Incubators – hot or not?

WSJ India Chief Mentor has an interesting article on incubators being an important engine of growth of entrepreneurship. It is an interesting observation, and makes me think about what will make these successful.

Incubators have been known before to have an adverse selection problem. Simply stated, if an entrepreneur has an option to either get cash investment or incubator support, what are they likely to choose. Incubator “money” is likely to be at a far higher cost than investment, and hence unlikely to attract the best ideas/teams.

There are a few things that can still offer an interesting opportunity for incubators:

  • Lower cost in startup phase: Web 2.0 has reduced the cost of internet startups in the west. If incubators can help achieve more with lesser money, or entrepreneurs can achieve more “under the radar” (with much less money than is typically supported through angels/VCs), they might be better off on a net basis being with an incubator. In a market like India, it remains to be demonstrated how much can be achieved (without compromising value) with 5 lakhs of cash.
  • Dramatic shortage of cash investments: If the ecosystem is too weak to support the top tier ideas/teams, than incubators may land up getting some of those as well. I do not believe that is the case in India though – the key gap might be in offering the adequate investor diversity, and in that scenario the screening skills of incubators become critical. From what I have seen of some of these incubators, that is not necessarily the strongest point in their favor.
  • Value beyond: In my mind, this is the most important element if an incubator has to succeed on a sustained basis. It has to provide value beyond money. That could be access to highly capable technical/scientific personnel (think IITs, or in a mature model, Israel). Or perhaps market access through a corporate incubator. I have heard claims that networking between incubator participants itself could be a key value, but am not sure of that one. Access to high quality mentorship at early stages – would the best teams get access to this anyway?
  • Own the idea factory: If ideas are generated in the incubator itself (such as a company, or a university setting, though in India most university incubators are tapping outside ideas) then the adverse selection issue might be avoided.

I would love to get thoughts on the merits of such an initiative. One can justify the government programs as a developmental initiative, but I would ask the question if they should operate as independent selection entities, or double down to increase probability of success of companies that have gone through a high quality selection process. Another key success factor will be the length of time for which an incubator supports the company – if business building is taking a few years, can an incubator effectively influence the outcome through a 3-6 month involvement? An interesting article here which outlines some similar thoughts.

9 Responses to “Incubators – hot or not?”

  1. Vijay Anand says:

    The fundamental problem with Incubators is the way that they are setup. Govt funded incubators – which is essentially most of them – do not have budgets to hire anyone with an entrepreneurial experience.

    I took over charge of RTBI (www.rtbi.in) about three years ago, and we have close to 14 companies and they are doing really well – given that the challenges they face in a rather new terrain of rural/emerging markets that these business focus on.

    The key – like every venture – is in the team that runs these things. THe second bit is in the planning to sustain these initiatives as exit in all things entrepreneurial – Venture capital included – is yet to be defined as well.

  2. Hi Amit,

    This is interesting.

    As you have mentioned that you did an extensive research on incubators in India, so can you please provide me with valuable research findings as I am also doing some research on best practices in business incubation typically focussing on the processes. So I think it will be of great help to me.

    Thanx

  3. Amit Sharma says:

    Alok- I did some extensive research recently for Satya (IWSB) around incubators in India, and developed a research report around it. The top recognized problems amongst incubatees were:
    1. Lack of expert guidance in their industry
    2. Minimal mentoring, and a hands-off approach (what has been called above the “once a month, armchair style” of mentoring).

    The top recognized value adds were brand association and networking (I’m from IIM-whatever, so pls. give me a hearing).

    In the end, the research team concluded that the underlying problems were of leadership and process.

    Leadership: The senior management at incubators, almost without fail, were people who had never started a significant company. Sometimes they were academicians, and sometimes retired corporate folks. We need people who have built companies to guide those who are trying to. Everything flows from the top 1 or 2 people.

    Process: We were surprised by the lack of a well thought out process almost everywhere. Best practices haven’t been developed very well in this space, and the “founding team” generally isn’t capable/motivated of coming out with a model that really works.

    So nothing wrong with the theoretical relevance of the incubator model. Its about the people and the execution.

  4. shish says:

    Dear Alok,

    I’ve had the thrilling experience of being incubated at an incubated incubator 🙂

    I think ‘incubator’ is a great idea and can be very useful. I am aware that there have been rare successes, if any, in a decade of incubator enthusiasm in India. However, IMHO, this is due to a discord between factors of kind of ideas / entrepreneurs targeted, corresponding infrastructure / funding / mentoring support, returns expectation, and patience.

    IMHO, we will see stunning successes if we can remove this discord. Further, I also feel that incubators are indispensable in certain areas such as high tech because of factors such as scarce research output in universities / public funded research labs.

    Please let me know if you are looking at any specific inputs.

    cheers
    shish

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