Yesterday, I participated in an interesting group conversation with an officer of a major foundation. During the conversation, we were told that the foundation no longer supports business incubators or the development of micro-enterprises. The reason? No positive return on investment can be calculated given the high percentage of micro-enterprises that fail after start-up. The statistic that we use in the classroom is that 75 percent of new businesses (including retail) fail within the first five years. The statistic presented by the foundation officer was that 90 percent of micro-enterprises fail within the first two years.
According to a March 2010 blog by David Moloney, neither statistic is based on fact. He reports that four years after launch, 50 percent of small businesses remain open, 33 percent fail for performance reasons and 17 percent fail for non-performance reasons. Unfortunately, in today’s environment perception is reality. Grant and foundation sources are turning away from funding sustainable economic development projects that focus on the creation of micro-enterprises or the establishment of business incubators. And the reason given is the assumed or perceived failure rate of these efforts which leads to a negative return on investment and zero job growth: a non-sustainable business model.
As in life, every cloud contains a silver lining. Just as business development fades into oblivion in the grant and foundation world, business acceleration is emerging as the new darling of sustainable economic development. So what is a business accelerator?
Roughly stated, a business accelerator assists established businesses in their growth, survival and desire to reach the next level. When reviewing the services provided by business accelerators, it is clear that the split with business incubators is semantic. Most of the business accelerators reviewed offer business incubation services, especially the university-based business accelerators.
An excellent list of business accelerators globally, including a section on University Affiliated Accelerators may be found on Robert Shedd’s blog. Robert revises the list periodically and it represents the single best compilation of business accelerators available on the Internet.
Of particular interest to those of us involved in the sustainability initiative is the University of North Carolina Kenan-Flagler Business School Business Accelerator for Sustainable Enterprises (BASE). BASE is designed to speed the growth and impact of green businesses that focus on social or environmental goals. This model is something that we’re interested in developing for our own sustainability program.
In a three-part series entitled “The Rise of the Business-Accelerator”, James St. Jean from First Ascent Ventures provides compelling arguments for the increase in venture capital (VC) flowing to business accelerators. In addition to listing potential VC sources of funds, his third article contains some great graphics regarding return multiples and comes to the conclusion that the business accelerator model works. You can access part 1, part 2 and part 3 via these links.
For those of us involved in sustainable economic development, funding sources for old-school business incubators and micro-enterprise launchpads are drying up. The money, including VC, is moving to business accelerators. Roughly 24 universities world-wide have transitioned to the business accelerator model to ensure the survival of their sustainable economic development efforts. From a pragmatic standpoint, survival of these programs depends on the correct alignment of terminology, perceptions and expectations with those of the funding sources. So while it is clear that business accelerators have superseded business incubators, it is equally as clear that the distinction between the two remains fuzzy and based on misperception. Being astute enough to recognize the need to change names in order to obtain funding is not rocket science.