Incubators accused of fostering start-up “ghettos”

A US-based serial entrepreneur has described start-up incubators as “ghettos” because most participants fail to secure funding, claiming the real value is in the networks on offer.

Andrew Shafer is the co-founder of Puppet Labs, which develops IT automation software, and has worked on other start-ups in the US, including venture-funded start-ups in Salt Lake City.

In an article titled “Incubators are a ghetto”, Shafer identifies flaws in the incubator model before offering his advice to both entrepreneurs and the incubators themselves.

“There has been an explosion of incubators in the last few years. Most of them suck. Some suck so bad that the net value created by the program is probably negative,” Shafer said.

“An incubator has a class of companies, they give them a little cash, they have a weekly session with a mentor or whatever, time goes by, demo day, no one gets funding, fail, fail, FAIL.”

Shafer accuses newcomers of blatantly copying Y Combinator’s well-known program, placing too much emphasis on the minor details of the model such as timeframe, funding amount, etc.

According to Shafer, many of the companies that participate in incubator programs still struggle to effectively communicate with investors, suggesting there is a flaw in the overall model.

“If you can’t connect the right dots for the investors, they probably can’t connect them for you,” he said.

“I literally grimace when I meet founders who have come through these programs and don’t understand how to discuss the addressable market, the go-to market, let alone term sheets.”

“The point is that a company is only as fundable as they are able to tell the story that they are fundable. That skill is something that many incubators fail to teach.”

Shafer also stresses the importance of having the right investors in attendance on demo day, when start-ups pitch their ideas – after months of preparation – with the aim of securing funding.

“If you have an incubator that can’t… get the right audience in the room for demo day, then the value of the program is severely limited,” he said.

Mick Liubinskas, co-founder of Australian incubator Pollenizer, says it’s important to remember that incubators are only one element of the start-up scene.

“They do have a role for entrepreneurs at specific points in their lives… They provide a different way of approaching [an] opportunity,” Liubinskas says.

“Incubators are only one way of starting a business. However, there is a lot of attention on incubators at the moment.”

“A lot are quite young – Pollenizer’s only four years old. Everyone’s out there busting a gut trying to do what they can.”

Despite his criticisms, Shafer does see some value in incubator programs, encouraging start-ups to participate in such programs, providing they are realistic about the outcome.

“In addition to the time and equity commitment, be sure to get more data, and weigh the options and benefits,” he said.

“You’ll learn things and get a tiny bit of money, but the connections you make to the network of founders and mentors is what will make all the difference.”

Shafer says start-ups need to determine:

• How many companies have been through the program and how many have been funded.
• Who the mentors are, including information about their backgrounds.
• Whether previous participants can be contacted, particularly those that failed.

With regard to incubators, Shafer says they need to be building relationships with investors “as much or more than any of the companies”.

“If an incubator is run by people who have never run a start-up, never successfully pitched [a] venture or haven’t got the cash on hand – plus the risk tolerance – to make considerable investments, the companies that accomplish anything will be in spite of the program rather than because of it,” Shafer said.