Can business incubators reverse the start up failure rate in India?

Institutions that support incubation not only provide this requisite support but act as the bridge between startups, incubators, corporate entities, investor communities, academia, and the government so as to create the most supportive environment for business nurturing and growth.

Today, India is the third largest startup ecosystem in the world. Does that reflect a global leadership position in creating financially viable business entities? No, not yet. Many young entrepreneurs are fuelling this passion for startups but more than 90 per cent them in the country fail, according to a new study by IBM.

This may come as a surprise, especially in the era of Startup India and Standup India. This study was based on interviews with more than 1,300 Indian executives; including 600 start-up entrepreneurs, 100 venture capitalists, 100 government leaders, 500 leaders of established companies and 22 educational institution leaders.

‘Startup’ is a venture working towards innovation, development or improvement of products or processes and services, or a scalable business model with a high potential of employment generation or wealth creation.

The Government of India launched the Startup India action plan in February 2016. This embraced a national policy framework for startups and provided ease of setting up and doing business, promoting foreign investment, job creation and skill development. Further, under this plan, the startup can avail various tax benefits. The Finance Act of 2016 provides an exemption of income tax for three years in a block of seven years from the time of incorporation.

Entrepreneurship needs innovation as much as it does resources, but perhaps what it needs most of all is access to support functions, mentorship and resources that would provide new enterprises a springboard to stability. It is true that there is no dearth of unique ideas that may solve a problem, target a certain market segment or create a successful and profitable business, but the journey on that path is long and arduous.

A helping hand is welcome and often the only means of survival. This is where the role of incubators comes in. Institutions that support incubation not only provide this requisite support but act as the bridge between startups, incubators, corporate entities, investor communities, academia, and the government so as to create the most supportive environment for business nurturing and growth.

The role of incubators, while explored to some length in India, has not yet reached the maturity of international models and ‘for-profit’ incubation is an initiative that is still in a nascent stage yet to take firm root in Indian industry. Business incubation has been globally recognised as an important tool for job creation and economic development.

India now has the third-highest number of startup incubators and accelerators in the world after China and the US, says a report by IT industry body National Association of Software and Services Companies (NASSCOM) . With 140 incubators and accelerators, India has inched past Israel, whose count stands at 130. However, the gap between the top two is still wide — China and the US have over 2,400 and 1,500 incubators and accelerators, respectively. Incubators are responsible for providing support across a startup’s life cycle, while accelerators are focused more towards growth and acceleration of the startup (NASSCOM). The business incubators offer affordable working spaces, communication and media resources, mentoring and advisory services. Technology business incubators, which are mostly associated with universities or corporates offer access to advance tech laboratories, equipment and libraries. A vital contribution of business incubators to entrepreneurship lies in the opportunities they provide to interact and develop relationships with other entrepreneurs, mentors and other resource persons. Incubators play the role of an aggregator and bring all the components together to provide support to start-ups to grow at an accelerated pace and increase their overall chance of survival.

National Science and Technology Entrepreneurship Development Board of the Department of Science and Technology, Govt. of India is supporting Technology Business Incubators (TBI) primarily in and around academic, technical and management institutions to tap innovations and technologies for venture creation by utilising expertise and infrastructure already available with the host institution. Technology-based new enterprises are high risk and high growth ventures, and require an enabling environment like TBI to enhance the prospects of their success. There are different variants of incubators like - Technology Business Incubators (TBIs); Innovation Hubs; Centers for Innovation & Entrepreneurship; Virtual Incubators and Seed Accelerators.

The objectives of the technology business Incubators are to nurture technology-based startups in the following thrust areas: Information & Communication Technology, Healthcare, Manufacturing, Agriculture and allied fields, Energy, Water, Services etc.

Gujarat has been a pioneer in building a strong ecosystem for nurturing innovation and startups in the state that drives economic growth and large-scale employment opportunities. The government of Gujarat has an ambitious plan to establish around 100 Incubators and to develop two million sq ft of “Incubation Space” and support at least 2,000 startups in the coming years. This will facilitate investment (VC Funding of $ 1 billion for startups by 2021).

As on date over 267 startups/innovations have been supported by 33 nodal Institutions in Gujarat. There are several startups and scale up success stories of Innovators incubated from leading Academic Institutions - IIM- A, IIT -Gandhinagar, MICA, Entrepreneurship Development Institute of India, Ahmedabad University, NID, GLS University , Gujarat Technological University, iCREATE, PDPU, Gujarat University etc.

The real-life scenario

 Like any other enterprising business teams, the startups go through many struggles. All of them do not have the expert knowledge in all the relevant areas. Therefore incubators must evaluate the management capability of the entrepreneurs and assist in finding the right talent for these companies. Especially when the entrepreneur is a technologist lacking business skills, it is critical that the incubator assists the innovator in finding managers that have the necessary skills to manage a successful entity and take it to the next level. Two things determine whether a business can get off the ground successfully and sustainably: a validated market opportunity with customers willing to pay for an innovative product or service or process; and a product or service or process that addresses such an opportunity. The incubators that can mentor and guide potential startups on the above parameters can ensure that the startups are not aborted or stunted in their growth.

There is a lot more to incubator success metrics than funding!

Most incubators use funding as a success metric, which is a somewhat flawed criterion. Over 99 percent of companies should operate as organically grown, self-sustaining businesses — bootstrapped, without external financing.

For them, the goal is to achieve customer validation, product, service, process innovation and not just financing. Yet if the incubator uses only financing as its success metric, it will persuade inexperienced entrepreneurs into an unnecessary financing round. And more often than not, this strategy may fail in the long term.

Mentoring and Networking are the critical skills that will ensure the success of startups in India.

Of course, where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is an important service. Equally important is to provide insights into what is and isn’t a marketable product or service from a customer’s perspective.

Founding a startup is a highly risky venture. The high failure rates should not be a deterrent for the entrepreneurial spirit. Business incubators have a long calendar of activities comprising of seminars, capacity building, investor meets, road shows, network expansion workshops, demo pitching sessions and business competitions.

As the startup crosses certain milestones they need subsequent funding to scale up. Incubators syndicate the round of investment through various agencies including government, corporate and angel investors.

The business incubators have a systematic action plan to ensure graduation of at least 80 percent of the incubatees to a promising stage that can attract Venture capital funding and holistic venture success.

The success of the startup is the success of the business incubator – ‘responsible business incubation’ is the need of the hour!

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)