Why Your Startup Needs To Join An Incubator

Why Your Startup Needs To Join An Incubator

ENTERPRISE54 – What is the draw for an aspiring young entrepreneur to pursue membership at an incubator? Is it office space, networking opportunities, or training? Could one sit under a tree at a local park or at a desk at a local library and generate the same results? Entrepreneurship has never been an individual activity,

ENTERPRISE54 – What is the draw for an aspiring young entrepreneur to pursue membership at an incubator? Is it office space, networking opportunities, or training? Could one sit under a tree at a local park or at a desk at a local library and generate the same results? Entrepreneurship has never been an individual activity, and even though many moguls will tell you their stories about how they made it to the top, in most cases they had an unnamed mentor, and core team of roll up your sleeves types that helped lay the groundwork. But what role do incubators play, especially in the emerging market context, and are they useful?

The most common perception of incubators is that they are somewhere that you go to start a business, but what if you already have a business? What about the millions of young citizens that are employed by informal means? Do these people need an incubator? Incubators have been exploding across the African continent over the last decade, aiming to maximize economic opportunity, especially for youth, where traditional employment has become less and less accessible.  Now as many of these hubs have pushed out their first cadres of bankable businesses, it is time to measure their success, or rather their utility.

Whether it is categorized as a tech hub, co-creation space, startup accelerator, etc, the major challenge with measuring the success of an incubator is that incubators are typically measured by the number of “graduates” they have, or more simply the number startups that leave their services because they received an investment or other follow-on support. If a startup successfully exits an incubator, there’s still a likelihood for failure so perhaps a more accurate way to track incubator success is to see the number of graduates still operating after 3-5 years of leaving the incubator. However, in many emerging markets, including in sub-Saharan Africa, a lot of incubators (in their current form*) are less than 5 years old, so that metric isn’t yet available. Some international institutions have laid some solid groundwork in evaluating their own investments. The World Bank’s InfoDev is a great example of this.  In a recent publication, authors examine the business model of a number of incubators that it supports, and notes that continuous learning will be needed to better understand the dynamics of mLabs and mHubs. This research can help donors and investors maximize their effectiveness, and the lessons learned are invaluable.

As a young entrepreneur championing a first or second business venture, it is important to avoid choosing the wrong incubator, as it can set the company back more than the normal trial and error.  If you take a look at some of the leading incubators on the continent, you’ll find a few common constraints including: technological education, deal flow, funding, and time. Each of these takes a slightly different form depending on type of incubator and the sorts of businesses that is supports, but in general terms these key areas tend to distinguish the good from the great.

Technology Training

A growing number of young entrepreneurs don’t have formal computer science or business training. With the more than 700 million estimated mobile users in Africa, these skills have become a necessity for any business. Incubators have now been charged with closing the gap. Many have tried to close this gap by forming partnerships with device manufacturers or networks of web/app developers. Even for those startup owners with some formal education in computer science, the programming language is ever changing and their skills quickly become out of date. I’ve come across countless startups that have raised capital, had a sound business plan, but just couldn’t reach their segment of the market because they lacked the tech skills to make it happen.

Robust Deal Flow

With regard to deal flow, there are a LOT of incubators that have very motivated individuals, but a lack of quality keeps them from thriving. There is much to be learned from successful enterprises in leading global markets, including websites or mobile applications that have proven to be very profitable in the U.S. or elsewhere. The challenge is that there are a growing number of duplicate companies, claiming or seeking to be the “Ghanaian Facebook”, or “Kenyan Uber” etc. While the passion is there, these entrepreneurs seem not to understand the market that they are entering or believe that their product is innovative when in reality, there are many enterprises across the continent who have developed a similar solution or product.

Funding

At the end of the day, debt and equity are needed to grow and scale a business. Funding for incubators remains a challenge in many markets, given that many are not yet self-sustaining and rely on grants and donors. This means that there’s a limited pool of capital to hire business consultants or offer much needed services to address skills gap and other startup business needs. Many incubators have attempted to move some of the funding in house, essentially becoming for profit, raising capital for a fund, or taking equity positions in portfolio companies, reinvesting returns into operations.

So Many Choices

Even with these constraints, a number of incubators on the continent have indeed proven to be successful, as they continue to grow and expand. The Co-creation Hub  in Nigeria, BongoHive in Zambia, iHub in Kenya, Hivecolab in Uganda, and JoziHub in South Africa are a few examples, though new incubators are popping up everyday. The space has become quite crowded in just a few years time! As a young entrepreneur it can be difficult to sort through them, and figure out which is best for their business. However, though entrepreneurs seem to be spoiled for choice with regard to incubators, just as many incubators are disappearing. Much like any innovative enterprise, failure rates are high.

As most hubs incubate companies for two years, with the aim to graduate, creating and maintaining a pipeline is key. If incubators can focus on enhancing these core skills, they can attract more young entrepreneurs, translating into stronger and more scalable, and ultimately sustainable African enterprises.

 

Editor’s Note: This piece was written by Morgan McClain-McKinney, International Development Advisor.

 

DISCLAIMER: The views in this article reflect only those of the author and in no way represent the United States Government.

 

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