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Who Exactly Benefits From Startup Incubators?

The path of a startup is never easy, but do incubators make it even more complicated?

5Jan

In his interview with TechCrunch in 2015, David Butler, former VP of Innovation at Coca-Cola said: 'What every company needs today is scale or agility. The Coca-Cola company is one of most scaled companies on the planet. We need to learn more about agility.' This was at the time when, along with other notable companies like McDonald's and GE, Coca-Cola was looking to collaborate with startups to boost their innovative initiatives. These are usually introduced in the form of hubs, incubators, and accelerators. The usual concept is that startups receive seed funding and access to more resources, whereas incumbents/investors get access to new ideas and innovation - and that's how Coca-Cola's Founders Program emerged in 2014.

In the last couple of years, funding startups has essentially developed into a trend, so incubators became a vital place for young companies to learn about business. Today, though, Coca-Cola is shutting down their Founders Program, because a handful of successful projects weren't enough to meet expectations, and at the same time, venture investors globally are hitting the brakes on their seed investments. According to KPMG's Venture Pulse analysis, Seed to Series A deal share in North America fell to 49% of all deals to VC-backed companies, representing a 5-quarter low (as of Q3 2016). The unicorn birth rate remains relatively low, so large investments mainly flow in later stage investment rounds, particularly, in private startups, whose current valuations barely match the reality.

Despite the challenges, an increasing number of people still chooses entrepreneurship as their career path, but according to Startup Genome Report Extra’s ‘Premature Scaling report’, over 90% of them fail. The majority face the harsh reality, where aside from innovative ideas and a positive attitude, young companies need to demonstrate a long-term business model and guarantee a good ROI, and only a few can offer this. In order to get valuable advice and reduce the risk of future failures, entrepreneurs start seeking help from incubators and accelerators. The problem, however, is that today, there are over 10,000 seed related programs, where only a handful are worth the time and equity. TechStarts and Y Combinator remain among the most influential and well-known having raised unicorns including Reddit, Airbnb, and Dropbox.

Inspired by several unicorn examples, many entrepreneurs tend to forget that success stories are exceptions rather than a common rule. This is the main factor that contributes to an increasing number of incubators.

One pitfall for pre-seed stage companies is an inability to recognize a program that would be a waste of their time. This is due to not being aware of how a successful outcome should look. It is often misunderstood that large companies' incubators do not always have mutual benefits for both sides. When large businesses look for agility in return for a scale, there is sometimes a difference in the quality of 'given and received' value. If a company takes too much from a startup, the latter can sometimes find themselves in a position, where they would be obliged to cater to the needs of their corporate benefactor, and later, unable to focus on their own growth.

For both startups and incubators - quality should always prevail over quantity. After all, if startups are forced to prove they are capable of delivering enough value to the business world, so should incubators.

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