The ROI of Joining an Incubator or Accelerator
Synthesizing Insights From the Data
👋 Hi, I’m Andre and welcome to my weekly newsletter, Data-driven VC. Every Tuesday, I publish “Insights” to digest the most relevant startup research & reports, and every Thursday, I publish “Essays” that cover hands-on insights about data-driven innovation & AI in VC. Follow along to understand how startup investing becomes more data-driven, why it matters, and what it means for you.
Brought to you by Affinity - Exclusive Dealmaking Benchmarks
What can Affinity data on 3,000+ firms reveal about how VCs performed last year? Find out in the 2024 investment benchmark report with exclusive data on deal volumes, communications, and network growth. You’ll learn characteristics that set top firms apart and actionable insights for updating your deal sourcing strategies.
We previously explored what makes founders successful (Education & Success, Work Experience & Success, Serial Entrepreneurship & Success) and how investors can contribute to this success (Does Investor Choice Matter).
Today, we turn our attention to the role of incubators, accelerators, and company builders/venture studios (IACs) in building successful startups. An important yet controversially discussed topic.
People often confuse the terms, so we’d like to start by getting the definitions straight. Here’s our understanding:
Incubators: Idea —> Startup. These programs typically provide early-stage founders with resources like office space, mentorship, and networking opportunities over a longer period, focusing on nurturing business ideas. It’s the breading ground for ideas to become a startup.
Accelerators: Startup —> company. Often more structured and intensive, accelerators offer short-term programs that provide existing startups with mentorship, investment, and education, culminating in a demo day where they pitch to investors. It’s the stepping stone for startups to become a company.
Venture Studios/Company Builders: Idea —> Startup —> Company. These entities build companies from scratch, providing not just resources but also ideas, operational support, and a team to help launch and grow new ventures. This category is quite heterogeneous and discussing its complexities in detail would be outside the scope of this newsletter. If you are interested in an in-depth analysis, see the comprehensive report by Max Pog.
While all three types of programs promise benefits such as access to experts, proven business models, and operational support to allow founders focus on long-term growth, you rightfully ask for the data to back this up.
It’s essential to consider the costs involved, as many IACs take equity stakes in exchange for their services, with some making bold claims about their contribution to a startup’s future value (not to talk about the opportunity cost..)
Critics argue that the best founders with the highest potential for building large, successful companies, do not need the help of IACs and that giving away equity in such cases may be a waste. This brings up critical questions: Do top-tier founders join IACs? Adverse selection? If they don’t, can these programs develop top-tier founders from individuals who might not have succeeded independently? If these criticisms are unfounded, what is the actual value that IACs provide?
With this episode, we aim to cut through the noise, synthesizing the available research on this matter and aiming to determine if IACs are worth their cost and how they influence the probability of startup success.
Why Join an Incubator/Accelerator/Venture Studio Program?
Recent studies (Manconi et al., 2022; Woolley & MacGregor, 2021) provide quantifiable insights into the impact of incubators and accelerators on startup success.
Startups in private incubators are 70% more likely to secure venture capital, while those in university incubators are twice as likely to obtain government grants. Additionally, university incubators and accelerators significantly reduce the likelihood of negative closures like bankruptcy, with firms in these programs over 50% less likely to fail.
However, it's essential to note that not all startups benefit equally, and some may experience lower short-term sales or even an increased risk of closure if the program isn't a good fit.
The findings highlight the strategic value and potential pitfalls of selecting the right venture development program. More often than not, this is a task worth spending a good amount of time on.
Below graph by Woolley & MacGregor (2021) reveals the heterogeneous offerings that incubators (both private and university-based) offer to their cohorts, based on 146 reviewed programmes:
A study by Games et al. (2020) reveals that participation in programs not only affects the business and its performance but also the founders on a personal level (which of course has substantial impact on the company’s performance).