A couple of months ago, I was sitting in a coffee shop in Bangalore with a friend who works on Indian startup policy initiatives. We were discussing the state of incubators in India when I noticed him start to fidget anxiously with his cappuccino.
“Based on our projections of the growing number of entrepreneurs, we would have to go from 250 to 2,500 incubators in India. We need to find a better model of incubation. So…which successful model do you think would be best to replicate in India?”
“None of them,” I replied. “The world’s best incubators can’t be replicated and expected to work somewhere else. Copy and pasting miss the ‘investability DNA’ that makes these programs tick.”
For those that are new to incubators and accelerators, these programs are crucial elements of a strong entrepreneurial ecosystem when designed and executed properly. An incubator is an organization that takes in very early stage or idea stage startups, helps them to define their business models, prototypes or early versions of their products, and maybe even helps these startups acquire their first customers. Accelerators also provide entrepreneurial support, but they are more selective, accept more mature startups with more mature products, take equity, and are focused on helping these startups achieve scale in a rapid period of time––a typical accelerator program will run for 3-4 months. If incubators are cosy, comfortable support systems for entrepreneurs as they are figuring out the beginnings of their businesses, then accelerators are like pressure cookers to force entrepreneurs to push their business towards growth.
Data points to the efficacy of incubator/accelerator programs in helping entrepreneurs increase revenue and raise additional rounds of capital as compared to their non-incubated peers. The mentor-driven model of incubation/acceleration has delivered astounding success for organizations like Y Combinator, TechStars, and others, but when replicated in a different market, they are just not as successful. If we look at the data, the world’s best accelerator programs like these have a 70% funding metric or greater. Among the global best incubators, their cohorts will typically have a 35% funding rate. Still, the reality in most nascent entrepreneurial ecosystems is that most incubators are underperforming compared to a global standard; that funding metric is around 5-8%.
Looks Like an Incubator, Smells Like an Incubator
Here’s the problem: In an attempt to reverse engineer successful incubators and accelerators, many organizations try to replicate mentor-driven models for incubation and acceleration––and it just isn’t working. We see it all the time. An incubator or accelerator sets out to be “the next Y Combinator”, sees the structure of a program in the Bay Area, sets up a physical space, attracts startups, matches them with mentors, and magically, that startup should succeed. Programs like these look like incubators. They feel like incubators. They may even smell like incubators––but something is missing.
The magic of these programs is not in the surface-level structures and processes; what makes them successful is the “investability DNA” that is ingrained in the way that they started, and how they have evolved to function today. From the very beginning of successful programs like Y Combinator, TechStars and others, there was a laser-like focus on improving the investment potential of the startups they brought into the program. Simply replicating these models and structures alone cannot reproduce that.
I had an “aha” moment a few weeks after my coffee shop conversation in Bangalore while sitting in yet another café on the other side of the world in Cambridge, Massachusetts. I was chatting with a new friend from Harvard Kennedy School’s Building State Capability program. Harvard’s BSC is a unique initiative that helps global public policy stakeholders implement what they call a “problem-driven iterative adaptation” approach to designing public policy interventions. Their work brings a lean, problem-focused approach to the public sector with powerful results. When I mentioned this replication problem to her, she grinned.
“We call that isomorphic mimicry…it happens all the time in public policy,” she said.
Simply put, isomorphic mimicry is when policymakers identify an effective institution or policy that works in one region and try to replicate that same initiative in another. The structure is the same––but in action, it doesn’t work. This is because it’s not adapted to the local context and root problems faced on the ground. This is exactly what we see in incubation. It may look like an incubator, it may feel like an incubator––it may even smell like an incubator––but it’s not working in the same way.
Just because an incubator has the facilities, runs events and matches startups with mentors, what is essential is the quality of that mentorship because that is the mechanism used in mentor-driven incubation and acceleration that plugs in that instability element.
Getting to the root of Investability DNA
See, Y Combinator did not start out in the Bay Area and neither did TechStars. 500 Startups did not start out as an accelerator either. But there are three things that are integral to their DNA:
- These programs were set up by veteran entrepreneurs, who
- Wanted to invest in startups at really early stages––earlier than angels, so
- They mitigated their investment risk by improving the startup’s investability.
At the core of the world’s best programs, these organizations are able to do two key things: they are able to “think like investors” as well as “think like entrepreneurs”. It is the ability to balance these two mindsets and build a process to help an entrepreneur become more investable, that is the root of a great incubation or acceleration program. If we want to see more incubator programs flourish outside of the bay area, we need to deconstruct the problem that they were originally solving in the first place.
In part II of this series, we are going take a little history lesson on the origins of incubation and acceleration to unpack just how investability became an integral part of these programs. Part III discusses ways that we can inject this investability DNA back into the incubators and accelerators in ecosystems outside of Silicon Valley to create more sustainable, viable and investable startups. Stay tuned.