With the UK’s biggest event for growing mission driven business (Beyond Good Business 2017) happening this month, Dirk Bischof, founder of Hatch Enterprise explores the wider impacts of business incubators.
It was back in 2013 when the words “accelerating an accelerator” were spoken in reference to the work of the Young Foundation’s Accelerator programme, which was helping a new venture get off the ground. That new venture, at its very core, was a business support programme for other businesses, but with a twist. Hatch Enterprise would not, like so many others, seek to support only the best social or commercial ventures, but support those that come from a specific demographic, whilst foregoing any equity participation in the ventures it helped.
We understood that many social innovations, both product and service based, would not see the light of day due to the challenges they face in the first three years. With very few business support programmes based in South London, there was a clear demand and opportunity for such an initiative.
Hatch started in 2013 with a tightly set objective to support “1000 Mission Driven Businesses in South London by 2020”; an ambitious goal, knowing how hard it is to get a business off the ground, and how much harder it is to establish an entire enterprise support ecosystem.
Back then, NESTA had published a report on “Good Incubation”, defining the work of ecosystem providers, like Hatch, around “incubation” as “a collection of techniques that can be used to prove an idea, develop a team and de–risk ventures for later stage investors.” ‘Incubator’ programmes often provide space in exchange for a monthly fee and offer more long-term (business) support. They are often publicly funded and attached to a university or are stand-alone business or innovation centres.
On the other hand, the so-called ‘accelerator’ programmes are highly selective, cohort-based and usually of limited duration (3-12 months). Their support comes in the form of workshops, lab time and one to one assistance with developing a business plan, building investor pitch decks and product or service prototypes. The most prolific one being U.S. based Y Combinator, responsible for accelerating businesses like Dropbox, Reddit and Airbnb. Throughout the programme, the accelerated ventures are also exposed to early stage and seed investors to support their capital raises.
The short-term engagement via accelerators is usually funded through equity participation in the various ventures that are supported. They are generally backed by Venture Capital (VC) funds which pay for both programme delivery and the early-stage investment in return for equity (anywhere from 6% - 10% stake in the businesses supported), with the amount invested ranging from £10,000 - £100,000. Y Combinator, which started in 2005, has already worked with over 3,200 founders and 1,470 companies (January, 2017), with the total ventures they’ve supported now worth over $100 billion. The appeal of accelerators and incubators to investors is deal flow. The ventures selected stand a good chance to be the next Unicorn (a company worth North of $1 billion), offering opportunities of direct investment for the VC funds that back them. But these programmes create something else of value. They create an ecosystem. These ecosystems harness the power of relationships for skills and expertise, networks and further finance for both the entrepreneurs and the investors. But it’s not only VC-backed funds that want to encourage business growth.
The new kid on the block is corporate-backed accelerator programmes. Here, large companies may choose to sponsor or subsidise such a programme for “broader strategic reasons including internal innovation, culture change, marketing, corporate social responsibility (CSR) or public relations.” According to the new report by BEIS/ NESTA, over 50% of all accelerator programmes in the UK are now corporate-backed.
Business Incubators And Accelerators: The National Picture (2017)
The report cites that the partnerships between corporates and incubators/accelerators are being established for reasons other than to participate in the ventures directly.
Benefits to the corporate partner include (Mocker, Bielli, and Haley 2015):
- Testing and solving (their) business problems quicker and at lower risk
- Expanding into future markets by accessing new capabilities or channels
- Rejuvenating corporate culture to create an entrepreneurial mindset among employees
- Creating an innovative brand that attracts customers, business partners and future employees
There are benefits for the entrepreneurs and startups as well, such as accessing resources and opening up supply-chain opportunities with established players in their industry. These are exciting opportunities for both sides, but often these relationships need to be brokered, as the corporate businesses may not consider working with such early stage ventures.
Since 2014, Hatch has worked with two large corporate partners, J.P. Morgan (via the J.P. Morgan Chase Foundation), and Deutsche Bank. We initiated these partnerships to establish high-quality, intensive support that incubator and accelerator programmes offer, without having to take a stake in the businesses we support. The entrepreneurs Hatch work with are generally not interested in starting high-growth tech businesses, but rather they are locally rooted, often addressing a societal or environmental challenge.
Their programme with Deutsche Bank, now in its second year, focuses on mission driven businesses. Hatch offers places to these businesses on either their very early-stage Launchpad programme, aimed at individuals looking to test their ideas, or their Incubator programme, for those that have already been up and running for at least 6 - 12 months. All ventures benefit from business model validation support, mentoring via a corporate mentoring programme, access to subsidised workspaces and post-course opportunities such as free legal support and monthly workshops.
A recent review into mission-led business for The Department for Culture, Media & Sport (2016) argues that these businesses contribute positively to society by helping address the various social and environmental challenges we currently face.
At present, the corporate businesses that fund enterprise programmes that support mission-led businesses are those which are looking for more engagement with civil society. For most of these mission-driven businesses, it will take years before they have developed strong enough foundations for social investors to engage with them. Their particular challenges in measuring their financial and non-financial return on investments (as compared to non-mission driven ventures with straightforward and quantifiable financial gains) additionally makes them unattractive for VC-backed funds. For these reasons, it is much harder for mission-led businesses to gain investment.
By and large, corporate partners are very suitable for backing mission-led enterprise programmes (incubators and accelerators alike), because they stand to benefit from workforce engagement opportunities, such as mentoring or financial coaching, whilst directly impacting societal or environmental challenges that are being addressed through the businesses being incubated or accelerated.
There are those that see such initiatives as a way for large corporates to boost their PR or communications activities. “Greenwashing” and “purpose-washing” are definitely real threats to this blooming sector. At present though, whether a corporate business wants to back enterprise programmes for CSR-reporting purposes that do not go beyond giving money, or whether they want to get “stuck in” the work being delivered by the enterprise partner, the investment is still making a big difference. The businesses being supported are able to gain crucial support in the very early stages of their journey, helping them cross the much-feared “valley of death” (year one to three) by leveraging skills, expertise and networks.
There are additionally those who challenge the effectiveness of the incubator or accelerator model. The jury is still out on this, as measuring their effectiveness is much harder than a direct investment into a specific business or cause. However, every growing industry such as this will ultimately have to back-up its claims and validity in their approaches. As such, more scrutiny is welcome to better understand what impact these incubators and accelerators have on the businesses they support, from the corporate staff they engage to the wider community they are part of.
Corporate support for incubators and accelerators is on the rise and we believe it will enable more mission driven businesses get off the ground. Corporate support in “accelerating accelerators” should be encouraged, particularly for programmes that support social enterprises. Hatch has worked with a variety of such mission-led businesses, which address challenges such as homelessness in London (Change Please) or food waste (SNACT). Both of these ventures have gone on to raise serious (social) investment to continue to grow their business, whilst making an even deeper impact on the area of need they identified.