Subtitle: How Qualified The Program Managers are in Selecting The Right Startups at the Right Stage
Business incubation programs have different approaches to the selection of startup clients. The success or failure of a startup in a business incubation program depends on how qualified the program managers are in selecting the right startups at the right stage. Four out of the eight startups mentioned that their business incubation programs did not perform formal due diligence because of two main reasons:
They were newly established or the program managers simply believed that the product was in line with the program’s focus and competencies. None of those four startups received feedback or were evaluated by the program. It could be assumed, therefore, that incubation programs acted in their own self-interest when attracting new tenants and raising public awareness of their programs. This is especially applicable to university-based business incubation programs, which are more supportive and more inclusive in nature. SE4, who was co-founder of an incubation program, pointed out that demo days are only for community, to show that the program is still operating.
Overall, entrepreneurs should be conscious that incubation programs are not always necessarily acting in the best interest of startups. Moreover, an incubation program’s admission process should be seen as an indicator of how seriously managers are taking a startup into consideration. Without due diligence on by both the programs and the startups, startups are at risk of becoming part of a program that is not necessarily valuable to them.
Services and offerings: General workshops, courses, and lectures about entrepreneurship were not found to be valuable
One out of the eight startups mentioned that general workshops and lectures about entrepreneurship were not found to be valuable. Startup B emphasized that it was a waste of time to participate in general workshops when the company needed financial resources to develop a minimum viable product (MVP). Without a functional prototype, startup B was unable to demonstrate their proof-of-concept. Despite spending one year in a university-based incubation program, startup B has not succeeded in developing a functional prototype. Thus, startups who are involved in the program can spend a lot of time working on secondary tasks, instead of focusing on primary ones. According to SE3, business incubation programs “keep startups busy with stuff which they don’t really need to do like presentations, instead of helping them with securing first customers.”
Services and offerings: Startups received low commitment from program mentors and advisors
Four out of the eight startups emphasized that they received low commitment from program mentors and advisors. Startup F gave an example in which the lawyer of their incubation program suggested not to file a patent application in China despite the company’s plans to expand globally and build a pilot plant in Hong Kong. Startup E has not received any support from mentors and advisors and wished there was someone to keep them accountable. Startup D, as with start-up E, has been left on its own. Startup H failed to leverage a sound marketing strategy and expected advisors to help them earlier in the process. SE2, who has also passed through a university-based business incubation program, indicated that some of the mentors were professors and a variety of mentors would have been more appropriate. SE4 mentioned that some entrepreneurs do not get appropriate help from incubation programs because that help is untargeted, as service providers are not interested in startup results.
Services and offerings: The incubation program did not meet the company’s initial expectations
Business incubation programs promise startups a variety of services. However, according to SE1, the quality of these services, and even their availability, might be in doubt. Such a situation happened to startup D and startup B. Startup D complained that the program managers promised to help with further product development, but their company never subsequently received such help. Startup B was totally disappointed with their program, as it provided only physical space and general workshops while the company expected to get help with acceleration, mentoring, legal advice, investors, and networking. Startup B was even willing to pay for services if the program was able to provide what they needed. Accordingly, startups should make sure in advance that business incubation programs will provide what they promised and what was expected from them based on the initial formal or informal agreements.
Services and offerings: Tangible services such as access to manufacturing capabilities were not provided or were limited
One of the reasons why startups join a business incubation program is access to office space. However, other tangible services such as manufacturing and prototyping capabilities are no less important. Startup F joined a program because of the potential access to prototyping labs. They emphasized that renting a lab can cost a fortune. Startup F developed a kit to test marijuana oils, but because they did not have access to a workshop, it became impossible to produce the kits. Startup A emphasized that existing manufacturing firms require a continuous production supply and are not interested in signing contracts with startups. In addition, startup A was not allowed to use the resources of the university incubation program for commercial purposes. Thus, it could not achieve a competitive advantage based on early prototyping. Startup C also noticed that startups who have physical products face difficulties in getting into contact with potential manufacturers. Startup G wished that the program facilities had a workshop, where they could test their product.
Network: Startups did not efficiently use the office space provided by the incubation program
The purpose of startups sharing the same office space is the opportunity to build relationships with peers. Startup H emphasized that sharing an environment with people who are going through the same challenges is very valuable. In fact, startup H established a partnership with another startup that was part of their incubation space – something that would not have been possible if they were not using the same physical space. In addition, startup H mentioned that, at a certain moment of time, the attendance of startup teams in the office space dropped down significantly, which reduced opportunities for collaboration. Startup B felt frustrated that only 2 or 3 startups out of 15 used the office space on a regular basis. Startup E also noticed that attendance of the startup teams diminished over time. After all, the entrepreneurs themselves started to question if there was a difference between using the incubation office space and working at home.
Network: The incubation program’s network was not aligned to the startup’s product
As was emphasized in the literature review, incubation programs provide more generic network resources and offer less idiosyncratic network resources, because it is not practical for a program to even try to address each potential startup’s every need. Accordingly, three out of the eight startups who joined a more general incubation program (i.e., with no specific sector of focus) stated that the program cannot help them with connections to strategic partners. Startup F needed access to pharmaceutical and chemical manufacturing industries in order to secure access to a valuable supply chain. Since the program network was not in line with their product, the startup had to build its own network. Startup A needed access to manufacturers and distributors in order to start commercial production. Since the incubation program did not provide the necessary connections, startup A considered finding a business angel with the right competencies and knowledge in the field. Startup D needed access to the automation industry in order to test a product and meet potential customers. However, the incubation program was more focused on the healthcare industry than automation. Startup D spent 10 months in an incubation space without any luck establishing the necessary partnerships in order to commercialize the product or even test it at a customer’s site. According to Mas-Verdú and co-authors (2015), business incubation environments are insufficient on their own and have to be aligned with other businesses characteristics such as technology, size (number of employees), and sector. In general, generic network resources are valuable only for those startups that do not know how to pursue their business idea. Startups who are looking for strategic partners in order to commercialize their product should join sector-based incubation programs.
Network: Startups were unaware of the business incubation program’s ecosystem
Sa and co-authors (2012) stressed that entrepreneurs cannot fully benefit from an incubator’s resources when those resources are not well coordinated. Two out of the eight startups mentioned that they were unaware of the ecosystem of the business incubation program. Both startups were part of a university-based program. Startup F found out about some of the existing resources, but only by accident. Meanwhile, startup E mentioned that the services provided by the program were not very well advertised. Startups who were unaware of the existing program resources started looking for resources outside of the incubation environment, which is a time-consuming process. Therefore, business incubation programs must make sure that their startups are informed about available resources.
Financial resources: Business incubation programs did not provide direct or indirect access to investment
To cross the valley of death, startups can use the resources of the business incubation environment to secure initial funding. Startup D had a proof-of-concept and was ready for investors. However, none of the investors from the incubation program’s network were willing to invest in it. After a few unsuccessful attempts to find investors, the incubation program stopped trying to help with investment search despite earlier assurances from the incubation program managers that startup D would receive funding from their investor network. Startup B was not ready for initial funding but needed seed money in order to finalize their prototype. The rest of the interviewed startups either were not ready for investors or they succeeded in attracting investors by themselves. According to Rijnsoever and co-authors (2016), non-incubated startups who have access to the same investors raise as much funding as incubated startups. Accordingly, being part of a business incubation space does not necessarily mean that a startup will receive funding or be connected to potential investors.
Equity: Equity taken by the business incubation program made startups unattractive to potential investors
Different business incubation spaces operate under different business models. Most of them are looking to promote regional growth, while others are focusing on generating financial returns from equity. Startup D joined an incubation space with high hopes of securing investors, potential customers, and product development in exchange for 38% equity. The incubation program did not help with product development and customers, but it was ready to charge the startup for other services. Startup D did not use any of the services, because the services were not good enough and were not worth paying for. As it appears, the incubation program adopted a for-profit property development model to charge a fee for services offered. However, the startup did not receive any investment through the program. The program only provided office space and connections to investors. In fact, most of the startups in this program received an investment from other institutions operating in the region and the program managers only advised startup D to approach them directly. On the other hand, the funding institutions were running government-initiated incubation programs that filled the gap of financing when nobody wants to invest in early-stage startups. Those government-initiated programs seemed to provide better, free, or much cheaper, mentoring and consultancy for startups.
On the other hand, SE3, who was involved in a government-led incubation program, mentioned that the program focused on taking startups at the point where they are ready for investment. SE3’s company never needed an investment because they used bootstrapping. According to SE3, the best exit strategy for incubation programs is when their client startups are acquired.
IP Protection: Participation in a business incubation program puts intellectual property at risk
Participating in an incubation program can put a startup’s intellectual property (IP) at risk because multiple entrepreneurs share office space, workshops, laboratories, and mentors. Startup F emphasized that their product and IP can be very easily exposed to third parties as everyone can access the incubation program lab and office facility. Since most incubation programs do not provide legal services and obtaining a patent is expensive, startups bear the risk of IP exposure. On the other hand, it is typically not the responsibility of the incubation program to protect their startup’s intellectual property.
Post-incubation: Following incubation, startups looked to join another business incubation program or sought business angels
Usually, startups go through several incubation programs to build or acquire necessary resources for their businesses. After spending some time at a university-based early stage incubation program in Ontario, Canada, startup E applied to join another one, because they were looking for more dedicated hands-on mentoring and business support focusing on growth. Startup B, in Denmark, applied to join a university-based incubator but the application was rejected because the program was for students only. As a result, startup B applied to a regional investment agency in order to receive funding. Startup A is considering finding a business angel who will help with distributors and manufacturers. Accordingly, when an incubation program provides idiosyncratic resources or limits access to complementary assets, startups start to look for those resources in other programs or try to find business angels. Therefore, startups should understand that graduation from an incubation program does not necessarily mean that they will be ready for the market or able to grow and scale-up.
This section summarizes the key insights gathered from our research and analysis. In addition, it focuses on results that can be used to improve an entrepreneur’s understanding of incubation programs. The analysis of the empirical observations resulted in the articulation of the following downsides of being part of a specific incubation program.
Equity dilution can lead a startup to bankruptcy. Startups who have diluted too much equity to an incubator or accelerator will struggle to convince investors to invest in them later. Every time a startup issues new shares, the existing shareholder’s equity decreases.
Startups can face low commitment from incubation program stakeholders such as business mentors, advisors, and external partners. External service providers are usually not interested in startups’ results.
Putting IP at risk. Startups who join an incubation program are risking exposing their product or idea to third parties that have similar access to the incubation facilities. Half of the interviewed incubation programs do not provide legal advice nor IP consultancy.
Young and inexperienced incubation programs do not do enough due diligence since, most often, their main goal is to fill spots and enhance their regional reputation.
Startups can be unaware of the business and innovation ecosystem of the incubation program. Some programs do not do a good job in advertising the expertise and knowledge of their networks.
General workshops, lectures, and courses provided by incubation programs are time-consuming and not necessarily useful. Startups spend a lot of time working on secondary tasks instead of focusing on primary ones. For instance, an interviewed startup spent 12 months in an incubator and was not been able to build a functional prototype during that time period.
Incubation program networks may not align with a startup’s product. The majority of the incubation programs provided only general network resources.
Incubation programs do not usually provide seed money, investment, or connections to investors. In fact, being part of an incubation program does not guarantee any investment.
The collaboration opportunities significantly decrease when an incubation space is underutilized and only a few startups use the office facility.
Prior to joining an incubator or accelerator, startups should consider whether or not they would need specialized facilities/equipment. Most of the interviewed founders participated in incubation programs that did not have specialized facilities/equipment.
Startups may go through multiple incubation programs to acquire or build necessary resources. Therefore, startups who have not received necessary help or resources in a specific incubation program consider joining other programs or finding business angels with the right competencies for the startup’s context.
Finally, consider the differences between incubator-like and accelerator-like programs in the way they refer to startups that have used multiple incubation programs. The general tendency for startups using multiple incubation programs is to move from early-stage incubation to more dedicated acceleration programs. As a rule, university-based programs are focusing on early incubation offering young entrepreneurs the opportunity the experience of being an entrepreneur. In this sense, we should be careful when comparing the performance of incubators because their missions could be quite different. On the other hand, acceleration programs tend to focus on growth objectives and stronger investment exposure and opportunities. Even though early-stage incubators also claim to offer funding-related networking opportunities, their focus seems to be on the quality of the entrepreneurial experience and the validation of the viability of the emerging business opportunities.
In conclusion, it is not always a good thing for a startup to join an incubator or accelerator. Or, rather, there are multiple aspects of business incubation practices that could affect negatively early-stage companies, and founders of new ventures should be very careful when selecting a specific incubation program. The answer, of course, cannot be considered in black and white terms since the focus of the selection process should be on the interference of the multiple factors that could potentially affect the future of a startup in terms of operations, market potential, external funding, etc.
We believe that the analysis provided here will enhance the awareness of both researchers and practitioners about the potential negative impact of improperly selected incubation programs. It should enable executive managers of existing incubation programs to refine their startup selection process and better articulate the value propositions of their programs. At the same time, we should point out that our study is based on a limited number of cases. Future studies should build a broader empirical base by selecting a larger number of startups and more sophisticated methodologies, taking into account the distinction between the incubation programs, the stage, and the strategic goals of the new ventures.