Incubators Lay An Egg

Why are the business nurturers so fragile themselves?

Flawed business plans, inexperienced leadership, weak financing--these are just some of the common missteps that business incubators are supposed to help their clients avoid. Trouble is, the incubators seem unable to avoid these pitfalls themselves. Of 356 for-profit incubators identified worldwide in a recent Harvard Business School study, "I'd be surprised if 100 survive two years," says Nitin Nohria, a Harvard professor and a co-author of the study.

The prognosis from the National Business Incubation Assn. is no less harsh. "If 50 good incubators came out of this, that would be a great survival rate," says spokeswoman Sally Linder.

That's hardly the image that incubators cultivate. And indeed, Nohria says incubators can be helpful to inexperienced entrepreneurs. But the recent boom, which saw the number of for-profit U.S. incubators leap to 213 from 24 in less than three years, bred a lot of wannabes.

Successful incubation, say Nohria, demands hands-on advisers with deep pockets and expertise, not just impressive Rolodexes. "Everyone can drop 10 names," says Nohria. "You need people who can translate that into a durable business relationship." The reality, says co-author and Harvard B-school professor Morten T. Hansen: Most incubators feature "inexperienced people helping inexperienced people." Even proven entrepreneurs aren't always good coaches, and a new-media guru may have little to offer an up-and-coming router company. As for financial help, don't count on it: Less than one-third have $10 million or more to invest in their clients.

Perhaps this explains why for-profit incubators are stumbling. Just 30% have managed to "graduate" even one company, and only 46% house a company that has won outside financing. Some recent casualties barely managed to stay open themselves a full year.

Which incubators will make it? Look for the ones that cater to narrow niches, says Hansen, pointing to eCompanies' pact with Sprint Corp. to focus on wireless startups. They may also start charging for services to boost their own cash flow as they wait for their clients to go public. David Wright, vice-president at researchers Aberdeen Group Inc., says full-service incubators--those that offer everything from strategy to Web hosting to public relations--are particularly vulnerable since they're saddled with very high overhead.

The lesson? "Get big fast"--the dictate that incubators pushed on startups without regard to cost--wasn't very good advice for either of them.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE