Sean O’Sullivan believes that 90 per cent of the world’s 7,000 incubators and accelerators will fail, close down, or be absorbed by their hosts within the next few years. As someone who has worked in an incubator, this prediction caught my attention.
O’Sullivan, founder and managing director of SOSV, a large venture fund with its own privately run accelerator program, and who has invested in 400 companies over 20 years, gave a keynote speech at Montreal Startupfest’s Premium AcceleratorFest (held a day before the main festival) on July 13. And while bullish on the importance of entrepreneurs in innovation-dependent economies, he did not think the future was bright for hybrid incubators or accelerators in particular. This was not good news for the attendees—the majority of whom manage or work in these organizations—or for the entrepreneurs who depend on hybrid incubators and accelerators to succeed.
But let’s start at the beginning. In order to understand O’Sullivan’s predictions for the sector, it is important that one knows some basic industry terms.
What Is an Accelerator and Incubator?
While their operational practices (length of program, terms of engagement, level of pressure, sector focus, philosophy) vary, they both aim to improve an entrepreneur’s odds of success by providing programming, mentoring, space, and facilitating access to funding. The main difference between the two is in legal form and who pays their operating costs. Incubators are primarily non-profit organizations (or hosted by them) and are funded publicly or by donations and grants. Accelerators tend to be private, for-profit organizations, often backed by a private equity or venture capital funds.
For-profit accelerators or incubators are in business to make a profit for their shareholders or venture fund partners as quickly as possible. Non-profit equivalents are generally in business to diversify the local economy, provide new opportunities for struggling demographics, build out new industries, and create local jobs. They generally take a longer-term view with a focus on social benefits.
So What Are Hybrids?
The hybrids are a combination of incubator and accelerator. They are funded by public money and donations, and are charged with the mission to achieve economic development and social goals for their area. However, they’re increasingly expected to reduce their dependence on public money (and the uncertainty that comes with that) by also aiming to make a profit on the companies they incubate. Many university incubators serve as examples.
And therein lies the rub. Hybrids essentially have two masters and dual missions: serve the public policy agenda, and make money while doing it. In O’Sullivan’s view, it’s like trying to mix oil and water. You can be one or the other, but not both. “Trying to combine social goals with profit-making is very unlikely to succeed.”
O’Sullivan also suggested there was an oversupply of incubators and accelerators generating increasingly mediocre results. High potential startups will gravitate to the best, or not bother with incubators or accelerators at all (like entrepreneurs used to do before they came along) because they will be perceived as either a waste of time or money, or both. This will result in a much needed shake out. “And that’s okay,” said O’Sullivan.
Many in the audience nodded in agreement with the prediction that hybrids are likely the first to go. Those that don’t close down entirely will most likely be absorbed by their institutional or corporate hosts and be re-configured (for example, marginal university incubator programs will be reclaimed by academic councils).
In O’Sullivan’s view, ultimately, only venture-capital-backed programs will be left standing.
But as we consider this prediction, we also need to remember that this “who will survive” divination is coming from the perspective of venture fund managers and venture capitalists like O’Sullivan. Making money for shareholders or partners is what they are paid to do. For them, doing anything else would just amount to a mandate to fail.