Public and private sector investment in business accelerators and incubators (BAIs) stems from their potential to play a catalytic and supportive role within the broader innovation ecosystem. An analysis conducted by Canada’s Department of Innovation, Science and Economic Development (ISED) found that the companies participating in BAI programming significantly outperform the broader population of Canadian SMEs on several key measures. For example, BAI companies are considerably more likely to be growing in employment and revenue and much more likely to invest in R&D than a comparable benchmark group in the broader firm population. The analysis also found that 76% of companies that participated in BAI programming described their BAI program as being either ‘significant’ or ‘vital’ to their success.
While these contributions to Canada’s economic performance suggest a public policy rationale for ongoing public investment in BAIs, it is equally prudent for BAIs and their partners in government to works towards enhancing the fiscal self-reliance of these support organizations. The array of economic benefits created by BAIs suggests several revenue-generating opportunities that could diversify and improve the funding sources available to BAIs while deepening their relationships with angel investors, VCs and large corporates. In fact, leading BAIs are already increasing the proportion of revenue they generate from non-governmental sources—sources that range from partnerships with innovation-hungry corporations to consulting fees charged for services provided to mature startups and SMEs.
With the Partners for Prosperity and Innovation project, the DEEP Centre led the first nation-wide effort to assess the viability of self-sustaining business models for BAIs in Canada. With a focus on equity investments, service fees and partnerships with large corporations, the four-part study identifies the revenue models with the most potential to contribute to the fiscal sustainability of startup support organizations. Drawing from a wide-ranging series of executive interviews and case studies, the study also examines the impact and sustainability of BAIs from the vantage point of organizations that frequently interact with business accelerators and incubators in Canada, including large companies and venture capital firms.
Key Takeaways
Despite evidence of traction in generating private sector revenues, the DEEP Centre found that, with very few exceptions, almost all BAIs in Canada receive some level of funding from government. More importantly, government funding still accounts for 55% of the overall funding mix for the population of 25 BAIs in our sample.
The average amount of funding from government, however, obscures some noteworthy differences in the sample. In fact, our research points to a spectrum of financial sustainability along which we can identify three distinct groups of business accelerators and incubators.
- Publicly funded BAIs. At one end of the funding spectrum, our sample included a significant number of BAIs (36%) that derive 70% or more of their funding from the public sector. BAIs at the publicly-funded end of the spectrum are typically mandated to serve the community. These entities tend to focus on early-stage companies and are more likely to be located outside of Canada’s largest urban centres. Publicly funded BAIs are also common in capital-intensive sectors (e.g., health sciences and cleantech) where executives cite the need for long-term support and the capacity to use public funding to leverage more private sector engagement. Our executive interviews suggest that few publicly funded BAIs will produce venture track companies. However, there is a more modest role for publicly funded BAIs as economic development engines that produce sustainable SMEs that will contribute to local growth and employment. Given that our sample includes 25 of Canada’s most recognized BAIs, we suspect that the majority of the approximately 250 BAIs across the country fall into the publicly-funded end of the spectrum
- BAIs with balanced funding. Second, there is a larger cohort of BAIs in the middle of the fiscal sustainability spectrum that generates revenue from a stable mix of public and private sources. In our survey pool, BAIs with balanced funding represent slightly less than half the sample (44%) and receive an average of 50% of their funding from government. Advocates of the balanced model suggest that the public-private mix allows diverse organizations to contribute to and benefit from building the startup ecosystem. In practice, these diversified entities serve clients across the spectrum of maturity and draw revenue from a mix of service fees, partnerships and real estate.
- Privately funded BAIs. Finally, there are a small number of BAIs in Canada that receive an average of just 4% of their funding from government. These privately financed BAIs include VC-backed entities and those that have been successful in attracting significant corporate investment. BAIs at this end of the spectrum typically specialize in vertical niches and have a highly selective intake that prioritizes later-stage companies.
On a forward-looking basis, the survey and interview results suggest that public funding will continue to be necessary to keep the majority of Canadian BAIs afloat. Very few of the BAIs surveyed by the DEEP Centre anticipate any changes in their revenue mix over the next two to three years, which suggests that most BAIs will not be viable without at least 50% public funding going forward. In several regions and sectors, even higher public contribution levels will be required. The bottom line is that only a small number of BAIs have fashioned a path to fiscal self-reliance, and the executive interviews do not engender confidence in the ability of a large number of BAIs to follow in their footsteps.
The variability in the capacity to earn private sector revenues implies that Canada needs different funding models for BAIs across the spectrum of fiscal sustainability, including a differentiated strategy for distinct stages, sectors and regions of the country. In our recommendations, we suggest that funding programs establish a more precise division of labour among BAIs and fund entities to do specialized jobs in the ecosystem based on client stage, sector and location.
The findings in this study also underline the importance of measures that will improve the capacity of BAIs to deliver a more robust return on investment. Top of the list in these measures is the need to “flood the system” with genuine startup experience. Experienced entrepreneurs are needed to instill sound business judgement, improve access to targeted strategic and operational advice, and help entrepreneurs open the right doors and avoid costly mistakes. BAIs with entrepreneurial leaders are also more likely to put time and energy into tapping into new markets and new client segments to grow new revenue streams. In short, there are loud calls for more entrepreneur-led BAIs that can attract and sustain meaningful engagement with the private sector, including VCs and corporates that will contribute significant resources to the ongoing growth and success of Canada’s startup ecosystem.