What is a good incubator?

This blog was first appeared on Medium courtesy of Impact Seed.

A result (and cause) of an increasing number of startups, is an increasing number of incubators. A decade ago there were just a handful, StartupWA counted twelve in 2015, and in 2018 there are nearly sixty existing or emerging across the state.

More incubators means more to choose from for the entrepreneurs, investors, funders and policy-makers.

So a common question becomes what (and which) is a good one?

This article will take an initial look at what is a ‘good one’. Reading should empower you to better ask the question and make decisions about your engagement with incubators.

First we need to clarify what we mean by incubator. Here we mean an entity or initiative that grows startups with startups being: innovative, adaptive, early-stage high-potential ventures. Incubators grow startups by providing mentoring, education, investment, co-location, networking and professional services. Accelerators can be considered a rarer type of incubator with cohort-based entry and exit, and number about five hundred globally as of 2017.

So, we have incubators, now what is a good one for entrepreneurs?

For entrepreneurs, the general value proposition of incubators is that it will make it easier and quicker to get from starting to stabilising to scaling. A quantitative metric could be increase valuation, invisibility or investment in your venture.

What is valuable for your venture will vary and it’s up to you to decide what is good for your venture. As an entrepreneurs, consider things such as your:

Capacity e.g. team, time, cash, geographical proximity
Preferences e.g. mentoring, group learning, overseas missions, co-location, sector-focus
Precedents e.g. performance of previous cohorts, track record of incubator staff and mentors
Alternatives e.g. going it alone, paying for the same services, recruiting others with experience
Possibilities e.g. access to investment, people, exposure you couldn’t get alone

One incubator that promotes itself as being ‘good for entrepreneurs’, MassChallenge “the most startup friendly accelerator on the planet” They make this claim largely due to their zero-equity model value of prizes and global connections.

What is a good incubator for those running them?

Those running incubators care deeply about the same considerations as entrepreneurs (their customers) but also care at least as much about the viability of their own venture – the incubator itself. Business models based on small numbers of early-stage companies are pretty marginal so incubator failure is a real proposition. Revenue generally comes from corporate sponsorship, investors or earned income from coworkers or members (usually a larger number than incubator or accelerator participants).

A constant consideration for incubators in each program session, venture, cohort or year is “is it working…for us, as intended, and for the ventures and stakeholders it’s serving?”. Each level and frequency of asking has it’s own measure and audience e.g. evaluations, valuations, profit, social return on investment.

As an example of assessing which, how and why incubators are working, The Global Accelerator Learning Initiative (GALI) collects data on this globally. Their reporting is insightful for policy makers, investors and those running incubators e.g. asking whether program design correlates with cohort performance.

What are incubators good for?

Investors, funders and directors of incubators may ask this “good for” question as they can be good for many things.

If you’re an investor who simply expects them to be good for making money, you’ll want to see increase in valuation of the ventures in which you have an equity stake e.g. Internal Rate of Return (IRR) on investment.

Another financial measure is “Net Flow of Funds”, as used by GALI for accelerators. This measures the average change in financial resources flowing to ventures. It enables comparison against: dollars invested in the incubator, other incubators and against non-incubator startups. For example, does $1 spend translate into more than $1 of additional funds invested in participating ventures? How does that compare to other incubators, or startups outside the incubator?

Are they good for more than simply generating financial returns for ventures and investors?

Beyond finances, incubators may be good for: including as part of a broader innovation strategy, attracting entrepreneurial talent to work in your sector, as generating a pipeline of ventures for later-stage investment etc.. There are also ‘social’ reasons that may extend beyond the specific strategy of an individual investor, company or industry.

There are many incubators that are good for driving social change and delivering wider social benefits. Here are just a few examples of incubators that are good in this way:

Incubating food businesses for economic benefit while addressing local disadvantage and ‘food deserts’ – The Hatchery
Boost biomedical entrepreneurship and translation of medical research for the benefit of researchers, clinicians, healthcare system and wider community – Accelerating Australia
Nurture innovations and entrepreneurs for the benefit of communities – a purpose shared by Pollinators Inc and HatchLabs
Enable evolution of a better world through combined accomplishments of creative, committed, and compassionate individuals focused on a common purpose – ImpactHub Austin
Incubate incubators (!) that deliver on the Sustainable Development Goals – Frontier Incubators
Maximise the benefits of science and technology for society through incubating nation-scale innovations – World Economic Forum for the Fourth Industrial Revolution.
Growing early-stage social enterprises that address social impact problem areas across environmental sustainability and social disadvantage – ImpactSpark

Are good incubators good for all these reasons?

As we expand the ways to ask and answer what a ‘good’ incubator it, we realise that some may be good in some ways but not others.

Being good for investors, may not align exactly with what’s good for social benefit or those “in” them (the entrepreneurs and team members).

This is significant.

Each way of asking is a distinct question with its own motivation, scope, methods of answering and implications for business models and program logic.

The multiple ways an incubator could be good and that they may not be good for some things is not a ‘problem’ rather just a consideration: you may continue to invest in an incubator even though the IRR or NFF is lower than expected, because it’s good for the sector, community, industry or economy in which it’s situated.

So, what’s the “good of” incubators?

Incubators are a particular thing (as described in the introduction) but they aren’t the only thing that can achieve objectives for ventures, investors or others. Growing your venture, changing a social system, realising human potential, diversifying economies can all be achieved by using methods or tools other than incubators.

Like other methods, tools, programs or interventions, incubators may also have unintended systemic impacts. A good startup incubator, good for generating financial returns on investment may not be for the good for founders mental health, city livability, accelerate too-quick adoption of new technologies, or direct significant energy and attention to stupid sh*t no-one needs.

So what the good of incubators is well worth asking to understand the assumptions underlying them, and why they make a good or not-so-good choice as a means to an end.

In the Western Australian context and with increasing interest in startups and incubators, we are still early in learning what they are good ones, what they are good for, and what is the good of them.

Through engaging consciously, purposefully in their development we have the opportunity to both learn from and contribute to global learning so the incubation of startups that may be, just possibly, good, for all.