An Underused Tool For Job Recovery

As the U.S. economy continues to hiccup, large-scale entrepreneurship is a badly needed remedy. In transitioning hundreds of thousands of people to self-employment and job creation through entrepreneurship, incubators look like an extremely helpful tool. But we need to produce more of the most effective incubators.

There are approximately 1,100 incubators currently operating in the U.S., another 300 to 400 in Canada and Mexico, and at least 5,500 others around the world, says Dinah Adkins, president emerita of the National Business Incubation Association. The first business incubator in the U.S. opened in 1959 and is still operating. Several others have been open since 1980, including the Advanced Technology Development Center at the Georgia Institute of Technology.

Over the past 30 years, Adkins says, the incubator concept has really taken off. A few examples of successful incubators include the Innovation Depot in Birmingham, Alabama; Innovacorp in Halifax, Nova Scotia; the University of Central Florida Incubation Program in Orlando; the Accelerator in Seattle, Washington and BioCenter and the Environmental Business Cluster in San Jose, California.

Dan MacDonald, chief executive of Innovacorp, says that in fiscal year 2008-09, the companies that benefited from Innovacorp’s High Performance Incubation (HPi)™ business model generated more than $270 million in export revenues and employed more than 1,440 people, most with a salary 15% higher than the provincial average.

Of course, many incubators failed, especially during the dot-com era when every law and accounting firm decided they were going to become incubators. Charles D’Agostino, executive director of the Louisiana Business & Technology Center at Louisiana State University, offers some analysis: “Incubators do work, but they must be more than a real estate entity offering executive suite services. Effective incubators provide business counseling and management assistance to their client firms. The value-added business services differentiate them from an office suite.”

Indeed, as I investigated why incubators fail, I was astounded to find that many incubators assume that cheap real estate, used furniture, plus a phone and Internet connection equal business incubation. Jim Flowers, president of the Virginia Business Incubation Association, says, “They mistake cheap floor space for meaningful program content.”

Well, it isn’t. Neither are discounted legal services, accounting, or other kinds of commodity services.

Two things determine whether a business can get off the ground successfully and sustainably: a validated market opportunity with customers willing to pay for a product or a service; and a product/service that addresses such an opportunity. The only kinds of incubators I consider “real” are the ones that help entrepreneurs achieve these two goals.

Adds D’Agostino, “Incubators must evaluate the management capability of the entrepreneurs and assist in finding management for these companies. Especially when the entrepreneur is a technologist lacking business skills, it is critical that the incubator assist the owner in finding managers that have the skills necessary to manage a successful entity and take it to the next level.”

The only “next level” worth getting to for a start-up is a validated business idea that has the endorsement of reference customers, and a product that caters to their needs. The rest– an office, legal documents, QuickBook files – doesn’t build valuation or business value. The benchmark criterion for an incubator, the success milestone they should be measuring themselves against, is simply to help their clients validate their businesses, gain reference customers, and complete at least a beta product.

This, of course, raises the ever-controversial question: What about funding? Most incubators use funding as a success metric, which is a flawed criterion. Numerous businesses should operate as organically grown, self-sustaining businesses – bootstrapped, without external financing. For them the goal is to achieve customer validation, not financing. Yet if the incubator uses financing as its success metric, then it will force inexperienced entrepreneurs into an unnecessary financing round.

Of course, where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is an important service.

(You can read more of the discussion on why incubators fail as well as participate in it.)

All this being said, many incubators are doing an excellent job of getting companies off the ground, building sustainable economic value, and creating jobs and GDP. It is time to understand what is working, propagate the best practices, and replicate the incubator model around the world. Incubators, I believe, can make a serious difference in getting more infant entrepreneurs off the ground, as well as reduce the infant entrepreneur mortality (IEM) rate.

Let us get past the myth that incubators do not work, figure out how to make more of them work better, and make them a meaningful part of the global economic development arsenal.

In Silicon Valley, Y Combinator has already shown that incubators can work very well. Many others have followed their example, TechStars, DreamIT, and others. fall in that category. At 1M/1M, we are running a successful virtual incubator, which differs slightly from the model of offering funding:

The bottom line is incubators, when done right, can work. We should make them work as a powerful tool for economic development.