What's the Deal With the Sudden Rash of Incubators?

Ajeet Khurana

If you have been in the Indian startup space for the past couple of years, you would have noticed that the past 15-odd months have seen an abnormally high number of announcements of new private incubators and accelerators. What are these strange animals? What do they want from us? And what is it that has caused the sudden rash?

What are incubators or accelerators?

Before we examine what has caused the heightened interest in incubators or accelerators, let us take a moment to recollect what they are all about. Sure there are some philosophical differences between these two beasts, i.e., incubators and accelerators, but in essence the give-and-take equation with startups remains similar.

Some of what incubators or accelerators give startups:

·         Gyan (i.e. knowledge)

·         Money

·         Connections

·         Office Space

Some of what incubators or accelerators take from startups:

·         Fee

·         Equity

·         Nothing

As is obvious from the lists above, there are a variety of models. The most common model is where the incubators provide a small amount of money (usually ranging from Rs. 5 lakhs to Rs. 25 lakhs), office space, introductions to investors or customers, plus lots of information and training. In exchange they take approx 5% of equity as a fee for the incubation or acceleration.

The main reasons why there is a sudden rash

1) The Fad Factor

Though this is not the only reason, there is no denying the fact that accelerators and incubators are in vogue. Out-of-work senior management kind of people, or for that matter experienced but presently-idle entrepreneurs, find it easy to appear valuable by becoming mentors to startups. And when dishing out tons of free advice gets tiring, they naturally evolve into incubatorsand demand an ownership position in their mentees.

As an angel investor I have often detected a snob factor in some other angels. Apparently the very fact that you are an "angel" somehow makes you cool. When it comes to people running incubators or accelerators, this coolness quotient increases manifold.

The Rash of Incubators or Accelerators is a Natural Consequence of the Spurt in Interest in Entrepreneurship

In the recent past, we have seen a significant upsurge in the number of youngsters seeking entrepreneurial opportunities. This has led to a corresponding increase in websites, magazines, training programs, workshops, and other ecosystem activities that support entrepreneurs. In this scenario, the rise in the number of incubators or accelerators is natural; one could even argue that it is a necessity.

Backdoor Entry to the VC World

From the point of view of the individuals who are running these incubators or accelerators, I have always suspected that some of them have a hidden agenda. They are probably using this as a stepping-stone to raising their own VC fund. The past couple of years have seen a large number of new funds taking birth. But most of these have been tiny in size. Today there are many aspiring fund managers who are not able to raise funds. As a result, some of them are finding that setting up an incubator or accelerator might be a good way to keep their foot in the door.

Deal Pipeline

It is not just aspiring VCs, but also some existing VCs that seem to have an interest in incubating startups. This helps them get first dibs on upcoming deals. VCs who invest in the early stage often find themselves playing blind. The ability to get a prolonged close look at the business of the startup, the entrepreneur, the team, and the traction, is a great luxury in evaluating deals. As a result, some VCs have been interested in setting up their own incubators or accelerators, or participating in existing ones.

Monetizing One's Gyan

There are many people who have been entrepreneurs, investors, and directors… They can try to monetize their backgrounds by turning into paid consultants. But many of them find it more attractive to offer consulting in exchange of a stake in the ownership of a startup. These "gurus" have always been around. But now that there is a spate of new startups, especially in the technology space, they are finding takers for their mentorship.

All in all I think that the growth in the number of incubators or accelerators is an inevitable, I would even daresay desirable, advancement of the startup ecosystem in India. But these are early days and I predict that many of the present incubators or accelerators will not exist even a year or two down the line. At the same time, some of them will strike gold with stellar exits, and emerge as formidable institutions that startups aspire to associate with.

The author, Ajeet Khurana, wears many hats: angel investor, trainer, author, entrepreneur, digital marketer…He is screening committee member of Mumbai Angels, one of India's oldest angel networks. In addition he is an angel-trainer for new angel investors with NEN (National Entrepreneurship Network). He sits on the boards of Carve Niche Technologies and of Rolocule Games, You can reach him on LinkedIn and Twitter..

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