The Incubator Boom: How Much Do They Actually Help?

Accelerator launch party, San Francisco, 2014

Startup culture is white hot in America right now. Valuations are high, the IPO market is finally back, and the cost of starting a business is at historical lows, especially for many tech companies. It’s no wonder that nine in 10 startups say they’re hiring.

But anybody who’s ever owned a Members Only jacket or a Pet Rock knows that when something becomes trendy, people sometimes pile into the market to try to capitalize on it. That may be happening in the world of business incubators, which have exploded from just 12 in 1980 to over 1,250 at last count from the National Business Incubator Association (NBIA).

Incubators are organizations that provide mentoring, interaction with other entrepreneurs, legal advice, insurance and cheap office space to help new, early, or mid-stage ventures get off the ground. Often, seed money is also involved. According to the latest numbers from the NBIA, incubators helped about 49,000 startups get off the ground in the U.S., and together they provided 200,000 full-time jobs.

Generally speaking, the business model behind incubators is relatively simple: sell office space and mentorship, receive rent payments and (sometimes) equity in what could be the next Dropbox or Airbnb (both of which sprang from incubators).

Nextwave, for example, an incubator in Troy, Michigan, provides access to experienced mentors and rents a “Dedicated Desk” for $400 a month or a “Private Office” for $1,000 to $4,000 a month with a three-month rolling commitment. The space includes the use of conference rooms, “ideation walls,” fast internet, a data center, networked printers, mail service, a kitchen, and showers.

The money to run an incubator doesn’t just fall out of the sky. According to the 2012 State of the Business Incubation Industry report, universities and taxpayers are the most common sources of the funds that subsidize the real estate, keep the lights on, and pay for the expert help. Universities and academic institutions sponsor about a third of North American business incubators, 25% are funded by economic development organizations (often an arm of local or state governments), and 16% are sponsored directly by government entities. The rest fall into the “other” category, which includes for-profit entities and combo sponsorships.

The entrepreneurs are lining up to get in, and many incubators accept just a handful of companies each year. That exclusivity heightens the lure and prestige of being in an incubator, but researcher Alejandro Amezcua at Syracuse University says some of them may be more sizzle than bacon.

Benefits of Incubation: “Marginal”

Amezcua took a look at thousands of businesses and found that incubated businesses on average grow only about 2% to 7% faster than unincubated businesses, and few companies ever leave incubators to become self-sustaining companies. Out of 18,426 incubated businesses in the study, only 2.9%, or 527 firms, exited their incubators. And of those, 17%, or 90 firms, failed.

Amezcua’s conclusion: “Overall, this study found that the effect of incubation on the performance of incubated businesses is marginal when compared with the performance of unincubated businesses. In other words, incubation is not associated with a major increase in the survival, employment growth, or sales growth of new ventures on average.”

It is also clear from Amezcua’s study that many of today’s incubators may be little more than commercial property landlords that are more about rent than launching companies. “It appears that most incubators recruit nascent entrepreneurs—individuals just beginning the business planning process—to fill their space, rather than seeking out fledgling firms and enticing them to relocate,” the study noted.

With so many incubators entering the market but so few doing a good job of launching powerhouse companies, there seems to be a whiff of competition in the air. After all, incubators aren’t the only groups out there trying to get companies off the ground. Accelerators, which usually offer intensive bootcamps designed to help entrepreneurs launch companies, are also booming—and we haven’t even mentioned the research parks and small business development centers (SBDCs) also scattered throughout the United States.

The increasing saturation may be one reason Techstars, one of the most famous accelerators in the world with locations in six U.S. cities and London, U.K., recently abandoned its requirement that companies give up an equity stake in their ventures (typically 7% to 10%) to join. Techstars is now giving entrepreneurs an “equity-back guarantee”: if the entrepreneurs in the program don’t feel the program met their needs, they can demand their equity back from Techstars.

Even incubators have to worry about keeping their customers happy.