What is a good incubator?

Guest article by Andrew Outhwaite 
(Incubator Facilitator, StartupWA Director, Pollinators co-founder)

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 them.

First we need to clarify what an incubator is. Here we mean an entity that grows startups: innovative, adaptive, early-stage high-potential ventures. They 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. Recommended considerations include:

* capacity e.g. team, time, cash, distance,
* 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

As an example, MassChallenge markets itself as being the most ‘startup friendly accelerator on the planet’ largely due to their zero-equity model value of prizes and global connections.

What is a good incubator for those running them?

Within incubator teams, they care deeply about the same considerations as entrepreneurs (their customers) but also care at least as much about their own viability! Business models based on small numbers of early-stage companies are pretty marginal! Revenue generally comes from corporate sponsorship, investors or earned income from a bigger pool of coworkers or members.

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.

The Global Accelerator Learning Initiative (GALI) is a great initiative that looks at which, how and why incubators are working, globally based on data. This generates insights relevant for individual incubators such whether program design correlates with cohort performance.

What are incubators good for?

This question and methods of asking about “good for” is what investors, funders and directors of incubators will ask.

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 their 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 e.g. Does $1 spend translates 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 generating financial returns?

Beyond finances, incubators may be good for: part of a broader innovation strategy, attracting entrepreneurial talent to work in your sector, pipeline for later-stage investment, or any number of strategic reasons. 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.

• Incubating WA’s early-stage social enterprises that address social impact problem areas across environmental sustainability and social disadvantage (eg Aboriginal business, disability, homelessness, domestic violence) Impact Seed’s ImpactSpark program

Are good incubators good for all these reasons?

Now, here is a significant point: 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. And it’s 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 or ecosystem.

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 your objectives. Growing your venture, changing a social system, realising human potential, diversifying economies can all be achieved by using methods or tools other than incubators.

And, like other methods, tools or programs, 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 all worth asking to understand the assumptions underlying them, and why they make a good or not-so-good choice as a means to an outcome.

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 good, for all.

About Andrew Outhwaite

Andrew facilitates the development of incubators and innovations for local and global benefit. His experience includes growing WA’s leading regional incubator (Pollinators Inc), opening WA’s first coworking space (CityHive), designing local and international incubator programs (Spark Challenge, Catalyst) and co-authoring regional and state innovation strategies. The quality and contribution of his work has been recognised through the 2016 Regional Innovation and Leadership Award and a recent IVLP scholarship from the United States Government.
 
His current roles in the innovation ecosystem include being the Australian Government’s Incubator Facilitator for WA, Chair of the startup technology advocacy group StartupWA, and as an independent adviser and mentor. Andrew’s work in all these roles is informed by his background in marine science, ecological sustainability, decade living in a regional community. He has an interest in the intersection and accordance of human, humanity and machine learning.