Incubators, Accelerators and Impact Investors, oh my!

We need more incubators and accelerators, or so I am told, because start-ups, small businesses and social enterprises are not investment ready. Lots of would-be Fund Managers descry this lack of investment-readiness as a key reason for long investment periods and poor returns. On the flip side, well-meaning venture philanthropists have heard this cry and hope that by funding incubators and accelerators, deal flow will improve and more investments will be made. Although I am a huge fan of collaborative effort, this strikes me as a good fix for the wrong problem.

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The wrong problem is “how do we make these companies attractive to venture capital (VC) investors?”. Why would VC be the right investment model outside of the technology sector? Are we really going to get traction using a tech sector investment methodology to fund education, health, affordable housing or community services? Tim Devaney and Tom Stein recently wrote a provocative piece for Read Write Web “Start-up Accelerator Fail: Most Graduates Go Nowhere” that makes a case for quality programs and industry-focused accelerators. Both are good ideas, as far as they go, but graduating start-ups will still require some type of financing for them to graduate to.

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In response to the piece by Devaney & Stein, Arie Abecassis of crowdfunder AppStori wrote a response  “Is there a better way to evaluate Start-Up Accelerators” in which he argues that exits aren’t the only way to measure impact. Abecassis makes some good points. However, if we’re creating incubators and accelerators as an investment-readiness thing, follow-on investment must be a key performance indicator.

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Have you figured out what’s missing in this saga? What are we trying to achieve through the “incubate and accelerate” trend? Are we creating investment pipeline so that VC firms can more easily find deals that offer social and environmental returns as well as financial return? Are we helping start-ups attract “next stage” funding?  Or are we looking for sustainable ways to create economic opportunities and jobs in underserved communities?

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Devaney and Stein note that there are now more than 200 accelerators on a global basis, so potentially 2000 new ventures are receiving some type of support and investment-readiness orientation. How many investment funds are looking for the early stage opportunities that these accelerator graduates can offer? 10, 50, 200? Not enough for there to be space for 2000 new investments each year! So toward what are these companies accelerating? Higher cost, slower failures, perhaps.

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I’ll be rolling out some alternative ideas for supporting social and environmental startups soon, but today I want to highlight the “what’s wrong” part of the equation:

1. Venture Capital is not an appropriate model for creating and financing sustainable business opportunities, with the possible exception of tech sector and tech-related disruptive innovation;

2. Scalability is probably less important than replicability when we’re talking enterprise level investments for local economic development. The local green grocer and the corner barber cannot and should not promise scale. With appropriate support, however, they can offer sustainable jobs and fulfill community needs. We can scale the financial intermediaries that serve these small and social enterprises; we don’t need to scale the enterprises themselves.

3. Incubators and accelerators are intended to address the issue of investment-readiness. If this is the purposes, who are we expecting to finance the next stage of growth? If we don’t have a clear vision of the financing continuum, it’s possible that incubators and accelerators will be most successful at spreading bitterness, not growth.

4. Assuming we can identify enough scaled and scalable financial intermediaries across the financing continuum to ensure access to “next stage” financing, are we using the right methodologies to incubate and accelerate? Any model that starts with two guys writing code in a garage will fit right into current US incubator practice but models that rely on anything other than coding software are likely to need a different approach. Brazil has the best range of incubator programs, and sector-specific incubator programs on a global basis. There must be lessons we can learn from Brazil’s decade plus of creating incentives and support for incubators!

5. At the end of the day, maybe we should stop trying to focus on making social enterprise investments look like VC deals and re-focus on new techniques for reaching larger numbers of social enterprises on sustainable terms. I’ve heard Business Competition sponsors crowing about selecting 10 ventures from a field of 10,000 applicants. Me? I’d like to find a way to finance say 5,000 of the other 9,990 ventures instead.

Lauren Burnhill, @LaurenOPV

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9 responses to “Incubators, Accelerators and Impact Investors, oh my!

  1. Great point Lauren! Not sure if you picked it up when I published last time, but here a related article I wrote where I argued that growth obsession in the typical VC manner may be overrated and that, similar to your point, replication through other mechanisms may be preferred way for some social enterprises.

    http://goodgeneration.org/2012/04/23/the-importance-of-impact-offtakers-why-growth-is-not-the-end-goal-of-social-enterprises/

    Would be curious what your thoughts are on the impact offtakers concept.

    Best,
    Thien
    GoodGeneration.org

  2. Bart Doorneweert

    Super post! This is exactly what I’m puzzling with for my idea of a sector specific accelerator in agriculture. Would love to get in touch to exchange ideas.
    I think the most sustainable contribution an accelarator could provide to startups is building a robust business model. Having that business model will make the whole discussion on scaling more tangible. What would you say, is it possible to scale the systems of local and small through replication?

    Best regards

    Bart

    • I’d enjoy talking with you about your ag accelerator concept – and WordPress suggests that I read some of your posts first – which I will do! I’m curious what you have to say about value chains since my first thought on ag accelerators was “how do we capture value chain advantages in a company-specific model?”. Maybe the answer is a value-chain acceleration model? I’ll see if I can direct tweet my email to you (rather than just generally making it available here) so we can share ideas.

  3. Hi Lauren,
    I’m a friend of Sal’s (@saintsal) and have been following your tweets, so I found it really interesting when I saw you two in conversation on Twitter. I look forward to reading about your “flip the incubator” model.
    I’ve been observing, researching, and experiencing the impact investment and social enterprise space for 3 years and am presently building a network of women investors here in Vancouver. My hypothesis is that the investment ecosystem comprised of an investor network (that brings in new investors, provides investor training), an investment vehicle or fund (that actively invests and co-invests), and a capacity building organization (to support the development of the enterprises and investment opportunities) does work. It has the blend of community, energy, and learning tools that are needed for an ecosystem to thrive.
    I am also a huge fan of lean startup techniques and used them myself on developing my own investor venture.
    One of the big missing pieces, which I’m working on through my consulting work (as I bootstrap my venture!) is that the investment decision-making process needs to change. Impact investment seems to use old models tweaked for impact. And whilst the propensity towards turning everything into a metric for measurability and comparability seems prevalent, at the end of the day, this is all just information and not a decision. We need to be making decisions differently, in a more integrated way, if we’re really going to achieve the social change and impact we desire.
    I would love to speak with you more about this and put heads together. It sounds like you’ve been putting a lot of thought to the system as well.
    All the best,
    Bonnie
    @BonnieOWong and @Pique_V

    • Hi, Bonnie! I’m a bit torn, because most SMI/SME enterprises could use more support, so I don’t want to bash incubators and accelerators indiscriminately. I do worry though that in pushing innovation and scale, we’re indiscriminately replicating a sector and market specific strategy. Understanding our individual values, goals and beliefs is just so critical in impact investment. Everything we do has an impact, it’s achieving purposeful impact that’s such a challenge 🙂

  4. Hi Lauren, I totally agree. We were already lacking diversity in the “traditional” investment industry and now the same lack is weaving its way into impact investing. I don’t want to be so bold as to point to the LED bulb over my head, but I do feel like I have the answer… or an answer… Looking forward to sharing it with you (it’s not rocket science and not a secret, but it’s also not pervasive in the investment industry at the moment).
    All the best, Bonnie

  5. Bart Doorneweert

    Hi Lauren and Bonnie,

    This is a very interesting discussion you have going here! I’m also in the early stages of experimenting with an accelerator concept myself, in the mix between social venture and agriculture. The two sort of naturally tend to blend a bit. I know this from my own experience as co-founder of http://www.zameen.org/ . We were continuously wrestling with how to start up from a donor-based backing and turn into a commercially viable company. In the end we made big steps with backing through the New Ventures network, but is was a big challenge (http://www.new-ventures.org/company/zameen-organic)

    I think it is very sharply noted, Lauren, that agriculture has to innovate on a value chain basis. A disruptive business model alone, is likely not to be enough. The Zameen venture did this by co-branding with consumer brands (like http://www.pantstopoverty.com/pages/the-farmers) . We also attempted to introduce similar concepts with Marks and Spencer and the likes back in 2006, but that just didn’t work. The Zameen company is now taking a renewed attempt with Coop in Italy, with ethical design guru Katherine Hamnett (http://www.vestosolidal.it/) Hope it works this time….

    What I look for in the ventures I support and mentor is their capacity in changing way value flows through the value chain. This has to do with all the negative externalities that farmers are “coerced” to create in the current value chain systems, due to that they are always only dealt what’s left after everybody else in the chain has had their share. Generally that is far below what is sufficient. I have written a piece on my bog on shared value that sort of tends to explain the idea.

    I’m now pooling several startups together, featured also on my blog, to see if I can set up systematic learning exchange and keep track of startup development using customer development methods. My partners are doing the same in India, and soon to start in Kenya. Hopefully we’ll be seeing some interesting patterns appearing to mould an accelerator model and attract some upfront investment capital. I’ll be sure to keep you updated on how that develops through my blog.

    Do tweet-send emails and I’ll be sure to be in touch! I think it’s highly interesting what you are working on, and am eager to learn more!

    Best regards,

    Bart (@bdoorn)

    • Bart,

      You are doing very interesting things! The branding strategy should gain traction – I see increasing airplay for sustainable fashion, fair trade consumer products and similar. It’s almost like watching the world wake up 🙂

      Here’s the small world part – I had just read your comment and looked up Zameen.org when I heard from a friend, Sanjay Sanyal of New Ventures India, asking for an introduction to former colleagues at ACCION International. It was great to be able to include reference to Zameen in my email, since I think ACCION should focus on this type of activity, not just mobile payments (where, admittedly, the potential for a high multiple exit is more obvious). I don’t know if ACCION’s Frontier Markets or Venture Labs would look at Ag, but they are looking at India FYI.

      Have you run across Saskia Van Baar de Knegt of Good Works? She has been creating a really interesting value chain company in Vietnam and is looking at expansion markets. I would foresee interesting conversations between you two.

      Thanks for sharing some of what you are working on with Bonnie, myself and whoever else reads blog comments! I’ll look forward to Twitter updates 🙂

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