Filling the evidence gap – do incubators work?

If you managed to read through the four hundred plus pages in last Thursday’s Canadian Federal Budget you might have noticed that, amongst the initiatives aimed at improving Canada’s innovation performance, is a $60 million investment over five years to fund “outstanding and high-potential” incubator and accelerator organizations.

The ethos of this investment is certainly laudable, aimed as it is at helping entrepreneurs refine their businesses and business skills. Through competitive selection processes and a curriculum of mentorship, training and advice, as well as the provision of early-stage funding, such centres aim to accelerate and catalyze good ideas into good businesses. And while the tech sector is most often the target for such centres, we’re increasingly seeing similar setups for the service and manufacturing sectors.

Evidently, the Canadian government is far from alone in attempting to utilize these centres as key elements of an innovation and entrepreneurship strategy. Hundreds have sprung up around globe, funded by public and private sources, and organized at the national, regional and municipal level.

Yet despite this popularity, there’s actually very little known about their effectiveness in creating long-term value, be it in terms of sustained employment or long-run survival. What little quantitative analysis does exist depends on data pooled together from a variety of sources, and poses some rather significant methodological challenges.

The most complete is that produced by Seed-DB -an online database of seed accelerators and their companies.  This data set contains information on 156 accelerator programs world-wide. Their findings highlight that such centres have, on aggregate, created over 6600 jobs at a net per job cost of over $200,000 (USD).[1] To be sure, this likely underestimates the number of jobs created in long-run spinoffs and multipliers from successful exits, and fails to capture less quantitative metrics around skills development.

Nonetheless, it doesn’t create a story of resounding success and instead mimics the per job funding costs of many traditional industrial subsidy programs.

Moreover, as NESTA, a UK-based research organization, found in a related research project, accelerator centres are prone to the following critique[2]

– They build only relatively small companies;
– They divert talent from higher-growth startups;
– Good companies still fail after accelerator programs;
– They attract companies that are already struggling; and
– They contribute to the creation of a bubble.

It warrants mentioning that just over a decade ago, in the hype that was the dot-com bubble, then hype-driven business incubators were sometimes referred to as “business incinerators” for their failure to contribute to long-run growth. Unfortunately little research has been done to ascertain whether this was really true, and what the longer-term impacts of the training and skills development that happened therein.

Fast forward to the present, and while the aforementioned critiques are by no means conclusive, and while there’s certainly no dearth of positive anecdotes relating to major exit successes, the available metrics regarding value creation necessitate further analysis.

If we’re going to allocate significant public dollars to these centres under the guise of long-term innovation and entrepreneurship facilitation, than we need to be asking tough questions about their effectiveness and how we might address their shortcoming.

In short, what we know and don’t know about incubators and accelerator centres begs for a sustained analysis of the effectiveness of such centres in creating employment, patents and new entrepreneurial startups, and how the economies and societies that host them benefit.

Filling this evidence gap is one of the major projects the DEEP Centre will embark on in 2013 as we provide policy makers with objective evidence as to what growth and innovation policies work best.

As part of this work, we’d love to hear from those of you on the inside of such organizations, and will be looking for case study organizations to help us better understand the short and long-run impacts of government funding for such centres. Get in touch!