Sunday, January 18, 2009

Top 5 Reasons why Tech Incubators Fail

I have read a lot of articles and reports about how Incubators help local economies and drive innovation - but I rarely come across anyone talking about why they fail. We have been running a "quasi" incubator for 6 years and so I thought I would share some of our thoughts from our experience.

1. People. I would say that the people running the incubator is the most critical element. I visit incubators where they are managed by an administrator or college professor - and they struggle to find ways to relate to entrepreneurs in the incubator. Also, there needs to be some level of respect between the management of the incubator and the tenants - they need to feel like the people helping them have 'been there and done that'.

2. Lack of Services. Many incubators feel their primary value is giving real estate, Internet access and a printer. This of course makes no sense. Why does this help anyone start a successful company? Sure, it may help keep costs low - but many entrepreneurs (especially successful ones who have had ventures in the past) can work from home or knows someone with a little extra office space. The key to incubation is providing high-value services like technology development, operations, sales and marketing and even temp-management.

3. Location. The location of the incubator matters because it is supposed to draw in a variety of people (investors, service providers, entrepreneurs, etc). Sometimes they put an incubator in an area way outside town that needs economic impact - but is not convenient for people to visit, and entrepreneurs don't really want to be in the middle of nowhere. Entrepreneurs want to be near the action, in a vibrant location where they can connect with other people easily. Downtown locations in my opinion are the best locations. Of course most incubators are located in a University because its convenient for students - but if you are doing an incubator to attract entrepreneurs who are not in college - a city location is a must. Any other location, will drastically reduce the value.

4. Funding. Incubators can help with a lot of aspects of starting a company, but the most important need in many cases is funding. Obviously most incubators are not set up to write an investment check, but it should have relationships with local investors and venture capitalists. It also should be able to help refine the business plan and make sure it is ready to present to investors (go back to #1 People). If there is no link to funding, incubators have a hard time creating sustainable businesses.

5. Politics. This may be the killer for a lot of incubators (typically before they even get started). Since most incubators are tied somehow into public funding (usually a University, City or County) there is always politics in play. Politics can play a role in who runs the incubator, where it is and how its managed. These decisions can be made to please the powers that be, but can completely ignore the needs of the entrepreneur.

In summary, I think an incubator is actually a lot like a startup itself. It needs good management, good product and good execution. And for the most part - Incubators succeed because they address the needs of the entrepreneur. This is what is sometimes lost in the discussion.