Incubators seem to be among the latest darlings of the business world, and to a lesser extent, the health IT industry.
Extremely rare just a few decades ago, there are now more than 1,200 incubators in the U.S., Entrepreneur.com reported.
While the vast majority of these incubators don’t cater specifically to healthcare, several prominent incubators do, including: Blueprint Health, Rock Health, HealthBox and Startup Health.
The logic behind incubators is that they can help inexperienced entrepreneurs by providing the mentoring, business advice, networking opportunities, facilities and funding they need to get their businesses off the ground.
Kendall Wouters, CEO of Reach Ventures in Cleveland, doesn’t buy much of that logic. Wouters believes the model most incubators operate on is fundamentally flawed. Most importantly, incubators fail to do the up-front diligence in assessing the market potential of ideas that entrepreneurs bring to them, meaning the vast, vast majority of companies that enter incubators are doomed to failure and won’t make it through the “valley of death.”
“Most incubators are cultivating a garden of startups that are dead on arrival,” he said.
To understand Wouters’ thinking, it’s important to understand his definition of the “valley of death.” For Wouters, it’s not the commonly understood definition of the term — the time period between idea and commercialization when many startups have a difficult time accessing capital.
Rather, in Wouters’ vernacular, the valley of the death is the period of time from idea to the point at which a company identifies a sustainable and repeatable business model. Crossing that valley requires a serious amount of scrutiny — a couple months to conduct a formal market assessment and develop an understanding of the market’s incumbent players, plus acquire a detailed understanding of how and why a product will cause its target customers’ behaviors to change.
“If you’re going into a market and you don’t have a fundamental way to disrupt, substitute or complement existing innovation enough for the customer’s behavior to change, you are wasting time,” Wouters said.
Most incubators are “puppy mills gambling with people’s dreams,” investing in startups despite not having a clue whether those companies actually have any chance of achieving that disruption, according to Wouters. Most incubators based their decision on a “gut feeling” about an incoming startup rather than on a deep assessment of the entrepreneur and his or her idea. And that’s the essence of the problem with most incubators, according to Wouters.
And then there’s the type of entrepreneurs that incubators attract — typically high-energy people with high-risk tolerances who don’t have the responsibilities that would prevent them from leaving their existing jobs to devote themselves full time to their new ideas. Those qualities don’t necessarily have much bearing on whether a person has the wide array of skills to be a quality entrepreneur, manage difficult people or see a company through the lean times when it’s constantly struggling to make payroll, Wouters said.
“Just because you think you have an idea doesn’t mean you have what it takes,” he said. “Just like the book “E Myth” says, because you’re willing to take the risk to quit your day job doesn’t mean you’re an entrepreneur.”
“Fine,” an executive with an incubator might say, “but we know that only 10 percent of the companies we invest in will exist in five years, and we tell that to every entrepreneur who steps through our door. Everyone involved knows what they’re getting into.”
The consequence, according to Wouters, is that so many snowball’s-chance-in-hell companies get funded when they shouldn’t, incubators are “killing the entrepreneurial spirit in these people because they’re gambling with their lives.”
In other words, don’t encourage these would-be entrepreneurs to quit their day jobs until they can confidently make it through the valley of death. “I feel sorry for them because I know they don’t have the proper recipe to keep their dreams alive,” Wouters said.
Wouters’ company Reach takes a much different approach to starting companies. Reach’s model is to find an idea, assess it, build it quickly and see it through Wouters’ valley of death — identifying a sustainable and repeatable business model. Then, Reach gets out of the way by handing off the idea to a follow-on funding group, like a private equity firm, to build a company.
“We go out and look for a gap in the market, then look for ideas on how to fix it and test them,” Wouters said. “Our goal is kill the idea quickly. The faster we kill it, the fewer resources we spend.”
Wouters said Reach is working on several possibilities now but isn’t ready to get into specifics. All take a big data approach to solving market problems, he said.
“With our approach, there’s a much higher likelihood of creating sustainable businesses that have a chance because the ideas are fully assessed,” Wouters said. “We have execution, clear positioning and market validation. And we’re not trying to build the next Facebook.”
[Photo by flickr user AlishaV]
By Brandon Glenn MedCity News
Brandon Glenn is the Ohio bureau chief for MedCity News.More posts by Author
Wow, great comments pro and con. As a veteran of almost 30 year in the business incubation industry I have seen those with Mr. Wouters' point of view come and go. He has some very excellent points but some very flawed ones too. I have either restructed or built, from day one, 11 incubator programs/projects. I have a total of almost 850 client companies under my belt with about 90% still operational today. The problem with comments like Mr. Wouters is that they come from fallacy that VCs do so well with investments yet most only see the "homerun" at a ratio of 1 in 20-30. True business incubators with all processes in place see success at a rate of 8 out of every 10. Additionally, this article surrounds itself with the idea that incubation is only about "technology" -- wrong!!!! There are five categories of incubator: kitchen, manufacturing, mixed-use, arts and technology. There are urban, suburban and rural. Shame on the author of this article for not doing their homework. Mr. Wouters says "natural selection" yet he would most likely be the first to say that if he invests he wants mentoring, counseling and monitoring of the company he invests in -- well duh -- that is what I do each day with my clients to assure the best possible chance for success. I challenge the author of this article to truly do their homework and for Mr. Wouters to not judge our successes until he truly sees a "true business incubator" at work.
Totally Agree with Sara Fields - in a perfect world, startups need no captial, and they are able to let the market tell them if the idea will fly or not. Sadly, that perfect world does not exist. VCs do see patterns, and spot trends, and simply through volume alone are better at predicting than most people, but you are right - the best option can often be bootstrapping, but most people do not have that option, and are focused to get into the blood-sport, as you called it. Fair point, indeed, but not all VC's are bad, just like not all startups are good.
Most incubators take a % for the money they grant, so the incentives are aligned with the founders (and I will NOT argue that most incubators take far too much). So The idea that they say "get the hell out" not only makes no sense, incubators often have a larger percent than seed or angel round investors (ave: 6%). So all of this talk about how they are built to produce duds just doesn't make logical sense, unless your core hypothesis is incubators don't want/like/care about making money (which is the measure of success in a commerical business - I am not talking about 503(c)'s here), and only VC's want to make money. It's not possible to discuss the whole thing in these comments, but I share the passion (and I'm interested in the outcomes), but I have trouble with the logic. I have already gone on record as saying there are plenty of bad VCs and Incubators, and mistakes being made. But to throw the whole model out? There is one point I can't let sit. You said: Should entrepreneurs fight for or earn a relationship or be handed one? So as a VC, you don't make introductions? I am sure you provide more than dumb money. In fact, you state above that you hand them off to a third party funding source. Do they "fight" for those in some way that is different than an incubator? Why do you assume that your handoff is different?
LOVE THE CREDULITY! Incubators are invaluable for keeping good ideas alive that might not survive the blood sport of venture capital. If your response to that is, "then the idea shouldn't be funded in the first place", then you have somehow fallen prey to the myth that venture capitalists are better at choosing promising businesses than others. A lot of pointless points above. The "get the hell out" part kills me - it's why they call them vulture capitalists.
Let a thousand flowers bloom. Dreams are in the eye of the dreamer. It is not the job of the mother dove to tell her eggs which will fly. It is only through risk and trial and error that birds earn their wings. We must create a nest for a thousand birds. That is our job. It is up to each egg to understand that not every one will turn into a bird. Some will die a horrible terrifying fall from the nest. But try to fly my little birdies. Try to fly.
LOVE THE ENERGY of these comments! Surprised to see such a strong defense of the incubator model, but no doubt this is a sensitive topic. Do incubators work? YES! But what are the odds of success and how is success measured? Here is a bit deeper dive on my point... Lets first get on the same page and understand what the typical incubator’s goal is for the start-up. Is it to get funding, create a great advisory board, t-up amazing introductions or is it to get the start-up to stand on its own legs through revenue and have a repeatable business model and then get the hell out? Could incubators improve their process in accepting and supporting and graduating startups? Do they feed the fish or teach how to fish? Should entrepreneurs fight for or earn a relationship or be handed one? Do incubators slow down the energy of the entrepreneur's passion? Is the average 1/10 success rate as good as it gets? Should incubators solicit entrepreneurship or be a Navy Seal Training Camp? Thanks again for keeping the conversation alive!
Some VC's might see incubators as a threat, since they are accustomed to having (jointly) somewhat more control on who the "selected few" will be... Other VC's will see it as the pre-selection benefit/opportunity it really is...
My dissagreement was more than I could write in the comments, so here's my blog entry. Rather than hyberbole, let me share with you what does happen inside the incubators listed (in the first few paragraphs), including many of the things we do wrong. http://rockhealth.com/2012/03/an-inside-look-at-incubators/
There is a germ of truth in the article, but just a germ. There are incubators and there are incubators. I know of some that were built from the ground up in government sponsored "research parks". What a terrible culture to bless a budding entrepreneur with - beautiful surroundings befitting a company with years of success. I know of others that were low budget affairs in abandoned buildings that had their share of roof leaks and utility problems. They were more successful. But in spite of the germ of truth, I don't like the attitude that one should not encourage an entrepreneur because they might fail. Failure is just a learning opportunity for them.
Unfortunately, the genie is out of the bottle, and old business paradigms are a thing of the past, regardless of business vertical. When the old is not just replaced by the new, and the paradigm of business is flipped, there will be losers and winners, but the winners are more than likely to come out of the non-establishment verticals rather than the tried and true. There are many examples of this, I look to the future with more business incubators and accelerators, not less.
Kendall Wouters has an interesting assessment of the incubator model and it seems like he's essentially improved upon it and is offering his own version through Reach Ventures. I admit, I don't know as much about those healthcare incubators as Kendall does, but I do know most start-ups across the board have the same issue... Not crossing the "valley of death" that Kendall describes. How can an entry-level entrepreneur overcome this obstacle to avoid risking everything in a flawed business model thus killing their entrepreneurial spirit as you say? Is there a simple worksheet or action plan describing how to do this BEFORE reaching out to Wouter's firm? ---Ivan
Disagree! I think incubators are great first-level of sorting for new ventures, as there is still a nominal level of selection going on. The evaluation of their market can start there. Incubators provide a leg up where less experienced or less monied individuals may push their project forward.