A graph $G$ contains a graph $H$ as an induced minor if $H$ can be obtained from $G$ by vertex deletions and edge contractions. The class of $H$-induced-minor-free graphs generalizes the class of $H$-minor-free graphs, but unlike $H$-minor-free graphs, it can contain dense graphs. We show that if an $n$-vertex $m$-edge graph $G$ does not contain a graph $H$ as an induced minor, then it has a balanced vertex separator of size $O_{H}(\sqrt{m})$, where the $O_{H}(\cdot)$-notation hides factors depending on $H$. More precisely, our upper bound for the size of the balanced separator is $O(\min(|V(H)|^2, \log n) \cdot \sqrt{|V(H)|+|E(H)|} \cdot \sqrt{m})$. We give an algorithm for finding either an induced minor model of $H$ in $G$ or such a separator in randomized polynomial-time. We apply this to obtain subexponential $2^{O_{H}(n^{2/3} \log n)}$ time algorithms on $H$-induced-minor-free graphs for a large class of problems including maximum independent set, minimum feedback vertex set, 3-coloring, and planarization. For graphs $H$ where every edge is incident to a vertex of degree at most 2, our results imply a $2^{O_{H}(n^{2/3} \log n)}$ time algorithm for testing if $G$ contains $H$ as an induced minor. Our second main result is that there exists a fixed tree $T$, so that there is no $2^{o(n/\log^3 n)}$ time algorithm for testing if a given $n$-vertex graph contains $T$ as an induced minor unless the Exponential Time Hypothesis (ETH) fails. Our reduction also gives NP-hardness, which solves an open problem asked by Fellows, Kratochv\'il, Middendorf, and Pfeiffer [Algorithmica, 1995], who asked if there exists a fixed planar graph $H$ so that testing for $H$ as an induced minor is NP-hard.

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