10th June, 2018

Do incubators just encourage playing at being entrepreneurs?

What are business incubators and accelerators? And do they work? A core belief among many working in the entrepreneurial ecosystem is that they are essential ways to foster more successful start-ups. I used to hold the same view; now I am not so sure.

One of the world’s great experts on the subject of entrepreneurs, the American Carl Schramm, recently wrote a book called Burn the Business Plan — and he asserts that the impact of incubators is overrated.

Like so many start-up initiatives, incubators developed first in the US, where there are now more than 1,600 of them. In Britain there are at least 150 — funded by universities, development agencies, corporates, high-net-worth individuals and other sources of capital.

Many incubators are non-profit facilities, offering a co-working space to early-stage enterprises. The occupancy is usually temporary. Incubators encourage networking between the tenants, and host events such as investor pitches and workshops about marketing.

In theory, incubators should help enterprises flourish; entrepreneurs can quickly sign up for office or workshop space, cross-fertilise ideas, meet partners, raise finance, recruit talent and be inspired by the atmosphere in their building. However, Schramm’s book says an entrepreneur housed in an incubator is no more likely to start a company than one outside.

Unfortunately, the uncritical culture in incubators does not steel people for the real world of commerce. Many tenants are “playing at business, much as children play house, and [have] gone through the motions of being entrepreneurs”, says Schramm — and most leave without having started a business. I have given talks at quite a few such places, and I’m often taken aback by the naivety of some of the so-called entrepreneurs in attendance: many are not suited to being their own boss.

If true, Schramm’s insight is depressing. Many institutions set great store by their entrepreneur hubs. Sadly, whenever organisations try to systematise entrepreneurship, it tends to fail. The very nature of the activity is that it cannot be regimented — least of all by large, bureaucratic organisations such as universities or big corporations.

Last year, a think tank I co-founded, the Centre for Entrepreneurs published a report, Putting the Uni in Unicorn. It promoted the idea that more universities should plough greater resources into campus incubators to help graduate entrepreneurs. But are these centres actually delivering? Six months ago, the Incubator and Accelerator Network was launched to act as an umbrella body for university incubators; its first task must be to rigorously research their effectiveness.

The more sophisticated versions of incubators are accelerators. These are privately owned, for-profit facilities that take equity in the start-ups they house. The most famous and successful is
Y Combinator. It invests $120,000 (£90,000) in each venture and, after three months, entrepreneurs have to pitch their project to venture capitalists. Since 2005, it has worked with almost 1,800 start-ups worth a total of $80bn, including the likes of Airbnb, Dropbox and Reddit. Research suggests, however, that accelerators, like incubators, produce a poor overall return. Only 2% of companies graduating from the top 20 US accelerators have achieved meaningful exits.

These conclusions do not mean that start-up incubators and accelerators should all be shut down, but expecting them to transform entrepreneurial outcomes is misguided.

Many of the most talented and ambitious entrepreneurs resist working in the sort of surroundings they offer. These founders don’t want that sort of advice and funding. Moreover, plenty of entrepreneurs prefer to start in their home or a nearby garage or shop.

There is no straightforward model for a successful start-up, despite what the entrepreneur courses promise. Interventions from governments, and institutions such as universities, to spur business formation mostly don’t deliver.

Pro-business governments should support the rule of law, property rights and open markets, and should not over-tax or over-regulate. Very few civil servants and academics really understand the dynamics of founding and growing a business. Compared with the security these people enjoy, running a start-up is the Wild West — but cowboys and cowgirls always have more fun.