February 5, 2015
Development shops (dev Shops), accelerators, and incubators are adapting to the needs of startups. If you haven’t noticed, there’s a growing trend in the world of entrepreneurship where dev shops are offering tech founders more than just their core service – software development – but also business advice. On the flip side, both accelerators and incubators are offering the services of their designers and programmers for new startups joining their program. Even their branding can be confusing—particularly for dev shops—where the services offered range immensely. And when it’s time to negotiate terms, there is talk of taking equity. Is the whole approach changing?
Yes, but that’s because startups need more to succeed.
But before we look at this trend, we should define some of the differences between accelerators, incubators, and dev shops. With so many companies offering various services, it’s important to understand the driving force behind the business.
Accelerators differ from incubators mainly in the competitive nature of their selection processes and their focus on mentorship. Usually, accelerators put companies together and call them cohorts. They fosters a communal identity among founders in the same cohort and allows the accelerator to focus its marketing and outreach around specific and predictable events.
Incubators are organizations geared toward speeding up the growth and success of startup and early stage companies. They’re often a good path to capital from angel investors, state governments, economic-development coalitions, and other investors. Incubators may call themselves accelerators when they work with more developed startups. Both accelerators and incubators take equity.
Normally, accelerators take equity from startups. On the other hand, incubators may sometimes take equity, but that depends on the program.
“These are the worst kind of shops. They take your requirements and then code, that’s it – their incentive is to maximize their billable hours, not their impact on the client’s success.” explained Andrej Kostresevic, Founder of the New Frontier Nomads.
Kostresevic's dev shop offers startups more than a product; they work with the founders in developing and validating the idea. He believes that this is how they are able to build better products. “The two most important words in our vocabulary are ‘no’ and ‘why.’ Since our upside comes from the equity, and the development work is done at or below cost, it really does not make sense to blindly accept the requirements until we feel that they will have a real impact on the value of the business.”
“If a startup doesn’t have the team in-house, they should find a dev shop that helps with building the technology but also understands the business and the market,” said Kostresevic. New Frontier Nomads has taken equity in return for their services from startups.
This is where the lines can get blurred. Just like dev shops offer startups knowledge and mentorship, more accelerators are offering designers and programmers for startups to develop their products. Google Ventures is one of many accelerators that offer their cohort such services, and TechStars has been doing the same thing through their HackStars program.
In the long term, this trend is beneficial for startups, independent of what stage they are in. By taking some equity, dev shops offer a higher value of services because their incentives are aligned with the startups.
“It’s a sensible way to collaborate, and have a stake in what the startup is doing,” explains Kostresevic.
Founders need to put in the time and do the right research to find out what are the best ways to grow their business.
Editor's Note: The article has been updated to include a correct citation to the Cohen Hochen 2014 research paper.
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