Incubator or Accelerator?

First of all, let's distinguish the type of the business we are going to cover.

Accelerators are three-to-six-month-long programs that are generally only open to startups with a minimum viable product (MVP), while incubators typically look for idea-stage startups with a time frame that can extend beyond the two-year mark. Both have the very same goal - a success of a venture. While the success can be measured in various ways, there is a common piece which both types put into practice in order to achieve it.

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A common goal of both, innovation-incubating (or accelerating) businesses is growth and success of the technology they invested in. Either rapid, short-term growth (rather on acceleration side) or long-term bet on the business (incubation). Since both models are meant to incubate the business growth, we'll stick to the term "Incubators" for the purpose of this article. For incubators to truly be impactful, they have to sidestep two challenges:

Challenge 1: Adding Genuine Value

Back during the internet boom, numerous law and accounting entities ventured into incubation, but many faltered. Charles D’Agostino, who led the Louisiana Business & Technology Center at Louisiana State University, provides insight,

"Incubators can be effective, but they should be more than a property-based entity with executive suites. The crux is in offering business guidance and managerial support. This is what sets them apart."

From my research on incubator failures, I was surprised to discover that several assumed that affordable office space, communal work areas, second-hand furnishings, coupled with basic telecommunication and internet services, were synonymous with business incubation. To cite a 2020-2021 trend, many embraced the remote working model due to the pandemic, further emphasizing the point that mere physical space doesn't define an incubator. As Jim Flowers, a key figure in the Virginia Business Incubation Association, pointed out,

“Mistaking affordable office space for meaningful content is an error."

And it is. Merely offering reduced rates for legal or accounting services doesn't cut it either. Ultimately, the first challenge is something that we could describe by things like the Incubator's product or service portfolio around mentorship and access to resources. Based on the most successful incubator in the world - Y Combinator, we can take a look at how the ideal, full-spectrum Incubator's service portfolio should look like.

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“YC is no longer just an accelerator, It’s a full stack product.”

Coming from the Managing Partner of YC’s growth-stage vehicle Continuity, that description feels particularly apt. Looking at YC today, you’ll find a firm designed to support entrepreneurs from pre-idea through pre-IPO. Most of the Incubators cannot afford this type of value offering complexity. While YC's product appears seamless now, it has been shaped through continuous experimentation. Over time, YC has explored various geographies, organizational structures, and financing approaches. Y Combinator has expanded not just the nature of its product but also the breadth and depth of its investments. Starting with backing ten enterprises in the summer of 2005, it now supports almost 400 from various sectors and nations per program.

President Geoff Ralston mentioned that "in the future, batches might include tens of thousands." It's something that only the top 1% of all Incubators will ever be able to achieve and not something the rest 99% should focus on.

The increasing size of YC's batches has sparked debate, with critics feeling it dilutes the accelerator's value, likening the growth to an industrial farm in the venture space. However, Ralston fervently defends the expansion, describing such criticisms as fabricated and emphasizing his enthusiasm for growth. He believes YC will maintain its track record of supporting unicorns. Despite an average annual growth of 20% in batch sizes, some years, like 2012, saw a decrease, while others, such as 2006, 2007, 2011, and 2021, experienced notable surges.

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If it keeps expanding at its current rate, YC will support nearly 1,400 companies annually by 2025 and close to 3,500 by 2030. To surpass Ralston’s 10,000 marker would require a further six years. That is something an Incubator can aim for only if it has the capacity, resources and scale of Y-Combinator.

Instead of looking for YC's opportunities, let's focus on values they've been able to deliver as their main differentiators. For that purpose, we'll take a look at each business stage separately - idea, inflection and growth.

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Idea stage

Founders with business plans apply to YC’s accelerator, with acceptance rates estimated between 1.5% to 3%. Traditionally, accepted participants moved to California, often residing in the “Y-Scraper” apartment. However, Covid altered this, though YC plans to resume in-person batches.

YC's investment terms include $125,000 for 7% equity and an additional $375,000 on an uncapped SAFE with a "Most Favored Nation" provision. In return, founders access YC's vast network, attend expert talks, and engage in office hours with partners. Malcolm-Wiley Floyd of Stairs Financial found these interactions invaluable. However, as YC has grown, some, like Ekaterina Damer of Prolific, feel its mentorship has become more transactional and less in-depth. As it has scaled, YC may not be able to give as much direct attention as it once did.

Joining YC also offers entrepreneurs a vast network of current and past participants.

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Inflection stage

From 2018, YC began assisting startups during their Series A fundraising phase. YC guides founders in assessing their readiness for this phase using their vast data and expertise on product-market fit. While they offer resources and advice, YC doesn't lead Series A rounds, allowing market dynamics to determine company valuations.

Simultaneously, YC introduced the "Work at a Startup" (WaaS) platform in June 2018, streamlining the hiring process for YC-affiliated startups. Candidates can use one profile to apply for numerous positions, attracting high-caliber talent, including engineers from top tech firms. According to Hariharan, the WaaS program has been a significant source of talent, with 75% of engineers at startups like Brex, WhatNot, and Faire being recruited through the platform. YC also offers an additional service for executive-level hiring.

As a result of their scale, here is a list of things that YC knows and most venture firms don’t:

1. They know who wants to start a company before they have an idea
2. They know which founders want a cofounder
3. They know who is open to a new job

In summary, the advantage YC has over all Incubators in the world is the unprecedented access to talent. Now, the important factor here is the nature of talents that YC attracts. It is to be noted that from the very begining, YC has been optimized for a different kind of entrepreneur. Rather than pursuing grey-haired executives ready to leave the bower of big business, it sought technologically-gifted youngsters. This turned out to be a jackpot bet as over the past two decades, "hackers" or "tech nerds" became the prototypical profile for tech entrepreneurs. They dared to challenge the notion of innovation being a result of a single stroke of genius rather than a concerted process. YC's curriculum changed this perception by teaching new founders how to build a business, step by step.  

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Growth stage

Hariharan and Rowghani invest between $20 million to $100 million in Series B and later-stage ventures, occasionally reaching up to $300 million for companies valued at $15 billion. Though Continuity only backs YC graduates, Convoy and Monzo are exceptions. Their portfolio includes heavyweights like Stripe, Webflow and Coinbase.

Continuity offers two scaling programs for businesses. The first is for post-Series A companies, focusing on enhancing product-market fit and gearing up for Series B. The second, for rapidly growing companies, delves into leadership and financial planning, enriched by insights from accomplished alumni like Tony Xu from Doordash. Annually, Continuity supports 200 companies through these curricula.

But what makes these investments so successful? The answer is - data. The massive, private data pool that YC owns thanks to their batch scale is unobtainable by 99% of Incubators in the world.

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The common ground of successful Incubator's value

As we analyse the success behind the extensive YC portfolio, we can derive the following, unique values that the company delivers at teach stage.

The common value of all three could be somewhat summarised as - attracting quality future entrepreneurs and quality, successful entrepreneurs to back them up (with knowledge of funds). In other words, the number one problem that all incubators face, and which determines the greatest part of their success is their ability to close the gap between potential and future entrepreneurs.

Closing the knowledge gap - batch quality problem

In the realm of new start-ups, there's a pronounced knowledge deficit on both ends. Newbie entrepreneurs often lack the experience to navigate through challenging times. Similarly, novices, whether they're friends, family, or increasingly, crowdsourced backers, aren't equipped to evaluate a business's potential or guide rookie business founders. Now, that is the source of the problem number one - batch quality.

This knowledge void, in my view, is best addressed by astute incubators. Yet, of the 7,000 business incubators globally (according to the International Business Incubation Association), a significant number don't survive. This means that there's an incubator for every type of business in practically every corner of the globe, but still, only a certain market area brings relatively good ROI compared to other types of the business. Clearly, YC has a large preference for SaaS startups, as well as interest in healthcare and consumer products. These 3 categories make up almost 60% of live YC startups.

D’Agostino emphasizes, “It's vital for incubators to assess an entrepreneur's managerial abilities and help them find the right management. When the entrepreneur is technically inclined but lacks business acumen, the incubator should actively help in sourcing skilled managers to elevate the company.”

Technical experts can indeed learn essential business skills. Period. That sentence doesn't require any further explanation as it's clearly backed up by all data Y-Combinator's case can deliver. While bringing in managers might be costly, intelligent engineers have consistently demonstrated an aptitude for mastering business practices under proper guidance. Hence, reaching greater heights is certainly within their reach. The primary duty of an incubator should be to shepherd them through this learning curve.

The real "elevation" for a start-up lies in having a business concept that's endorsed by key customers, complemented by a product that meets their requirements. All the other elements – a physical office, legal paperwork, accounting systems – don't inherently add to the company's worth or value. The gold standard for incubators should be their efficacy in aiding clients to establish valid business models, secure crucial clientele, and finalize at least a basic working product.

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Our Solution

Intranove's Art of Innovation program is a complete solution for all Incubators, that allows to close the knowledge gap and increase the batch quality. Art Of Innovation is designed to equip talented people, future entrepreneurs with the knowledge and skills necessary to drive innovation, overcome communication barriers, and tackle work organization challenges.

Through a blend of engaging workshops, mentorship sessions, inspiring stories and networking opportunities, we designed each program module to provide understanding of innovation principles.

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Module One contains sessions focused on the basics of the first stage of the innovation process - Ideation. We lay the ground for understanding the simple rules of developing an idea for an innovation project, including idea generation, classification and qualification.

The second module teaches how to navigate the treacherous yet exhilarating waters of the industry. Program is designed to equip participants with the essential knowledge and skills to build a successful business case. We dive into the intricacies of the market, unravel customer needs, and identify the perfect beachhead opportunity for the solution.

In Module 3 we dive deep into the world of user experience and the minimum viable product (MVP) delivery process. This module is packed with valuable insights and practical skills that will empower you to identify, validate, and iterate your solution hypothesis effectively. Talents get a comprehensive training of team dynamics, early product development, and user experience research.

In Module 4, participants unlock the secrets of stakeholder management and the art of persuasive pitching. This module is all about mastering the skills and strategies to win over stakeholders, manage their resources, and unite them around innovative vision. We help the people to unleash their persuasive powers and charm their way to success.

A struggle to translate theoretical knowledge into practical implementation and growth is solved by our unique, methodology used in all workshops and seminars included in the Art of Innovation program.

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Challenge 2: Definition of success

Looking at YC's results over the past (nearly) two decades, the majority of established companies are either acquired or shut down. Looking at startups from before 2015, 29% are acquired, 40% cease operations, 30% remain active, and 1.4% have had an IPO. Results differ significantly across industries, with consumer-focused startups shutting down at about double the average rate.

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What does this data tell us? Nothing without a context. The reason behind the rising trend of active funded companies comes mostly from diversified strategy of YC. There's a noticeable shift in investment trends by sector. Since 2011, fintech startups in YC's portfolio grew from 7% to 24%, while healthcare startups increased from 5% to 10%. Consumer startups, however, decreased from 30% to 14%. Crypto isn't a dominant category, but some might be categorized under “Unspecified.” YC has funded 85 crypto or web3 businesses so far, with 24 from the recent batch, suggesting they're still exploring this sector.

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In other words - YC secures more market gaps, following technology trends in multiple, diversified industries and verticals.

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Specialise in specific sector

Many incubators consider funding as a measure of success, which is a limited viewpoint. Over 99% of businesses should thrive organically without external funds, focusing on customer validation rather than financing. Incubators pushing funding can often lead these businesses astray.

While Y-Combinator ensures seed financing by collaborating with major venture capital firms, most incubators don't have such privileges or deserving startups. Incubators should educate on what's fundable and connect startups to relevant investors when needed. But their success shouldn't solely hinge on funding. Concentrating only on the under 1% of fundable startups neglects the majority. For future capitalism, a broad incubation approach catering to the 99% is crucial.

In recent years, the start-up accelerator landscape has seen a marked shift towards specialization, catering to niche industries from biotech to AgTech. Industry leaders such as IndieBio, BlueStartups, and The Yield Lab exemplify this trend, offering tailored mentorship and resources specific to their sectors. A 2020 study from the Global Accelerator Learning Initiative (GALI) underscores the efficacy of this focused approach, indicating that specialized accelerators tend to outperform their generalist counterparts. This evolution is particularly salient in deep tech and regulated sectors, where the complexities demand bespoke knowledge and facilities. With many success stories emerging from these sector-specific hubs, the accelerator world appears to be embracing the adage: "Jack of all trades, master of none." This approach is favored because:

• Industry-specific investors typically surpass their broad-focused counterparts.
• Expert mentors in a particular domain can offer startups more pertinent advice and connections.
• Recognized programs with a niche can seamlessly link startups with their target industry, establishing trust.

Programs without a clear focus or that choose irrelevant sectors often face failure. If we were to analyse how this trend applies to YC we would see, that their portfolio is indeed very specialised.

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Taking a deeper look into sub-industries and analysing which use cases YC invested in the most over time, we can derive the following picture.

This means, a successful incubation strategy must involve a strict, clear focus on certain industry areas, following current trends. A report by Nesta, a global innovation foundation, pointed out that there's a global trend of moving from a sheer number of startups accelerated to the quality of startups. Specialized accelerators play a pivotal role in this by focusing on deep mentorship and sector-specific support. In addition to the examples mentioned, other growing areas of specialized acceleration include edtech, greentech, and foodtech. Many of these vertical-specific accelerators are not only offering mentoring but also labs, tools, or facilities specifically tailored to the needs of startups in these sectors.

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Finding audiences for your industry niche startups

Intranove Artistotle is a technology transfer support program for Incubators, who want to increase their batch quality and specialise in their niche sub-industries. Aristotle improves Incubator's batch conversion rate by closing the knowledge gap and securing demand for specialised startup use cases.

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The program is based on a simple demand - supply mechanism, transferring startup technologies to enterprise areas where a need for these technologies exists. We utilise our wide enterprise network to bring companies willing to invest in incubated technologies that cover their innovative needs. We uncover and assess the potential of incubated technologies through the Art of Innovation program, which closes the gap between talented engineers and their business knowledge. We believe that a strong mentor network is vital for attracting top startups. While renowned mentors can draw in excellent teams, their true value lies in their active engagement. A program's success hinges on having mentors who are both knowledgeable and deeply involved. Programs that falter often have experts with specific knowledge but without the practical entrepreneurial experience and connections that come from hands-on involvement in the business world. That's exactly what Aristotle and the Art of Innovation provide - seasoned mentors and hands-on experience.

Incubators that fail usually only manage to attract a small group of investors to Demo Day. Sometimes the people of this group call themselves "business angels" but mostly show up for networking, cookies and coffee. Just as vetting the startups and mentors is crucial to the success of the program, it's equally important to make sure that only active investors are invited to Demo Day. That is where we use our Enterprise Innovation Management program - Aspen, which identifies innovative needs of our clients through comprehensive technology scouting and foreshight mechanisms, continuously happening in companies we work with. We connect Incubators with active investors, who are not only willing to pay but bring to the table something much more important - real market demand.

In simple terms - we help to matchmake Incubator's technology supply with Enterprise specific demand, making sure both sides are ready for the transfer.

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