The economics of evolving ecosystem: Why incubators need to be sustainable

The economics of evolving ecosystem

The concept of inviting ideas to build MVP and prototype in a shared and controlled environment called incubator started picking up in the mid of 2000’s. In 2010, the Indian government embraced a Western-inspired vision that benefited startups and propelled the country into the top tier of startup ecosystems.

Startup India introduced various initiatives to support innovative startups, primarily through incubators. Today, every department within government is expected to use a portion of its budget to fund grassroots initiatives. Every year, billions of rupees are invested to fund the next great startup success story. There are 718 incubators and accelerators in India, both privately funded and government-supported, as reported by Tracxn. Seventy percent receive funding from the government, while the  ..

The government wanted most of the technical universities and institutes to have incubators for which grants were distributed as first level incentive. This was done to set up infrastructure to support ideas and enable research into MVP and subsequent commercialization through mentorship, in addition to cash on the table to run the program operations. The grants were distributed to the ideas / startups with a promising future with no strings attached.

Fast forward to today, where India is the third largest startup ecosystem worldwide. A lot of awareness has already been created and the time for the government to strengthen the models of free-flowing grants with least or no underwriting to have some skin in the game.

Governments want incubators to rely less on grants and find sustainable business models. The approach is to treat incubators as a startup first, which has its business model and cash flows. Most incubation centers find the idea daunting, even though there are a few profitable examples.

Many education institutions and centers prioritised getting grants and meeting incubator quotas over building effective support systems for incubation. But as the startup ecosystem grew, there were discussions about closing certain centers to make better use of public funds and focus on quality startup ideas.

The university’s board of directors should view the incubator as a startup, the management as the founders, the CEO as an employee with a majority ESoP, and the government as the angel investor. A startup can afford to have delayed revenues in the long run, but not having a business model in place can be fatal.

The university needs to improve the thinking process behind managing the incubation and making programmatic changes. In the existing scheme of things too, the university boards can ensure better management of costs and unlocking of revenues. Here are some thoughts from my experience of building and scaling programs from scratch and running a private limited company with an agile and asset-light incubation model.

1. Startups enter the incubation center at a stage when they are short of resources and are carrying only an idea or an MVP. At this stage, the companies have founders and may have a couple of more members who rarely receive cash compensation. In 2-3 years, the idea becomes a company with funding. Startups may need to find a new place or want a nicer office for their team. The incubator misses out on the chance to provide services to the startup for payment (which the startup can now afford).

At the same time a startup is having difficulty finding trustworthy vendors/partners and many other services that an incubator could have provided more efficiently. The relationship and credibility established with the startups can be used at this stage to smoothen their journey further, creating subscriptions for qualified service providers with tech interfaces to ensure zero drop out of alumni startups. This further can open external opportunities for the incubation center.

2. Lot of incubators under the pressure to build sustainability, charge startups which at times leads to push back and bad-mouthing. Taking small out of less hurts more than taking a bigger share out of overfed.

3. Continuous innovation is not just the need of corporates, but also for startups. The alumni startups doing well can be invited to partner with professors or PhD candidates on joint R&D which can create good money for the incubation centers.

4. Nothing comes for free. The billion-dollar corporate giants should contribute to the incubator for ongoing profits.

There could be many such ways, but driving all this will require a sustained initiative along with the proficiency to execute such ideas. It is certain that many incubators that exist today will disappear on account of lack of business model and visibility for the future. Only the fittest would remain.

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