Understanding Incubators and How Corporations Can Access Innovation
Incubators have become an important part of any entrepreneurial ecosystem. Are they doing enough to help founders connect with customers? Should big corporations be taking a more active role?
I spoke with nearly 20 incubator leaders, entrepreneurs, investors and industry participants about the role of incubators. Despite their diverse backgrounds, a few common themes emerged.
More Than Just Co-Working Space
I’m defining an incubator as an organization that provides startups three main things in exchange for a monthly fee:
- Space – shared workspace for members and for hosting events.
- Access – to mentors and to potential funders.
- Education – programming around starting up a company and other industry-related topics.
Startups may join and leave the incubator on a rolling basis. Unlike an accelerator, an incubator does not constrain interactions to a few months or have a cohort of startups running through a structured program at the same time. As long as the member pays its dues, it can stay in the incubator as long as needed to get off the ground.
As defined here, incubators do not take equity in any members, while accelerators traditionally take a percentage of equity from each startup. Most co-working environments offer the physical space where a company can set up shop but don’t generally offer other benefits of access to people or capital and education to get a company started. Finally, I’m assuming that an incubator need not hatch its own ideas, as a corporate innovation lab would.
Almost everyone I spoke with thought the most important thing an incubator could do is create an environment for purposeful or engineered serendipity. Simply being in the same space as other people who are also starting companies and struggling with similar problems can increase the number of beneficial interactions that happen and can offer greater opportunities to learn from and build on the work of others. As Yael Hochberg, Associate Professor of Entrepreneurship at Rice University, puts it, “agglomeration matters.”
Several of the founders I spoke with said it was important for them to be around other founders, people like them, to see that they were not alone and that it was OK to fail. With all of the forces working against a startup, it’s important for founders to put themselves in a position to increase their odds of success. Being around other entrepreneurs can do that.
Knowledge and Resources
For Mark Achler of MATH Venture Partners, incubators “should connect startups with knowledge and resources.” Incubators should give startups access to smart people who can serve as mentors or coaches, people who can provide an objective perspective and give hard feedback. Along those lines, incubators should put resources towards helping startups think through their strategy, accelerate their hypothesis testing and solidify their product/market fit. Noting the importance of speed, Howard Tullman, CEO of mega-incubator 1871, suggests that “successive approximation beats postponed perfection.”
Incubators are a great way for founders to connect with the talent they may need to grow their company – whether co-founders or key first hires. Incubators also provide a fertile recycling ground. Startups that fail can have their assets repurposed, with people and technology being absorbed into other startups.
While most incubators help connect startups to potential funders, they should also open doors to potential customers, distribution partners or other strategic partners. As Matt McCall, Partner at Pritzker Group Venture Capital puts it, “revenue is the best form of capital because it is non-dilutive.” David Culver, Chief Collaboration Officer at VentureSHOT, is laser-focused on helping his members grow revenue. Revenue also has a multiplier effect – startups with revenue will have an easier time raising funding at a higher valuation and on more favorable terms to the founders. Since customer acquisition is so important, incubators have a role to play in facilitating that process for the startups under their umbrella.
Things get a little tricky here, as there are different incentives at work. An incubator may want all of its members to succeed, but risks damaging its brand if it introduces sponsors to startups that may not be a precise fit or at the right stage of development given the sponsor’s needs. Providing customized services for each member company can be challenging for an incubator’s staff given the more generalized nature of the services on offer.
The risk goes the other way too, as the startup may find that the point people assigned by the sponsor to work with the incubator are not able to facilitate productive interactions with the right people within that sponsor’s organization. Or a startup may spend valuable time giving pitch after pitch to various corporations that have no ability or structure to form a partnership with such an early stage company.
At the end of the day, as Prana Diabetes founder Sindhu Rajan said, “you run the business, not the incubator.” Founders make their own luck and are responsible for their own outcomes and taking advantage of all that an incubator provides. That said, it’s generally in everyone’s interest to boost the likelihood of success for startups within the incubator. Providing a searchable list of corporate needs and startup solutions might be a good first step. Adopting a hybrid incubator/accelerator model may be another approach, offering an incubator environment to all members and an accelerator model to a few selected startups.
Where do larger corporations fit within this paradigm? Let’s look at three ways they could add value to the ecosystem and enhance their own innovation programs.
- Become part of the larger community. Associate your organization with one or more incubators. Host events at the space. Go there frequently, talk to innovators on the front lines, learn what they’re seeing and hearing directly from the market. Learn about cutting edge technologies or solutions. Share your organization’s challenges with entrepreneurs and engage them in joint problem-solving. Sponsorship is a great way to associate yourself with an incubator and to gain access to many of the innovations happening within.
- Become a customer of a few startups. Go beyond being a sponsor or offering mentorship or industry advice. Erik Severinghaus, founder of SimpleRelevance (acquired by Rise Interactive), pointed out that despite the dozens of companies that regularly toured the incubator where he was based, very few were willing to become a customer and even fewer were willing to serve as a reference. His suggestion? “Big companies or sponsors should commit to signing three $25K contracts with three startups within 12 months.” Engage in a few pilots and help a few startups iterate and refine their solutions. Don’t be shy about referring the startup to other companies that could also benefit from their innovations.
- Become a member of the incubator. For corporate teams focused on innovation, help them stay focused by putting them into an incubator. Or rotate different teams through the incubator on six-month “innovation sabbaticals” where they are given specific project goals to complete in that time. The important aspect here is to embed your employees in an entrepreneurial community. Help them develop the hunger, speed, and agility that entrepreneurs are known for. Help them become scrappy so that your project can succeed – or fail – fast and so that your organization can quickly learn from that experience.
Most people didn’t think there were too many incubators (as opposed to accelerators). Ultimately, they felt that the increasing specialization of incubators was good for both startups and the community at large and that there wasn’t yet enough competition within different industry segments. Most people I spoke with were confident that ultimately the market would sort out the best incubators from the rest.
Incubators, like startups, must evolve. The best incubators will continue to test new offerings and programs and find new ways to increase the value they provide to their members and the community at large. Bill Fienup, founder and CEO of maker incubator Catalyze Chicago, is focused on a few key metrics to guide his incubator. Are member companies generating revenue, raising capital and creating new intellectual property? Bill understands that the more he focuses on those numbers, the more he’ll be benefitting his members.
Putting it all together, incubators should create an environment that enhances serendipity, that connects startups with knowledge and resources, that educates founders and that serves as a locus for innovation within their industry. Incubators should also find ways to help startups gain those first critical customers. And they should continuously test new ways to increase the value they provide to startups, sponsors and the community at large. Bigger corporations should commit resources to meaningfully engage with the entrepreneurial community. They should share more details about the challenges they face and work with startups to create solutions.