the University. Many of the best companies, including Facebook, Google, and Mircosoft, were founded by University students.

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Universities can be a great-breeding ground for startup innovation because they contain dense populations of ambitious students who can be cofounders, early adopters, or customers for a startup. Also, starting a startup or any company is an irrational decision. It's an expensive use of time, and it often fails. For this reason, being young and naive may benefit a founder because they may not be afraid to fail and can take risks that others can't.

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Most University incubators are structured to support research-driven startups best because they come with the following:

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• Access to knowledgeable faculty members, private research studies, and facilities with specialized lab equipment and state-of-the-art technology
• Dedicated support and resources from the University's technology transfer office or legal team to help you spin out or further commercialize the technology – including handling all the details with intellectual property, copyrights, trademarks, patents, and trade secrets
• An academic credential can provide a positive signal to make it easier for your startup to attract funding, recruit technical talent, and more.

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An example of a top University incubator is Launchpad by Stanford, which incubates ten new companies each Spring quarter. Stanford is known for its entrepreneurial talent, topping the student entrepreneurship list in almost every noteworthy category – venture-backed founders, number of founders, jobs created, etc. So it's not surprising that Launchpad has incubated companies that have raised more than 600M+ in venture capital since 2010, including notable alumni Ravel Law, Branch, and Pareto.

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Related Article: Best University Accelerators and Incubators of 2023

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Corporate incubators

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Large corporations often set up individual business units to form and run a corporate incubator, which is an incubator designed to fund and support businesses that align with the strategic objectives of the larger company.

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You may be wondering why they would do this. As a company scales, the rate of innovation and release of new products often slows down. An outsider may think the inverse would be more likely, but overwhelming evidence has debunked this. The more layers you build into a company, which comes naturally as you scale, the more you end up curbing innovation. No longer can a single employee make the decision that they want to launch something into the world as part of the company. Instead, they often run into one of the following:

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• (A good product never launches) Leadership sees the obvious downsides with the product, which tips the scale and outweighs the hidden upsides.
• (A bad product forms) Managers and their managers edit the idea so much that they build something nobody needs, and the product dies.
• (A new startup forms) They get shut down by the work it takes to make it through the approval process and end up quitting to build the product themselves.

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So, to counteract this paradigm, corporations set corporate incubators up as individual business units with a flat organizational structure that operate and report to different leadership than the primary company. Additionally, they may brand and name the corporate incubator separately from the company, such as Area 120 (by Google), to ensure that there is less of a brand risk if a product from the incubator fails publicly. 

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Xerox Corporation is credited with the first corporate incubator when it established the Palo Alto Research Center (PARC) in 1969. PARC is widely regarded as one of the most innovative corporate incubators in the history of computing. It has pioneered advancements such as laser printing, Ethernet, graphical user interface (GUI), and more. Xerox leveraged many of these advancements to stay relevant over the past decades.

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Many corporations used PARC as the golden example when designing and forming their corporate incubators, such as Mozilla Builders or Converge by OpenAI.

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When considering whether to participate in a corporate incubator, it's important to understand the corporation's relationship with the companies. Some questions to ask them:

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• How do you support the companies you incubate?
• What are the long-term objectives or goals for the corporate incubator?
• What data-sharing or access do you request of startups in your incubator program?
• What's your stance on acquiring companies that participate in the incubator program?

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Asking them these questions will help you understand how they work with companies, whether your business aligns with their long-term priorities, and how much access or control they seek.

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Related Article: Which Companies Have The Best Corporate Incubators?

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Non-profit incubators

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Contrary to its name, non-profit incubators don't just support non-profits. Some of them also support for-profit startups. The common factor is they work with companies that are solving societal issues, such as poverty, education, health, climate, or sustainability.

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Concerning non-profits, similar to an industry-specific startup incubator, they face unique challenges simply because of their entity type. For example, non-profits require more transparency and reporting around its impact on the issues they are tackling, use different legal structures to operate, are forced to fundraise from other sources, and must incentivize employees without using equity compensation structures.

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On the other hand, a for-profit startup may elect to partner with a non-profit incubator for several reasons, including:

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• Access to mission-driven talent passionate about making a positive difference in society.
• Increase the awareness and attach their reputation to a notable non-profit leader in the space.
• Increase their exposure to companies and partners in the non-profit space with whom they can work or collaborate.

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Generally speaking, non-profit incubators are great for the startup ecosystem, but there are a couple of things to be aware of before using one.

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Non-profit incubators vary wildly regarding quality – precisely, quality regarding starting and growing a business. Because non-profit incubators usually run at a loss, they can't afford to pay top dollar to attract and retain notable founders and investors who can give tactical advice rooted in years of expertise. Additionally, non-profit incubators will always push you towards the most societal impact, even in fixed-pie situations where you may need to pick either profit or impact, but not both for your business.

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One example of a top non-profit incubator is Blue Ridge Labs, founded by the Robin Hood Foundation. The incubator is structured to support both non-profit and for-profit startups aimed at reducing poverty in the greater New York area. The program alums have gone on to participate in top accelerators, such as Y Combinator, received funding from major philanthropic institutions, and named Echoing Green Fellows for their work to advance equity.

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Government-funded incubators

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Government-funded incubators are sponsored or supported by government agencies or public sector organizations. They aim to foster innovation and economic growth in specific regions or industries. Startups may create economic growth by:

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• Creating jobs at a higher rate than older businesses.
• Attracting talent from major cities to move to an area for a startup job.
• Increasing the wealth of its employees (i.e., Uber, Airbnb, and others created 1,000s of millionaires) during a liquidity event, such as an IPO, which is then spent in the local economy.

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When you consider the economic impact that startups can have in a region, it's easy to see why the government is willing to spend money to support incubators.

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Similar to corporate incubators, the structure of government-funded incubators varies and can impact your experience. For example, some incubators are entirely government-funded, while others are partly government-funded. In addition, some government-funded incubators support for-profit companies while others focus on non-profit companies.

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Government-funded incubators tend to be less competitive than other types of incubators. Rather than make entrepreneurs apply and interview to get selected, government-funded incubators tend to set requirements around the company structure to qualify for their resources. This is largely because they want to mitigate the risk of any political bias creeping into the decision-making process through which entrepreneurs access the incubator's resources.

One example of a government-funded incubator is the Los Angeles Clean Tech Incubator. It is structured as a non-profit organization and paid for by the City of Los Angeles and the Los Angeles Department of Water & Power (LADWP). Some notable companies that have participated in the incubator include Envoy, which raised $80M+ from professional investors, and Circuit, which raised $10M+ from professional investors.

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Small business incubators

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While most incubators focus on supporting startups, there are also some small business incubators. A small business incubator can help you conduct market research, draft a business plan, and assemble an application to open a business bank account. Many incubators skip over these things, but they are necessary to accomplish to get started.

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Another thing small business incubators are better at than other incubators is setting up a business with a physical location. Most incubators attract online startups since SAAS, marketplace, and other online businesses can achieve high-profit margins, which makes them attractive to investors who want breakout companies. Small business incubators can help you find an excellent location for your business because they have local connections and know the business that was in the place before you. In addition, they understand their community more deeply, as most people who work at small business incubators have started businesses in the community and have been active participants in their communities for decades.

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One excellent resource for small businesses is the Small Business Development Centers (SBDC) set up by the U.S. Small Business Administration. There are 62 lead SBDCs, one in every state, and a broader network of more than 900 service locations. So, if you're looking to start a small business, there's an SBDC nearby to support you!

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How to get into a startup incubator

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Getting into a startup incubator can be a competitive process, but there are some steps you can take to increase your chances of being accepted. I would know because I created the admission process for On Deck, a top startup incubator, as their Head of Admissions. 

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Here are some tips:

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• It's essential to know your story. This doesn't mean just what you did at work or in previous startups, but instead, make sure you understand the implications of your work, the results, the critical decisions made along the way, and what you wish you could've done differently in hindsight.

• Show that you're making progress. It's a huge red flag if you have been working on something for a year and have nothing to show. It's better to show what experiments you have run, even if they have failed and have not resulted in users or revenue.

• Use references and referrals to your advantage. The highest signal ones are notable founders or investors – such as Keith Rabois, Jess Lee, and Eric Yuan – or program alums. If they worked directly with you, make sure they highlight that for the reference check.

• Lean into your strengths. Startup incubators will take bets on people who spike on one skill but may need to improve at everything else. Startups are a team game, and you can often surround yourself with cofounders or early hires to fill in the gaps.

• Show that you are a long-term and structured thinker. Startups will get screened out if they simply don't have aspirations to build a multi-billion dollar company. Remember, startup investing is a game of outliers. Incubators are more willing to take companies with a slight chance of outlier outcomes than small business ones.

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