Accelerate or incubate?

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4 April 2014

AIB’s sectoral report on the technology space, released last week, was upbeat, if familiar in message. The short version is that the tech sector is growing, the banks (AIB anyway) are listening and, if you have a good idea, you may get funded or even acquired.

The report isn’t especially controversial but it backs up its points with some insightful statistics. According to supporting research from Amarach published in the report, the majority of respondents said they expected their companies will do better this year than they did in 2013. Some 92% said they planned to expand and 74% said they intended to hire more staff. On a more concrete note, 71% said they increased their turnover by an average 31%. Good times.

Amarach’s survey, however, revealed attitudes in tech SMEs that are cause for concern. Only 60% of respondents said they invested in research, and of that only half availed of the government’s tax credit scheme; 58% said they exported their products; only 40% said they used cost-saving software-as-a-service offerings; and 30% planned to look for credit from the banks. Is this what the philosophy of ‘fail fast, fail better’ has brought us? Badly run companies touting half-baked ideas?

It’s a view partially supported by experts from the country’s 27 incubator and accelerator schemes. While there is broad agreement that accelerators and incubators are an important part of the start-up ecosystem they present their own problems, in particular the creation of “walking dead companies” adept at securing grants and follow-on funding despite being of no benefit to the (smart) economy. Applications chasing applications with little focus on product.

A second area of concern is the lack of agreement on the differentiating factors between accelerators and incubators. The terms are often conflated and even used interchangeably in conversation. Both provide space and mentorship programmes to start-ups; share the same performance metrics (jobs created, potential for follow-on funding); work best when companies collaborate instead of compete; and act as showrooms for potential investors.

Thankfully, report gives clarity on the difference between the two. Accelerators take a single-digit equity stake in exchange for capital and mentorship and last for between three and six months with a ‘graduation’ at the end. In some cases there is even the chance to go before a judging panel of investors in search of Ireland’s next top start-up. Incubators support start-ups over a longer period of time, making them a better bet for research-intensive projects (for example, in life sciences).

If incubators/accelerators suffer a problem of definition they also share a crisis of identity when it comes to selection. Again, there is overlap between how the two function. The AIB report says the average intake attracts an average of 136 entrants but a more illustrative stat is the percentage of successful applicants. If you’re in Dublin you have a 21% of getting in to a scheme, that figure doubles outside the capital. However, don’t expect your selection to be based on the strength of your idea. The experts consistently rated market potential above innovation as criteria for entry. This will ring true with academics struggling to find funding for research without obvious commercial potential.

Incubators/accelerators have produced high-profile success stories like Logentries, Newswhip and FeedHenry but they shouldn’t be seen as a rite of passage. As more start-ups appear it’s inevitable that the number of applications will rise, acquisition rates will remain low (around 10%), good ideas will get lost in the shuffle and increased competition will leave less room to ‘fail forward’. You won’t get that in AIB’s report.

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