Why start-ups need the kid glove treatment

In the cut-throat world of business and commerce, where return on investment and bottomline rule the roost, love and affection would seem a far cry. But start-ups are engines for technological and commercial innovation, and throttling them would mean stifling innovation and efficiency.

Start-ups are most vulnerable in the initial months, and like a new born, need a lot of care and attention that cannot be analysed in monetary terms. This has been recognised, and the result has been the rapid increase in the setting up of incubators and accelerators. Broadly, incubators contribute to the growth of start-ups in three important ways: by democratising start-up creation, adopting a more tolerant approach, and increasing the chances of seeing money.

A singular feature of India’s start-up boom is that it has essentially been an urban phenomenon. Almost 97 per cent of start-ups are from Tier-1 and -2 cities, with smaller towns accounting for only 3 per cent. Similarly, 98 per cent of angel and venture investment go to start-ups in large cities. However, incubators have played an important role in evangelising the start-up creation process beyond the boundaries of large cities.

How? For one, the physical location of the incubators. About, 50 per cent of the incubators are located in Tier-2 and -3 cities. Tier-2 cities account for close to three-fourths of the total share of start-ups supported by the incubators. This shows the important role played by incubators in nurturing entrepreneurs in smaller cities.

As much as they would hate to admit it, it is the reality. The selection criteria adopted by incubators to select ventures are more tolerant as compared to that of angel and venture investors. And that’s the way it should be. The mandate of most incubators is to provide support to start-ups and not financial returns. Many of the incubators are set up in government funded universities and even incubators set up in private institutions are funded by the government.

Incubators thus follow an approach where incubation support is seen as a public good. The cost of support is heavily subsidised, and extended to as many incubatees as possible that can be physically supported in the facility. Though incubation support is restricted to a specific time period (normally 2-3 years), the incubatees are given considerable leeway during the support period.

The proof of the pudding is in the eating. An acid test for a start-up is its ability to sign up paying customers and obtain revenues. On this count, incubators play an important role. We compared the maturity index of start-ups that have been supported by incubators and those that have not been and found that the index values for the former are 13 per cent higher. This meant the proportion of start-ups in the early revenues and steady revenues stage are higher for start-ups that have been incubated. What is the bottomline? The odds of getting subsequent angel or venture funding are higher for start-ups that have been incubated. Our analysis shows that incubators increase the subsequent chance of venture funding by 3–5 times.

The immortal words of Victor Hugo ring true to this day: “Nothing is more powerful than an idea whose time has come.” Start-ups, before anything else, are an idea. With time, effort and capital, the idea takes shape, gains momentum to become a full-fledged business enterprise. But the transition from idea to reality is fraught with uncertainties. Incubators and accelerators perform the important role of nurturing start-ups in their most vulnerable phase.

In the absence of formal training institutions on entrepreneurship, incubators and accelerators are performing the role of finishing schools for founders, preparing them for the hard journey ahead. Young aspirants planning to venture on their own can actively consider incubators as their first port of call in their entrepreneurial journey.

The writer is Professor, Department of Management Studies, IIT Madras

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