What is the value of incubators?

Forbes published an article today about the effect of Incubators. In this article they criticise the notion that incubators are a low cost way of creating jobs: they say that it is hard to determine whether they create jobs, and also that it is not obvious that incubators are low-cost. The problem in both cases is that it is hard to get good data, and without good data anyone can have its own opinion.

Some of the main unknowns are the following:

  • Although the data of many incubators is used, one data-point, Y-combinator has had most successes. The results depend on this single data point.
  • For the cost of job creation, this article only looks to the funding going into the startups. There are many more costs: running an incubator is not cheap.
  • Data collection is incomplete, and it is likely that there is a bias in the data present: it is easier to find data for the companies that are still around and are successful than for the failed companies.

Instead of looking at the data, one can also looking for fundamental arguments pro and con. This paper looks at the effect of being in an incubator for companies, and notes that part of the perceived value of incubators is in the selection: incubators choose the best companies, and many of these companies would have been successful outside an incubator. Also: companies inside an incubator live longer, but is this not just postponing the inevitable? Companies are helped with the lower cost and helping hand, but do they really develop further, or do they unsuccessful ones just collapse later?

I have actually discussed this topic with several startups when they were looking for housing, and it turns out that it really depends. Several companies prefer to be outside an incubator since it helps them focus on customers and building new contacts. Other entrepreneurs tell me that their incubator actually has a very valuable network. They came for the low rent but received a lot more. So it really depends on the phase that the company is in, and it is important to choose an incubator with a relevant network. Unlike chicks, companies need more than warmth and shelter to grow in an incubator. (Image by AFP, courtesy of www.slideshots.com)

 

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