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Business advice toolkit: Incubators

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What are they and what do they aim to do?

Accelerators and incubators are business support programmes that provide packages of support to young firms to help them grow. Widely used in the tech sector, they are now increasingly applied in other industries. We distinguish accelerators from incubators based on the definition provided by the Harvard Business Review (summarised in Table 1 of the Annex). This toolkit is concerned with incubators. A companion toolkit considers accelerators.

Accelerators use competitive entry and a range of intensive support, typically targeting start-ups aged 3-6 months for a period of up to a year, although often for much less time. Incubators typically use non-competitive entry and comparatively ‘light-touch’ support, typically targeting start-ups aged 1-5 years. Typically, incubators are either non-profit or run as managed workspaces where firms have rolling contracts and pay rent, usually staying for between one and five years. Incubators provide their firms with workspace and ad hoc training that is directly relevant to the business (e.g. in accounting). Mentorship is also provided, but is often minimal and tactical (i.e. advice as needed), as opposed to the more intense, scheduled, and consistent mentorship sessions provided by accelerators. 

How effective are they?

We found seven evaluations that met our evidence standards. This sections summarises the findings from these studies. The Annex provides more detail.

There is some evidence that incubator support may increase participating firm employment and sales. Two studies look at employment, finding positive effects. Both studies consider support from accelerators and incubators and are unable to distinguish between the two. One of these two studies also looks at firm sales, finding a positive effect.

There is some evidence that incubators may decrease firm survival. One study looks at survival, focusing on five German programmes, finding a negative effect for three of the incubators and no effect for the remaining two incubators. Taken at face value, this suggests that incubators may be bad for firm survival. An alternative – and more plausible – explanation is that incubators help firms to more quickly gauge the quality of their business idea (e.g. through mentoring or demo days) and encourage them to drop bad ideas quickly, rather than continuing until the idea fails ‘naturally’.

We found no studies that looked at the overall impact of incubators on firms receiving external funding (e.g. from angel investors or venture capital firms).

Length of time spent in the incubator is, at best, weakly associated with improved firm outcomes. One study finds positive effects on revenues, no effect on survival and negative effects on the likelihood of graduating and getting funded. A second study also finds negative effects on graduating but a positive effect on survival – i.e. the longer firms stay in an incubator the more likely they are to continue to stay in the incubator. Finally, a third study reports a negative effect on survival and no effect on sales or employment.

The evidence on different incubator business models is inconclusive. Two studies consider the relative effectiveness of different incubator business models. One of these finds that, relative to for-profit incubators, non-profit incubators have no impact on revenue and employment, but are more likely to ensure firm survival. The other finds that firm survival is not related to the rent level charged by incubators.

University / academic involvement may help improve firm outcomes; affiliation seems more useful than involvement of individual academics. Four studies evaluate the impact of different kinds of academic roles on companies in incubators. Two studies compare university-affiliated incubators to non-affiliated incubators, with one finding university affiliation has no effect on revenue or employment, but a positive effect on survival, and another finding a positive effect on revenue and employment. Another finds that academic involvement in incubated firms has no effect on revenue, but suggests that using university research generally increases the likelihood of obtaining venture capital funding, and the amount of funding. The fourth study finds that academic involvement in the firm may increase the likelihood of firm survival, but may also have a negative impact on the firm’s ability to graduate from the incubator.

The type of incubator and accelerator support may effect firm survival. The one study considering this finds that incubators and accelerators that only host firms from a specific sector are more conducive to firm survival. It also notes that incubators that facilitate networking events are associated with lower likelihood of survival, while training programmes have no effect on survival.

These effects vary across locations. In areas with more competition, one study finds that networking events and training are conducive to survival, while only hosting firms from certain sectors has a negative impact on survival. Another study that looks at the effect of location finds that locating in areas with dense entrepreneurial networks has no impact on revenue or employment, but decreases the likelihood of firm survival. However, firms headed by a member of an ethnic minority group are more likely to survive in more competitive areas. In this case, incubator participants might be negatively selected overall, but participation might be helpful for firms that would face additional challenges (e.g. discrimination) in their business environment.

Are incubators cost effective?

None of the studies provide information on policy costs or cost-effectiveness of the programmes.

Things to consider

  • If incubators ‘kill’ participating firms, is that a bad thing? The limited available evidence suggests incubators may be bad for survival. It’s plausible that this is down to programme managers helping founders identify weak ideas and kill them, allowing entrepreneurs to develop new ideas.
  • What type of support should incubators provide? Targeting a specific sector produces better results for firm survival. On the other hand, networking events do not appear to be effective and providing training is only effective in areas with more competition. There is limited evidence here, however, so providers should experiment to see what configuration of these works best for them.
  • Should incubators have a minimum or maximum tenancy? There is little indication of a positive relationship between tenancy length and firm performance, in terms of employment, sales or survival. There is some evidence that firms are less likely to get funded, become independent, or be acquired the longer they are incubated.
  • Should incubators be left to the private sector? We found no strong evidence either way. Policymakers should consider whether there is any substantive market failure in incubator provision in their area.
  • Which types of firms are more successful in incubators? Firms that have patents survive longer; firms with patents citing academic research are more likely to secure funding.
  • Should incubators charge higher or lower rents? Results are inconclusive.
  • What roles should universities play in incubators? Overall, affiliation and using university research seems to be more helpful than involving individual academics.
  • Should different types of support be provided in different regions? Impacts of different types of support seem to differ based on how competitive the environment is in which they are operating. Think about your local economy when considering what model you adopt.
  • What is the value added of accelerator vs. incubator business models? We didn’t find any studies that directly compare the two approaches. 
Business advice toolkit: Incubators