How Accelerators and Incubators Support New Businesses

How do accelerators and incubators support British businesses?

It is estimated that there are around 750 startup support programmes that fit a reasonable definition of either accelerator or incubator. Whilst London remains the most popular location, there are other clusters around Oxford, Cambridge, the Midlands, the Glasgow-Edinburgh corridor, and South Wales. It may also be somewhat surprising to note that, when weighted by business population, England has the fewest number, perhaps reflective of relative economic development priorities favouring the other home nations.

What are incubators and accelerators?

The terms can be used somewhat interchangeably, and some of the features and functions may overlap, but their core purpose is mainly differentiated by the stage of business they help. Incubators typically are designed to take an idea and develop it into a business. The accelerator then takes that business and gives it the advice, support, strategy for market development, and tools that will give it the best chance of growth.

Incubators

The oldest incubator in the UK is St John's Innovation Centre in Cambridge, which was launched in 1987. Incubators are more appropriate for new ventures whose founders have a clear vision of what they want to accomplish but little or no history of successfully doing so.

Incubators are often physical spaces that offer shared facilities and business support services, such as mentoring, training and access to investors in startups such as angel networks.. Most incubator programmes require startups to relocate their operations for the duration of the programme. Within the incubator, a company will be able to hone and fine-tune its original idea and work on ensuring that the fledgling business can achieve product-market fit. It will receive mentoring and advice around a wide range of other, important issues, such as how to deal with intellectual property matters, competitor analysis, and improving the founder's overall business skills and awareness. One of the other major benefits of an incubator is networking with other similar-stage founders and peers.

Some drawbacks include the time commitment required by one or more of the founders. Some of the programmes can be quite intense, and if it isn't particularly local, then juggling your time can be problematic. In addition, some, though not all, take an equity stake, usually in return for some initial investment. Giving up part of the business at such an early stage, before it has even really got started, may not suit every founder.

Accelerators

Accelerators came into existence more recently than incubators. The most commonly agreed origin for them is the Y Combinator programme, in the United States, which was established in 2005. Accelerators, unlike incubators, typically offer their services through an intensive cohort-based programme with a limited timeframe of between 3-12 months. The entry process is highly competitive which usually favours experienced teams with track records or specific skills.

As the number of accelerator programmes has grown, and therefore the competition to find the best founders, there has been an increasing move towards sectoral specialisation. Types of support may vary, but they typically include a focus on getting high-potential startups to rapidly scale.

Applying for an accelerator gives entrepreneurs access to mentors who have been through the startup process before, the chance to meet people who are already running their own businesses, to learn how other entrepreneurs solved similar problems, and to get help planning their product launch. It also forces founders to produce a viable product in a short period of time. Founders also work towards what is, in effect, a graduation day when they pitch for funding to potential investors. Depending on the stage of the company, this can be seed investment or even later rounds of investment.

The downside of joining an accelerator includes giving up what is actually quite a substantial equity share early on - typically between 5-10%. It is also important to ensure that the programme is suited to your particular business. With the growth in the number of accelerators, it is sensible to do due diligence to ensure that the mentors have experience in your particular field and that the services offered are relevant and valuable to you, at your particular stage.

The current state of the incubator and accelerator support system

A recent report by the Centre for Entrepreneurs (CfE) called 'Incubation Nation: The acceleration of UK startup support', September 2022, found that there were over 400 incubators, 300 accelerators, as well as a number of other programmes. This number has nearly doubled since the last comparable survey was carried out by Nesta in 2017.

This rapid expansion has led to an estimated 19,600 firms a year receiving support which is approximately 5% of new firms in recent years (358,000 in 2020). It has also led to problems for the support organisations themselves, as they compete for funding, both public and private, via corporate sponsorship, good quality startups, experienced mentors, and a competitive edge.

The system can, very roughly, be split between two competing aims. The first is predominantly publicly funded, with the aim of boosting local economic growth and regeneration. The focus is on slower growth and greater contributions to the local ecosystems. The second is mainly private-sector-led. with a greater focus on higher-growth, higher-potential companies.

The sector has also seen newer entrants specialise (in a particular sector or vertical e.g. fintech or health tech), which brings its own problems, not least requiring a larger catchment area and ease of access for the founders.

According to the report, the ten most commonly directly offered business services by self-identified incubators were:
Office space
Networking with peers
Skills training (including business skills)
Business model refinement
Mentoring/coaching
Press/media exposure
Technical advice
Lab equipment or space
Investment advice/readiness training
Support with external grant applications

The ten most commonly directly offered business services by self-identified accelerators were:
Peer networking
Mentoring/coaching
Skills training (including business skills)
Business model refinement
Connections to potential investors/funders
Investment advice/readiness training
Press/media exposure
Demo days
Office space
Technical advice

Funding

There are four primary sources of funding for the sector:

Equity: based on the success of the graduates of the programme

Corporate sponsorship: private sector funds

Service fees: these include rental fees and other related costs such as facilities and venue hire

Public funding: these include local and regional funds from councils, Growth Hubs, LEPs, central government funding, EU funding and the university sector.

Interestingly, the equity funding is only 4.1% and 0.2% for accelerators and incubators, respectively (weighted data by programme size). For incubators, the two biggest sources are Fees/Rent from clients (47.9%) and European/international funding (42%). Corporate sponsorship (45.3%) and UK government/university funding (23.8%) were the two biggest sources for accelerators. The scale of replacement of European funding has yet to be fully ascertained. The UK Shared Prosperity Fund (UKSPF) is designed as a replacement, but exactly how it will work has yet to be finalised.

Future Trends

The recent pandemic, as for many other businesses, saw a rise in the provision of online services, with 93% stating that at least some of their services were now online. Whilst this widened catchment areas and reduced fees, it reduced revenue from in-person events and rent and the network effects from peer-to-peer interactions. New entrants, new services, and specialisations will likely see the sector continue to develop and evolve. The last few years have seen as many as 164 programmes forced to shut.

In addition, the 2021 report by Barclays Digital Eagle Labs, 'Unlocking Growth Creating Tech Ecosystems to Stimulate Local Economies,' highlighted the need to involve the broader ecosystem in the early-stage business support sector. Barclays Eagle Labs, one of the largest incubator networks found throughout the country, is designed to bring together local government, businesses, universities, and investors to help drive local growth. All the partners share the same interest in driving job creation, skills development, technological innovation, and growth.