In just a few weeks, I’m going to see my mom for the holidays. While I’ve been in the startup world for over a decade now, I know my mom (and many of my friends) have no idea about all of the startup jargon we throw around, especially when it comes to the type of support startups can receive. Words like accelerator, incubator, venture studio, and others are terms that sound the same or are very confusing. And my mom and friends aren’t the only ones who are confused. Even GAN’s Advisory Board has asked us to define certain terminology at various points in our meetings. Not because they’re not well aware of the lingo, but because things change every day and two people who use the same word can often mean different things.
So, I thought it might be helpful—for my mom and yours—if I put together a “startup support terminology guide.”
I’ll continue building on this over the coming weeks, but I at least wanted to get a start here, before the holidays. The caveat, of course, is that this is just my own interpretation of these terms and, any time you provide quick explanations of anything, you give up a lot of nuances. With that in mind, are there variations here? Sure. Might someone else describe them a different way? Absolutely. But, here’s my quick take.
First, Some Level Setting
If we’re going to talk about the ways startups get support, we first need to define the difference between a “startup” and a “small business.”
Here’s what (I believe) it is:
A startup is a company that is poised to grow very quickly from the outset of launching their company. The company is usually building some sort of technology because it can “scale” (or “get bigger”). Meaning, once the startup builds the thing it’s selling, the company can have an almost unlimited amount of people use it.
An example: Instagram. Within one week, 100,000 people were using Instagram and within three years, 150 million people were creating #LaterGrams and #TBTs and #NoFilter posts.
A small business is a company that is poised to grow steadily from the outset, though this growth doesn’t have to be quick or large. A small business typically must make a profit (meaning, the amount of money it brings in must be more than the amount of money it spends) from Day #1 of starting the company, or at least very quickly after that. Small businesses usually have a cap on the number of customers they can serve at any given time.
Example: My barber. He leases out a space that includes a total of six chairs, one for him and five others that he subleases out to five other barbers. He only has so much time and so many chairs, which means he can only have so many customers and so many fellow barbers that sublease from him, which means he has a relatively fixed amount of revenue he can make every month and that’s the extent of how much he can scale.
That said, I work in the startup world. So, everything I focus on from here on out will be on startups and not small businesses.
How Those Startups Get Support Along the Way
If you’ve been in the startup world for any length of time, you’ve likely heard that most startups fail. It’s very, very hard to run a startup. Because of it, there are a ton of organizations that serve as support mechanisms for startup founders. Here are a handful of the most common. These groups also happen to be the primary groups that GAN works alongside, facilitating connection across groups while helping each individual type of startup support organization to continue improving what it is they do in the world.
If you have a startup with an existing product or service and a small team (of around 2-5 people), you have the opportunity to join an accelerator. Instagram would have been a candidate for an accelerator because it had two founders and a product with just a few users. Accelerators are typically looking for companies just prior to raising investment from venture capitalists. Sometimes, startups will work with a local accelerator, but it’s more common for startups to move to the town where an accelerator operates and work in the accelerator’s offices. Accelerator programs usually last around 3-6 months, and startups will be in the accelerator’s office that entire time. And, an accelerator often gives some money to a startup—an average of around $40K—and free workspace during their time in-program. Meaning, startups never have to pay to go through an accelerator. The accelerator actually pays the startup in return for taking some ownership stake in their company. During an accelerator, startups also receive intense mentoring from both accelerator staff and outside mentors who give of their time, as well as connections to angel investors and venture capitalists.
Examples: Airbnb, Dropbox, and Instacart all went through an accelerator. GAN, of course, is a highly curated community of accelerators all over the world. More than 100 quality programs in over 100 cities across six continents.
If a startup has a single person running it, a small team of 5-10 people, or even a larger team of up to 50 or so people, many of them use coworking spaces. Startups are largely paying for rent and access to some fun amenities when they buy into a coworking space. That means office space for them and their teams and a variety of things like, for example, fresh-brewed coffee, wifi, kombucha, common areas, phone booths, reservable meeting rooms, parking spaces, etc. Though some coworking spaces offer programming that’s available at-will to the startups that work there—anything from speakers or events on a certain topic—startups are not required to attend these sessions. And, they don’t typically get much additional support from mentors or intentional connections to investors. There is also rarely intentional relationship building and cross-company collaboration at shared spaces unless those shared spaces focus on it specifically. Whereas, with accelerators and incubators both, staff work hard to facilitate peer relationships with those in cohort alongside you because building these connections can at least lead to relational support when things are hard, or—even better—new business from related companies you’ve come to know.
Examples: WeWork is the most famous example of a coworking space.
An incubator is a bit of a mix between a coworking space and an accelerator, but not squarely either. The biggest difference between an accelerator and incubator is that an accelerator pays a startup to go through its accelerator (the benefit being a small portion of equity in each company) while a startup pays an incubator to go through its program (the benefit being not needing to give up equity in their company). An incubator program also often lasts much longer than an accelerator would, where some startups work with an incubator for up to two years.
The biggest difference between a coworking space and an incubator is that an incubator does actually provide some mentorship and connections along the way, although these connections aren’t as intense as what you’d get in an accelerator. And, incubators vary on whether or how much required/offered programming exists for their residents. Meaning, many incubators do offer structured programming, including anything from branding and marketing skills to how to build a budget.
Example: InBIA is the largest network of incubators. Unfortunately, when you google “top incubators,” most of what pops up are actually accelerators. But, here’s a social impact incubator in New York.
Startup Studios: This model is the latest one to catch the attention of people in the startup world. These are different than the models above because it’s the managers or owners of the studios who come up with the company ideas. After very intentional and iterative testing processes of each idea, they then hire founders (which is a fancy term for the people who run startups) to come in and run each market-tested company. Usually, the startup studios are looking for people to run these companies who also have a proven track record—startup CEOs who have experience running a company or two that have reached “exit” (more on this term in the future) or some other major success. They also give founders funding and space for up to a year or two, along with pretty intense mentorship and legal, marketing, and accounting support. Out of all of the support organizations above, studios typically take the most hands-on approach and provide the most legal, marketing and account support out of all of the groups you see here. They also tend to take the highest amount of equity from their portfolio of companies.
Angel Investors and Venture Capitalists: At the end of an accelerator or studio and throughout the time that a startup is at an incubator or coworking space, many startups are going to need money to fund their businesses. When startups raise money, they’ll go to either or both angel investors or venture capitalists to raise money. The only difference between the two is that angel investors are individuals who invest their own money into startups while venture capitalists pool other people’s money and invest that money into startups. Sometimes angel investors and venture capitalists mentor startups but that’s not always the case. More often than not, they’ll make an investment into a startup and then support with much-needed connections to other investors.