Current Issue
This Month's Print Issue

Follow Fast Company

We’ll come to you.

5 minute read

Work Smart

Do Accelerators And Incubators Serve Themselves Better Than Startups?

There are now more support resources for startups than ever. Trouble is, most oversell and under-deliver.

Do Accelerators And Incubators Serve Themselves Better Than Startups?
[Photo: via Shutterstock]

According to the 2015 Kauffman Index on startup activity, American startups are on the rebound, with approximately 310 entrepreneurs for every 100,000 adults in the U.S. today. That translates into roughly 530,000 new business owners coming onto the scene every month.

Yet the rate of failure for new businesses remains high. It's that very failure rate that's led to the creation of an entire industry of startup support programs designed to help entrepreneurs beat the odds. It's working—for some, anyway, even if they're not who you think.

Accelerators As Far As The Eye Can See

There are literally thousands of startup accelerators, incubators, coworking spaces, innovation hubs, government-funded small business associations, university programs, and more. AngelList alone shows over 4,233 incubators on offer, while F6s lists some 3,851 accelerators at the time of this writing. And accelerators are just the tip of the iceberg when it comes to the range of resources available to startups and entrepreneurs.

Of course, support programs for new businesses aren't a new phenomenon. In his book The Wizard of Menlo Park, about Thomas Edison, Randall E. Stross argues that entrepreneurial incubators and accelerators have existed (in all but name) since the late 19th century, the most famous of which were the Menlo Park, New Jersey, facilities that powered Edison's creativity from 1876 until 1882.

What's arguably changed quite a bit since then is the degree of confidence we're apt to place in entrepreneurship as a means to progress and profit alike. And despite what one observer characterizes as increasing chatter about "a possible ‘accelerator bubble’" and skepticism for "the viability of the accelerator model," this confidence remains largely intact.

It may be true that, as Forbes columnist Brian Solomon writes, only 2% of companies to emerge from even the top 20 accelerators have a successful exit. But it's also true that some of the leading accelerators, like Y Combinator, TechStarts, and a handful of others, have produced major successes like Airbnb, Dropbox, and Reddit.

And it's those home runs that in many cases leads to an overblown impression of opportunity—which in turn, of course, benefits those accelerators.

How Accelerators Earn Money

Those programs' impact and success rates vary widely, often according to how each one is structured, operated, and financially sustained. At the same time, all of them face roughly the same challenge: "How," as the innovation charity Nesta frames the issue, "do you charge a startup/client that has very little resources today and may never make money?"

Accelerators and other ventures tend to take one of three broad approaches to generating income from startups:

  1. Growth-driven: programs are primarily dependent on growing the startup as it generates revenue from equity
  2. Fee-driven: programs charge clients member and service fees as well as rent
  3. Independent: programs are supported not by income from startups, but by sponsors, public funds, and events

This table from the Nesta study breaks down these differences in greater detail.

Three Issues With Startup Support Services

While most entrepreneurial support programs try to provide tangible benefits—from funding and mentorship to access to investors—they often miss some basics. And in the process, unfortunately, they wind up doing a disservice to those they're ostensibly trying to help, while still appearing to justify their own existence. Here are three of the most common issues:

1. The evaluation process isn't scientific enough. Companies in accelerator programs usually create a business plan—a static document that describes its market opportunity, products and services, differentiations, and yes, a five-year forecast for income, profit, and cash flow.

In real life, the business plan rarely holds true during the execution phase. More often than not, it soon becomes necessary to reevaluate how a company is doing—checking its growth potential while balancing new innovation against operational execution, developing processes to reach revenue growth while keeping an eye on cash flow, and pushing out a sustainable brand strategy, just to name a few.

These are big-ticket, interlocking issues, and it's tough to fault accelerators, incubators, and all manner of other support programs for failing to evaluate them rigorously. But that failure ends up getting passed on to clients, which in turn too often fail themselves. These programs need better ways to consistently monitor every new business team's capabilities and capacities to adapt and evolve.

2. There's a lack of real, hands-on mentorship. Any support program can put a list of well-known mentors on their website who agree (for a fee) to provide their advice. The best accelerators develop relationships with a select group of mentors who can offer hands-on entrepreneurial expertise.

The U.S. Small Business Administration reports that some 70% of small businesses receiving mentoring services survive for five years or more—roughly double the rate of non-mentored entrepreneurs. So there's little doubt that good mentorship can make an enormous difference. But when there's a disconnect between what a mentor can add and what the startup requires or expects, momentum can quickly stall.

3. Many programs don't have the brand recognition to attract high-quality startups. Every support program needs a sustainable pipeline of new companies in order to stay afloat. To date, too many are under-delivering while being propped up by the outsize demand for services.

As with any other business, accelerators, incubators, and others—especially those that aren't in the top tier—need to get their names and messages out there. Brand equity takes time to build. A strong, well-justified reputation doesn't come easily or overnight.

But there are a few places to start. Thought leadership content that creates a sense of differentiation, added value, and excitement among entrepreneurs is a good first step. And LinkedIn, Facebook, Twitter, and other social platforms, whose uses in the business world are evolving, can help programs build deeper connections with entrepreneurs that they can later deliver on.

So far, many are delivering too great a share of the wins only to themselves, leaving a long road behind them littered with failed startups and sterling intentions.

Serial entrepreneur Faisal Hoque is the founder of Shadoka. Shadoka enables entrepreneurship, growth, and social impact. He is the author of Everything Connects: How to Transform and Lead in the Age of Creativity, Innovation, and Sustainability (McGraw-Hill) and other books. Use the Everything Connects leadership app for free.

Copyright (c) 2016 by Faisal Hoque. All rights reserved.

The Fast Company Innovation Festival