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.
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.
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.
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?
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.
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