An insider’s view of the role of an incubator
The primary role of any incubator is to help nascent companies - by providing resources, access to industry mentors, interactions with other entrepreneurs and perhaps most importantly, patient capital, to get through the survival stage.Pranav Marwah & Arjun Madhavan
It’s no secret that the startup ecosystem in India has evolved exponentially in recent years. According to a recent NASSCOM report, India is the third largest startup ecosystem in the world and is expanding to become more global.
In fact, factors such as improving investor sentiment, higher success by local players and government impetus under the “Startup India Stand-Up India” initiative, there has arguably been no better time to be a startup in India. The rise of startups has paved the way for the birth of support systems focusing on mentoring, driving innovation and boosting scale and commercial success in the form of incubators and accelerators.
How has the incubation ecosystem evolved?
Today, India ostensibly has the third highest number of incubators and accelerators in the world with 140 entities proclaiming themselves as such. A significant challenge facing startups is understanding the role that these players have within the Indian ecosystem - while terms like incubator and accelerator have become common nomenclature, there is still a lot of ambiguity around the actual value that they bring. This ambiguity is compounded by the corruption of terms due to inappropriate usage, with every second organisation labelling themselves an “incubator” or an “accelerator”.
The list of questions we receive from startups has therefore grown longer every year - for example, are incubators providers of “free” working space? Do they provide access to resources and mentors? Do they provide capital and help in generating returns? Incubators should, in fact, provide all these things and more.
The primary role of any incubator worthy of the name is to help nascent companies - by providing resources, access to industry mentors, interactions with other entrepreneurs and perhaps most importantly, patient capital, to get through the survival stage.
What makes incubators different from accelerators and VC firms?
- One of the big differences between accelerators and incubators is in how the individual programs are structured.
- Accelerators typically support technology based startups, who have crossed fledgling stage.
- The selection process undertaken by accelerators is highly competitive and they take applications nationally/ globally. Y Combinator accepts about two percent of the applications it receives and Techstars usually has to fill its 10 spots from around 1,000 applications.
- The duration of program often offered by accelerators range between 3-6 months and the resources provided by them include rapid test and validation of ideas, mentorship and support from industry experts, seed funding.
- Accelerators mostly invest 10-12 percent equity for funding provided
- Startup incubators begin with companies (or even single entrepreneurs) that may be at a nascent stage of growth or development, sometimes even before the core team is fully established.
- Incubators often undertake a very competitive application process
- The duration of the program offered ranges between 1-5 years, on average 24-36 months.
- The resources that an incubator can provide include patient capital, office space & amenities, mentorship programs, networking, access to industry experts and third-party finance
- While there are some independent incubators, they can also be sponsored or run by VC firms, angel investors, government entities, and major corporations, among others.
- An incubator’s primary success metric is typically derived from the survival and sustainability of its companies and not necessarily only by return on capital, as is with accelerators or VC firms
- Venture capital funding is generally only available to companies in later stages of development. Venture capitalists provide their portfolio companies with exposure, connections to customers, and even help to establish partnerships.
- Venture capitalists manage the funds for limited partners who expect exceptionally high returns on their investment. Therefore, VC funding is highly competitive, and venture capitalists also tend to be more risk averse.
What are the common challenges that incubators face in India?
Misconceptions and limited knowledge about the incubation and startup ecosystem
- One of the most pervasive misconceptions in the Indian ecosystem is the idea that incubators do not provide capital investment – many founders incorrectly believe that an incubation program is just a trade-off of “free” space and facilities for equity, and that incubation programmes have no other value adds.
- The value that a well-structured incubation programme can bring to the table can be difficult for founders to understand, when compared with the allure of multi-million-dollar VC fundraising.
- Another common misapprehension is that incubation programmes could cause unnecessary early dilution for founders. Founders are sometimes wary of giving up equity for intangible value-adds as opposed to larger amounts of hard cash. It is thus important for founders to distinguish between actual value and perceived value and focus on raising the right amount at the right time, rather than being blinded by the glamour of having ten figures in the bank.0
Idea driven incubation over capital driven incubation
- Finding founders who want to build a product that solves problems than just creating a "startup" that can make money for them.
- Distinguishing the value proposition that incubators can provide – i.e. smart, patient capital in an ecosystem that is saturated with the opposite kind of investment
- Large asymmetry created due to the difficulty by founders and incubators to rightly price the “value add” at an early stage of the enterprise
- In a fair market, there’s a growing need for investors and incubators to display their “value add, just like founders/entrepreneurs are held responsible for the performance of their companies.
- Fundraising is a two-way street – it’s as important for an entrepreneur to question and establish the credentials of any potential investor, as vice versa.
- One of the biggest distinguishing value propositions of worthwhile incubators should be to provide smart, patient capital, forgoing immediate returns for substantial returns in the future. This should function as a beacon of hope in a market saturated by traditional investment structures focused on quick turnaround profits.
So, does every startup need the help of an incubator or an accelerator? Definitely not. However, it is important for founders to understand the different types of investment and programmes available to them, to make an educated decision as to what suits them best at the stage that they are at.
In a market where 90 percent of startups fail, incubators and accelerators can play a key role in growing the number of sustainable businesses. While the journey for these investment programs has been relatively smooth sailing so far, the next few years will be critical.
As the market matures and founders become even more discerning, the onus will be on each incubator and accelerator to prove its value proposition and viability to build sustainable business models – baptism by fire in the truest sense.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)