Are Startup Incubators the Emperor With No Clothes?

startup incubatorsI’ve been on the fence about the role and value of incubators: torn between whether they nurture and support startup entrepreneurs, or whether they encourage false hopes by letting wanna-be entrepreneurs play in the sandbox for three-months.

So it wasn’t surprising in some respects to see this quote in Fast Company by TechStars NYC managing director David Tisch:

“The majority of accelerators are not good for companies and will fail. There are too many of them. The idea of applying to just any accelerator is totally silly. A company should do homework and figure out which one is right for them.”

Tisch’s take reflects a few realities:

1. It is pretty easy to create an incubator so the barriers to entry are low. Raise a little bit of money, rent some office space, solicit startups, and open your doors. (Note: It is important to remember incubators are businesses that need “customers” to operate.)

2. There are too many incubators or, at least, many incubators that shouldn’t be in business because they don’t have the right people, structure or financial resources.

3. Many startups that participate in incubators have little or no potential but they are given three months of life support to live the dream. After the program ends, they out of time, money and options.

What we’ve seen over the past year is an incubator gold-rush as entrepreneurs embrace a different way to participate in the startup renaissance. Rather than invest in a single startup or launch their own startups, these entrepreneurs spread their bets and risk by creating an incubator to invest in dozens of startups. If one or two of them hits, the incubator can be successful. It’s like going to Las Vegas with $1,000, and then placing $5 bets on 200 crap tables.

The question is whether incubators are good for startup entrepreneurs. Do they provide enough value to warrant a place within the startup ecosystem? Or are most incubators selling false hope in return for 5% to 10% stakes in a slew of startups?

There are probably good incubators with the right people, structure, mentorship and networks to help startup entrepreneurs and, at the same time, generate a health return on investment. At the same time, there are lots of incubators that provide no value other than giving entrepreneurs a place to hang out for three months.

In over the next six to 12 months, there will be a consolidation within the incubator “industry” as weaker players disappear after none or few of their startups show enough traction to create a business or attract other investors. In the end, this will be a positive thing to weed out the pretenders from the real players.

What do you think? What value do incubators provide? What the key ingredients for a successful incubator?

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  • Chris Schmitt

    Incubators can provide a lot of value. They can provide funding and expertise to help start-ups get off the ground. Think of the creative ideas and game changing services that have come out of incubators, However, there’s no guarantee of success. There are too many variables involved. I believe, for now at least, they serve a need that isn’t being filled very effectively elsewhere.

    • Mark Evans

      Chris: I agree incubators can provide value. That said, not all of them are created the same – something that Tisch emphasizes. Thanks for the comment!

  • LT

    Like any business/industry…there will be successful and unsuccessful incubators. The “bad ones” will simply be unable to secure more funding for subsequent attempts/bets. What is positive is that this form of funding start-ups is giving more entrepreneurs a “shot”.

  • scottannan

    It’s a bit of a silly debate. Like all businesses, there are good ones and bad ones, some will succeed, and some will fail. The benefit of having many of them is that it helps the good ones get better (competition) which ultimately benefits the best entrepreneurs.

    The one big issue, like so many other businesses is when the government participates. It muddies the need for success. And the government is doubling down on these with incubators in nearly every school in Canada.

    Rather than debate if they’re good or bad, too many, or value, true entrepreneurs will be thinking about a better model – the successor to the accelerator…

    • Mark Evans

      Scott: I think the point is figuring out if incubators can serve a positive role. My sense is it’s a bit of a gold rush mentality with people rushing to set them up. It will be interesting to see how they evolve. Thanks for the comment!