Incubators and accelerators have boomed in recent years, but research has painted a mixed picture regarding their effectiveness. Indeed, some have suggested that membership in an incubator may do more harm than good. New research from Wharton aims to provide some pointers as to what makes effective incubation of startups.
The research took place in South Africa, which is as unequal as it is entrepreneurial. This inequality hampers the chances of many entrepreneurs, however, as the lack of both financial and human capital undermines the efforts of many, especially among Black entrepreneurs who face structural challenges.
The research set out to explore what makes effective incubation in order to help entrepreneurs to develop and grow their businesses. The entrepreneurs were tracked for six months as they received a range of support from their incubator, including starter funding and mentorship.
The role of incubation
The researchers wanted to explore how incubated and non-incubated companies fared to see what role, if any, incubators were playing in the learning trajectories of each entrepreneur, with a particular emphasis on knowledge in areas such as scaling and generally improving their business over time.
Unlike previous studies that revealed a limited impact from incubators, this latest one found that incubated companies grew by 22% in terms of revenue, with a 15% growth in employment compared to their non-incubated peers.
There also appeared to be clear benefits in terms of the knowledge transfer between mentors and mentees, with this additional knowledge translating into higher revenue and profit growth in the following year.
Growing human capital
A crucial aspect of this knowledge transfer was the knowledge the entrepreneurs had before entering the incubator. The biggest improvements occurred when entrepreneurs entered the incubator with relatively low levels of knowledge, especially when they were paired with the best mentors.
This is important, as the key takeaway appears to be that the value of an incubator is wrapped up significantly in the knowledge exchange between mentors and the entrepreneurs. That the study was able to quantify the impact good mentors can have is significant, especially when it comes to encouraging entrepreneurs from socially and educationally disadvantaged backgrounds.
It suggests that excellent mentors can help to level the playing field for entrepreneurs from disadvantaged backgrounds and help to untap the potential in many low-income communities.
“This research suggests that supporting business incubators, and mentoring programs within incubators, might be worthwhile activities for policymakers interested in closing the gap for socially and educationally disadvantaged entrepreneurs and promoting local economic development,” the researcher explains.
