The economics of incubators and accelerators
I’ve written a new CEP Discussion Paper on co-working, incubators, accelerators and what they mean for local economic development policy (co-authored with Margarida Madaleno, Henry Overman and Sevrin Waights). It builds on two toolkits for the What Works Centre for Local Economic Growth.
Here’s a run-through of what we found.
Accelerators and incubators are business support programmes that provide co-working-based packages of support to young firms to help them grow. Widely used in the tech sector, they are now increasingly applied in other industries — including retail, fashion and design and household goods — even in the Bank of England.
Why should we look at these interventions? In a nutshell, they’re now a very visible part of the UK urban landscape. As of April last year, there were 771 incubators, accelerators and co-working spaces in Britain. NESTA have done some great work mapping their spread (see image).
In particular, there’s been an explosion of co-working, incubator and accelerator provision in London: in 2014 there were at least 132 programmes, 50% of which had arrived since 2012, and in 2017 the capital had 171, more than the next ten cities combined. Together with pop-ups, co-working and evolving high streets, these flexible spaces and practices are — arguably — starting to change the wider urban fabric.
It’s also important to look at these co-working models because of what they might achieve. In theory, incubators/accelerators can make entrepreneurs more effective, and help firms/founders to innovate. That feeds into long-term economic growth. In cities, they could also deepen clusters. They may also help groups — like some BME or female founders — facing structural barriers in ‘regular’ economic space.
Given that over half of UK providers now have some public funding behind them, it’s particularly important to understand whether these programmes actually work. For the more selective business models, like accelerators, providers might just be picking founders and firms who would do well anyway — what economists call a selection problem.
We define accelerators and incubators in Table 1, which is adapted from the Harvard Business Review. Put crudely, accelerators (like YCombinator or Entrepreneur First) offer short-term, intensive support to a competitively selected group of firms; while incubators (like TechHub) offer less-intensive, more ad-hoc support to firms on a rolling basis. Accelerators don’t charge, and may take equity stakes; incubators typically charge rent. These are ‘ideal-types’; in practice we see spaces (such as Second Home or The Trampery) which combine features of both.
It’s also helpful to put these newer programmes in context: there’s a long history of co-working models (Figure 1).
In the paper we set out four — linked — ways to think about what incubators and accelerators actually do. Urban economists would think of them as cities in miniature, offering matching, sharing and (especially) learning effects over and above what economic actors would encounter at urban or neighbourhood scale. In addition, economic geographers might focus on how programmes enable different kinds of proximity, and the pros and cons of that; management scholars would frame programmes as de-risking the process of entrepreneurship; and economic sociologists would think about economic communities of practice, where founders can develop an entrepreneurial identity. All of these analytical lenses are helpful, and all suggest important questions for evaluators.
So what does the evaluation evidence tell us? We found fourteen high quality impact evaluations looking at incubators, accelerators or both. We also found eight further studies that look at researchers — often academics — in science parks, lab co-location and in ‘temporary co-location’ settings such as conferences.
These provide good evidence that accelerators increase employment for firms who take part, compared to losing applicants (or similar non-participants). One of these also looks at firm sales, again finding a positive effect. The evidence for incubators is also positive, though less clear-cut. We find strong evidence that accelerators help cohort firms to raise external finance post-programme, typically angel or VC money. For incubators, we didn’t — surprisingly — find any studies that tested this.
Strikingly, both types of programme have a pretty mixed impact on firm survival: of the four accelerator studies that test this, for example, we find one positive, one mixed and two negative results. What’s going on here? The most plausible explanation is that accelerators help participants to quickly gauge the quality of their ideas (e.g. via investor / peer feedback on demo days) and encourage those with weak propositions to quit early. That is, the programmes help kill bad ideas: one provider we spoke to told us they run ‘startup funerals’ to commemorate their passing, as founders move on to new things.
It’s rather harder to figure out how accelerators and incubators achieve these effects — and thus, how to design programmes that reliably get to these outcomes. In part this is because fewer evaluations have explored these issues — so the following results need more caution.
For example, we find no clear differences in outcomes when comparing public and privately-run accelerator programmes, although among the latter group, top programmes in the US (like YCombinator or TechStars) do seem to achieve better outcomes. The evidence for incubators is similarly inconclusive.
We find that more specialist programmes (single industry) help survival compared to more generalist programmes. For incubators, training seems to be more effective than networking, although neither has much impact. Significantly, what goes on outside the building also seems to matter. For incubators, having university involvement is helpful (although this doesn’t apply when individual academics step in). Two accelerator studies find that programmes in regions with denser entrepreneurial networks and high property values achieve better employment and funding effects. Not surprisingly, firms in these programmes are more likely to get funding from local investors. We also look at co-location of researchers, often academics. Results complement the findings for firms. Very close co-location seems to raise the quality/quantity of collaborations. Spillovers are biggest in closely related fields. It’s striking that both permanent and temporary co-location can help drive up these outcomes.
Overall, we were impressed by how much high quality evidence already exists for accelerator and incubator impacts. We hope local policymakers will be able to work productively with providers to fill in some of the remaining gaps. Many of these are around how programmes achieve their overall effects, and how to consistently replicate this. More broadly, we also need to test accelerators against incubators, and against traditional business support. We also need a clearer sense of programmes’ cost-effectiveness. We’re not able to find cost data for incubators in the available studies — but in the toolkits we provide some back-of-the-envelope numbers suggesting that accelerators are pretty expensive to run.
There are also some broader academic questions about how these very micro-scale interventions affect larger-scale urban processes. For instance, we know that clusters are characterised by positive and negative feedback loops. Productivity effects grow with cluster size, as the set of knowledge spillovers gets larger and richer; at the same time, growing clusters become progressively more crowded and expensive, often displacing smaller or newer firms.
Co-working-based interventions can — in theory — simultaneously increase cluster productivity for a given size (by enabling innovation and entrepreneurship) and flatten the cost curve (by more densely co-locating firms in physical space).What might be the effect size of such provision, at what scale, and how might such interventions shape cluster trajectories? There is a big and fascinating agenda to explore here.
Originally published at the CEP Urban blog on October 1, 2018.