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Perspectives on building technology businesses and AcceleratorIndia from Cartezia

Accelerators, Incubators and Crossing Chasm II

Sunday, January 11, 2015

By Dr Uday Phadke, Chief Executive, Cartezia.

As businesses and entrepreneurs wrestle with the challenge of turning research and innovation into commercial value, investors, policy makers and those charged with re-starting stalled economies search for ways to stimulate and support this transformation. Over the last fifteen years a wide range of environments designed to support, nurture and accelerate start-up businesses have emerged, with the term incubator being the most commonly used to define such interventional environments, with very different characteristics, that the word gradually began to lose meaning. More recently the term accelerator is being used more frequently (and sometimes interchangeably with the term incubator) to describe these new business support and growth environments.

This confusion is bound to continue as the words are used more liberally, especially by policy-makers and investors to suggest the more positive attributes of intervention in the pursuit of economic growth.

The graphic analysis below suggests a way of assessing and comparing the value-added by different types of incubators, seed-camps, accelerators and other forms of intervention. This illustrates three key points:

  • Most incubators and accelerators provide support only during the early stages of growth; specialist vehicles such as university-supported investors support the next stage, but their capability for intervention is limited.
  • The gap between what they provide and when support from private equity and venture capital kicks in, remains the major challenge in creating sustainable growth.
  • This lack of support for crossing Chasm II in the eco-system shows the need for better-designed interventions; investors and policy-makers take note.
  • In the absence of such support, ‘customers’ of incubation and acceleration services should look critically at the precise value on offer, beyond physical space.

Europe has a stellar record at generating new ideas and innovations: over the past ten years many of these ideas have been turned into product and service demonstrators, using proof-of-concept funds provided mainly from public sources, via EU funds, research institution grants and regionally-targeted funds to cross Chasm I. When it comes to crossing the Chasm II, which is about turning the proven concept into a product or service with a viable business model, Europe’s record has been poor. Historically, this was the area that Venture Capital was supposed to concentrate on, consistent with its mantra of high risk-high return.

Unfortunately, since the collapse of the first dot-com bubble in 2001 and the continuing problems in investment banking, VCs have been increasingly reluctant to invest in crossing this Chasm II, instead focusing on what they call growth stage. In reality, their focus is now on scaling up proven propositions, by crossing Chasm III to achieve mass market success, the Chasm originally highlighted by Michael Moore, in his book on high-tech marketing.

The reality is a seriously broken funding environment for deep technology enabled ideas and innovations, that needs to be fixed if we are to create new, sustainable, businesses, jobs and revenues. This problem will not be fixed by limited measures such as tax breaks for investors (although every little bit helps).

Mitigation of the risks associated with crossing Chasm II requires serious thought that is followed by real action. This includes shaping the product proposition ("impedance" matching to customer needs), finding viable, sustainable business models, and dealing with the execution risks, especially the expertise of the management team.

The expectations of potential investors also requires change, to take a more "enlightened" view on the risk vs reward equation, so they recognise that getting involved at this stage provides a genuine prospect of high returns, quite different from their experiences with returns from most VC funds over the last ten years.

Finally, more structured responses such as the establishment of Catapults in the UK are a step in the right direction and many of them have had an excellent start, but due care and attention will be required to ensure that these new interventions don’t merely end up adding more proof-of-concept funding.