Tag Archives: #seed capital

Trend Watch? Incubator Spin-Off to Oblivion

Lauren A. Burnhill – @LaurenOPV

Everywhere I turn there is a new incubator or accelerator being created to support  impact investment.  Although many social and environmental companies are newer, more innovative and potentially riskier than most investors would hope for, the rush to incubate is a one-off approach to a complex problem. Addressing the oft lamented “early stage gap” by focusing on the life-cycle start point will change the shape of the gap, but won’t eliminate it.

The companies that graduate from incubators, accelerators, technical assistance facilities and business development programs are still going to face the same funding gaps, except the gap will have a different name. Angel, seed, early stage, growth – four different types of capital, all in scarce supply.  The uninitiated argue that lack of pipeline is a key factor in capital scarcity. They insist that if we could help small businesses organize their finances and professionalize their operating practices, investors would be drawn to this expanded pool of “investment ready” enterprises.  Maybe they will be, maybe they won’t.

I’ve been wondering how incubators and accelerators will get to sustainability when the financial life-cycle has so many holes in it. Who gets the hand off? Even if all of the graduating businesses are financed, how is the incubator rewarded or repaid? Where does the money come from to support the incubator’s next class, much less collection and analysis of outcome data on the first class?

My bah humbug problem with the incubator/accelerator model is this: if we push to create new types of intermediaries that provide capital at specific life-cycle stages, we increase the number of investor entries and exits required to get from ground zero to lift off. I don’t think most sustainable social enterprises can support four or five different exits, each of which aims for a higher multiple than the lost. Following this kind of model will mean higher prices for the folks at the base of the pyramid (BOP) and middle of the pyramid (MOP) whose lives we’re trying to improve. In other words, despite our do-good intentions, we may be encouraging unsustainable programs and enterprises because of how we structure and regulate financing for these activities.

We need to redesign the models and the instruments we use to finance social and environmental enterprise. You’ll see some thoughts on flipping the incubation model in an upcoming post. Until we upgrade our financing practices, making constructive use of both philanthropic and investment capital , I suspect that many incubators and accelerators won’t survive beyond one or two graduating classes.

Now, I have no idea what was going on behind the scenes at Churn Labs, but I think these guys may have just launched a new trend:  http://techcrunch.com/2012/05/31/churn-lab-shut-down/

Incubators and accelerators often have sharp, energetic, start-up savvy young founders. Spinning the management team off to the graduating stars of an incubator and then shutting down the incubator itself  isn’t a half bad idea. It may not create permanent solutions to funding gaps, but it does address the need most start-ups have to build management teams and human capital.

If you know of other cases where an incubator has spun-off its own management team to one or more graduating businesses, please let me know! I’m curious to see if this will really become a trend, or if this particular experience just happens to have coincided with my own ruminations on sustainability and early stage investing.