During World War Two, American and European military forces used tiny, remote islands in the South Pacific as safe stopover points. Here, provisions could be cached to supply soldiers and ships fighting the war in the Pacific.. Some of the islands’ residents were tribes living in bamboo huts, fishing with spears, and had spiritual beliefs that appeared backward to Western observers. Picture the natives depicted in Mutiny on the Bounty or Apocalypse Now.

Each culture looked on the other with curious amusement. The soldiers would give the native islanders gifts: Proceeds from the supplies delivered by parachute from cargo planes: food, materials for shelter, and western sundries that amused the tribal hosts. For the natives this was a magical event as the crates floated down from the sky.

And then the war ended. These South Pacific islands were abruptly abandoned. There was no need to maintain a military presence – the Army and Navy dismantled the infrastructure that allowed planes to cache supplies on the islands for all those years.

But the natives still yearned for the treasure that came from the sky. In an attempt to bring back the supplies, the islanders created structures that visually resembled control towers. They carved headphones out of wood and made large-scale model airplanes. Every morning, they would stand on the long strips of cleared land, some standing in the center of the strip with their arms extended and palms making motions forward, right or left – just like they saw the airmen do when the cargo planes emerged from the sky and landed on the runways. They had faith that, if they recreated what they saw, and imitated the motions, then they would receive the same result: cargo from the sky.

Richard Feynman, the Nobel prize winning physicist and author who possessed a legendary talent for childlike curiosity, insight and candor, summarized the effect:

They’re doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn’t work … they follow all the apparent precepts and forms, but they’re missing something essential, because the planes don’t land.iiii Richard Feynman, “California Institute of Technology Commencement Address” (speech, Pasadena, CA, 1974).

Cargo Cults: They are among the most fascinating cultural phenomena – where the present tempts the past, and the past tries to influence the future. With over 186 known to have existed,iiiiii Steinbauer, Friedrich. 1979. Melanesian cargo cults: New salvation movements in the South Pacific. Translated by Max Wohlwill. St. Lucia: Univ. of Queensland Press. cargo cults are vivid illustrations of the common fallacy of cause and effect: when we get it wrong and covet the effects without really understanding the cause. Worse, perhaps, is repeating the motions over and over again, like a ritual, expecting the same result.

CULTS

Sadly, entrepreneurship has many cargo cults. Cargo cultism emerges within institutions, groups and organizations designed to foster entrepreneurship and help entrepreneurs: From accelerators and incubators, university programs, corporate innovation programs to government economic development, and many other programs – all suffer from this syndrome. They are trying to attract and nurture the growth of entrepreneurial companies so they can reap the economic rewards.

Cultism isn’t all bad: When it works, it works remarkably well; the entrepreneurial riches are real, vivid and bountiful. One mega-success story can offset hundreds of failures and misfires – unless of course, you are involved with the failures. But it’s the hope for successes that proliferates the cults.
Using term “cult” is inflammatory hype, right? Here are a few excerpts from dictionaries. Let’s see if definitions of “cult” are appropriate:

• great devotion to a person, idea, object, movement, or work.
• some have members practice certain rituals or follow a set of principal rules. The group usually believes its way is the only correct way to live life, and all non-members are doomed to some horrible fate if they cannot be persuaded to join.
• A misplaced or excessive admiration for a person or thing.

As we’ll soon discover, in entrepreneurship, cult is an apt metaphor.
By very nature, entrepreneurs are independent thinkers so they must be immune to cultism – or at least acutely aware. But does any cult member really think they’re in a cult? Are fish aware that they swim in water?
Entrepreneurs can be prone to the same, often excessive, devotion to ideas, rituals, and behaviors associated with cults. Just ask some tech- entrepreneurs about their preferred programming language or business model, and watch the cult-like devotion unfold.
Entrepreneurship is a lonely, frustrating way of life. Add to this, the inherent risks and ambiguity. It’s no surprise the field is rife with cargo cults. Of course, as an entrepreneur you should avoid cults. But can you recognize them when you seem them?

The Cult of Silicon Valley

A billion dollars isn’t cool, you know what’s cool? A trillion dollars.
– from The Social Network, adjusted for inflation. iviv The Social Network, Film, Directed by David Fincher, 2010.

Apple, Google, Facebook, Yahoo, Intel, Cisco, Hewlett-Packard, Oracle — each is valued in billions, and even hundreds of billions of dollars. Apple alone has more than one-quarter trillion dollars in the bank.vv Wang, Christine. “Apple’s cash hoard swells to $237.6 billion, a record.” CNBC. October 26, 2016. http://www.cnbc.com/2016/10/25/apples-cash-hoard-now-nearly-238-billion.html. That’s trillion, with a T. And Silicon Valley is home.

Silicon Valley is also the birthplace of thousands of other entrepreneurial high-tech companies that will produce incredible wealth for their employees and for the regional economy. No town or city in the geographical region is actually named “Silicon Valley” so it is, literally, a mythical place. Like other mythical places such as Utopia, Atlantis and Tinseltown, Silicon Valley is a really a euphemism. The Silicon Valley concept evokes images of young entrepreneurs tinkering with technology in their garages or dorm rooms. Within a few short years and several barrels of caffeine later, these kids transform their genius into sprawling billion dollar empires. Empires that enrich everyone from the janitors and secretaries, to hundreds of other entrepreneurs who also have profited by building upon the original idea.

Success breeds success, and the geography known as Silicon Valley continually attracts the brightest and most ambitious entrepreneurs, engineers and other talent. More companies, more jobs and more wealth attract more entrepreneurial talent moving into the area, seeking to be a part of the whirlwind of success.
The equation is not merely wishful thinking. A recent study based on nearly 30 years of data, conducted by the Ewing Marion Kauffman Foundation, concludes:

“When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing. In fact, net job growth occurs in the U.S. economy only through startup firms. … existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.”vivi Steve Borsch, “Startups Aren’t Everything… They’re the ONLY Thing,” Minnov8, August 24, 2010, http://minnov8.com/2010/08/24/startups-arent-everything-theyre-the-only-thing/.
Tim J. Kane, “The Importance of Startups in Job Creation and Job Destruction,” Social Science Research Network, July 2010, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1646934.

Economic growth comes from new jobs. And clearly the best way – if not the only way – a region can see an increase in new jobs is from new companies: Startups. Entrepreneurial startups:  not the startup that creates a job for its founder and a family member or two, but from startups that “scale” and create hundreds and thousands of jobs faster than they can buy desks and chairs for these new employees.

Every region of the world wants this kind of job growth. Job growth means prosperity and an upward spiral to a higher quality of life. If you’re in charge of enhancing the prosperity of your remote village, how do you make the riches drop from the sky?

Ecosystems

If you want economic growth from entrepreneurship. you can either:

1. Establish startups yourself one by one – like planting seeds – and hope enough sprout to have a significant economic impact.
2. Attract companies to the region – via incentives and relocation.
3. Build an environment favorable for local entrepreneurs starting new companies.

Most strive for the last method – attempting to build an ecosystem that looks just like Silicon Valley.
Harvard Law School Berkman Center Fellow James F. Moore, who pioneered the field, defines a Business Ecosystem as:

An economic community supported by a foundation of interacting organizations and individuals—the organisms of the business world. The economic community produces goods and services of value to customers, who are themselves members of the ecosystem. The member organisms also include suppliers, lead producers, competitors, and other stakeholders. Over time, they coevolve their capabilities and roles, and tend to align themselves with the directions set by one or more central companies. Those companies holding leadership roles may change over time, but the function of an ecosystem leader is valued by the community because it enables members to move toward shared visions to align their investments, and to find mutually supportive roles.viivii The concept first appeared in Moore’s May/June 1993 Harvard Business Review article, titled “Predators and Prey: A New Ecology of Competition”, and won the McKinsey Award for article of the year.

James F. Moore, “Predators and Prey: A New Ecology of Competition,” Harvard Business Review, May/June 1993, https://hbr.org/1993/05/predators-and-prey-a-new-ecology-of-competition.

An entrepreneurial ecosystem, then, is an economic community that supports young startup companies. Who typically drives a region’s entrepreneurial ecosystem? Three groups:

• Institutional: Government Organizations & Universities
• Private: Accelerators, Incubators & Factories
• Organic: Individuals, Communities & Collectives

Only government organizations are formally charged with the task of stimulating economic growth. Arguably, this is their top objective. They do this via Economic Development.

The Cargo Cult of Economic Development

For government officials –- particularly elected officials – the logic is straightforward: Prosperity keeps constituents happy. Job growth causes prosperity. New jobs come from entrepreneurial startups.

They’ve seen it happen in Silicon Valley ecosystem, so it’s natural that economic developers try to recreate the most obvious and visible attributes: innovation from major research universities; venture capital; a “critical mass” of talent; and a community where this ecosystem can brew and percolate until the new companies are ready to become the next Microsoft, Apple or Google.

Does it work?

After 25 years as an economic development expert, David Hockmanviiiviii David Hochman. dh@tbed.org, https://www.linkedin.com/in/hochmand, Founding executive director of the Business Incubator Association of New York State, Inc., Member of the Board of Directors, New York State Economic Development Council walks a fine line. A lifelong economic development professional and former board member of New York State Economic Development Council, his profession is advising and devising regional economic development programs all around the country. But he also acknowledges the rampant failures of most of these programs. In many ways, he observes, it’s not that regional economic development organizations can’t do enough to foster entrepreneurial growth – it’s that they may be trying to do too much.

Economic development agencies work with the only tools they have at their disposal:

• Taxes: Tax breaks, tax credits and other similar incentives.
• Real estate: Specially zoned buildings, office space, and manufacturing plants and incubators.
• Funding programs: Grants and contests; subsidizing tech transfer [and in certain cases – investment in tech sectors]
• Marketing: advertising and branding of the region, designed to attract companies to relocate.

These all are formidable initiatives, visible and high profile – complete with ribbon cuttings, speeches and handshakes. And the impact on the prestige of the participants and organizations is also significant. But for the entrepreneurs who create scalable, growth companies that produce jobs – the impact is minimal.
For a potential high-growth (vanguard) startup company with no revenues, a tax break is meaningless. While the small team is struggling to prove their market and attract investment, securing office space is often low on the list of priorities.

Subsidies and grant funding sound attractive but government agencies severely misunderstand how entrepreneurs thrive in a world with venture capital and angel investors. Securing funding from grants and other subsidies takes about as much time from the entrepreneur as does securing venture capital and angel funding. Grants and subsidies might be welcome cash for the other types entrepreneurial companies – namely small businesses and lifestyle business – but these kinds of startups are not likely to produce a significant number of new jobs.

Relocation is a double-edged sword. Enticing a company to relocate is always a marketing coup for the economic development agency. A 200 person company might relocate to the region (with the help of significant tax breaks and an attractive building) – but the deal is not creating any substantial number of new jobs in the region. People are merely being shifted from another region to another, for a price.

Of the top 5 startup ecosystems in the US: ixix “The 2015 Global Startup Ecosystem Ranking,” Compass (blog), July 27, 2015, http://blog.compass.co/the-2015-global-startup-ecosystem-ranking-is-live/.

• Silicon Valley
• New York City
• Los Angeles
• Boston
• Chicago

Not one has achieved its status through any formal economic development programs targeted at startups. After Silicon Valley, the others are thriving because they have three intrinsic attributes in common: Each is a top population center, has a concentration of top universities and is a major financial center.

Governments will always try to attract more entrepreneurial ‘cargo from the sky’ using the economic development tools described earlier. One of the most recent attempts – a broad program called Start-Up New York – produced outcomes that are not all that unusual. Forbes summarizes the results: xx David Brunori, “Admit It – The Start-Up New York Tax Incentive Program Failed,” Forbes, August 1, 2016, http://www.forbes.com/sites/taxanalysts/2016/08/01/admit-it-the-start-up-new-york-tax-incentive-program-failed/#6e89187127eb.

“The state recently disclosed that the much-heralded incentive program spent $53 million in its first two years of operation. The program is said to have attracted 159 companies and created 408 jobs .. [at] nearly $130,000 per job. Under what definition can this be considered a success?

And let’s be clear. The $53 million is only the amount the state spent on advertising and marketing Start-Up New York; it does not include the dollar figures for the tax incentives. […] Those tax breaks include complete income, sales, and property tax exemptions for the business, as well as income tax exemptions for most employees. […] Basically, the state is giving money to companies to do what they would have done anyway — and it will keep giving them money for the next decade.”

With all the attempts by regional economic development agencies to attract high growth entrepreneurial companies to their regions, it is actually very difficult to quantify the extent of the failures, for several reasons as Hockman explains: First – while the initiatives are launched with lots of funding fanfare, and great expectations, those expectations and objectives are usually open ended and vague.

But, as Hockman acknowledges, the cause-and-effect is not that straightforward, and measurements can become very complicated. Not all jobs created are equal in economic impact, and it is not the salary that always dictates the impact. For instance, a solo consulting business generates a high salary for its owner, but may never generate another new job as a result, whereas, an entrepreneur may not make a salary for the first 2-3 years but creates a company that employs 2,000 people.

The Cobra Effect

If you’re an entrepreneur, the prospects of getting “no strings” attached money from the government can be alluring. Who cares if the government’s economic developed efforts are successful, as long as your start-up gets the cash it needs? The counterintuitive irony is that financial incentives can actually hurt startups. Pursuing grants, contests and participating in other funding programs can delay success. Those programs invariably move slowly and sometimes take years to complete – causing startups move at the speed of government, at the expense of other opportunities. And worse, the funding opportunities themselves may be illusions.

A recent study of more than 4,200 economic development incentive awards in 14 states finds that large companies benefited the most. The deals, worth more than $3.2 billion, were granted in recent years by programs that, on their faces, are equally accessible to small and large companies. Yet big businesses overall were awarded 90 percent of the dollars from the programs, indicating a profound bias against small businesses. 11

The Cobra Effect occurs when an attempted solution to a problem actually makes the problem worse.

Most economic development agencies seem to rely overly on the relocation part of their toolkits. It’s not surprising, since there is relative instant-gratification for those running the program, and the formula is more tangible: advertise and market the benefits of your region, offer all the incentives you can to a prospect; get them to agree to relocation, and you’ll be able to announce 200 or 10,000 local jobs overnight.

But this style of economic development alienates startups already in the region (whose founders presumably are taxpayers too). When their  local government offers incentive resources to companies outside the region, it discourages local entrepreneurs from starting companies. The practice encourages local entrepreneurs to seek the same relocation incentives from other regions.

When your economic development agency offers financial incentives to attract new companies to the region, it’s kind of like having your parents adopt an exchange student and pay for her college, while you have to struggle for your own tuition.

Bragging Rights

Most people reading this chapter may be thinking: ‘My region is really succeeding at developing our entrepreneurial ecosystem. Our economic development organization is constantly being lauded for job growth, attracting companies, and fostering their success.’ Every month it seems, there’s another report from them with metrics on our region’s success.

Measuring the success and ROI of economic development programs is important, if only because it justifies continuing (or shuttering) the programs themselves. This is why, as Hockman and others maintain, it is dangerous for these agencies to conduct their own assessment (or “impact”) studies. The complex and indirect nature of creating growth jobs leads to the practice of creating and using “multipliers:” A multiplier is what it sounds like – an arbitrary fudge factor number to be applied to any ROI results. With this practice we may never know which economic development practices are effective.

At their worst, these measurement techniques keep sustaining the economic development practices that are the most ineffective, instead of uncovering which practices actually contribute to entrepreneurial job growth.
Worse, is that there are no independent measures of success or ROI, and almost any attempt at measuring success is conducted by the very agency and officials who were responsible for the failures. Hockman and many others find this methodology suspect and self-serving. Self-measuring success is like having students grade their own SATs – and then calling them impact reports.

Naturally these “economic impact” reports are all positive and cite the well-intentioned activities of all involved. But tangible mention of outcomes almost always seem to be blurry. The outcomes often get re-framed in terms of the intent or quality of the effort: “the experiment was important”; and “we may have said we wanted to promote entrepreneurship, but what we were really after was greater equity, or more inclusion …” xiixii Dane Stangler, “The Ecosystem Trap,” Growthology, April 18, 2016, http://www.kauffman.org/blogs/growthology/2016/04/the-ecosystem-trap.

Mis-Alignment

If tax incentives, funding, marketing and relocation were ever effective tools for government economic development, clearly these tools have dulled with age. For entrepreneurs, anything that could be fostered, attracted, or stimulated by tax breaks, bonds, real estate – has become increasingly irrelevant. Economic development institutions are trying to feed an ecosystem that no longer eats the food they have to offer.

In the prior chapter, we looked at what happens when there is a mis-alignment of entrepreneurship resources, outcomes and activities. This is not just a mistake entrepreneurs make. Support systems make the same mistake – using the wrong resources to achieve a specific type of outcome.

Other times, the failures are from using the older tools, or even the wrong tools. Sometimes economic development programs target the right outcomes with the right resources, but something still is not quite right.

Wayne’s World

Saturday Night Live legends Mike Myers and Dana Carvey starred in a feature movie created from their popular sketch on the comedy show. Wayne’s World was about two heavy metal, head-banging, slackers who lived with their parents; they did little else in life but talk about music and pop culture, and hang out in the mall. Out of their parents’ basement, they broadcast Wayne’s World – a no-frills, laid back talk show about their favorite subjects (music, girls, mall life) – that was broadcast on a free public-access cable channel. In the movie, the show Wayne’s World was a local hit. It attracted the interest of a major network , who planned on leveraging the show’s format and success to sell advertising to the rapt demographic.

After the show was acquired, Wayne and Garth found themselves at the network’s professional broadcast facility. The network had recreated their basement set, sofa by sofa and poster by poster. It was an exact duplicate. As the show started, the show’s hosts felt surreal and disoriented. It looked exactly like their basement set, but something was different. They couldn’t quite articulate it but the big rich TV network had missed some essential nuances – and Wayne’s World was never the same.

It’s a familiar meme: A large organization shovels money and resources in a misguided attempt to recreate success they’ve seen somewhere else. Outwardly everything looks like they’re achieving the outcome. But just like our cargo cults: when they try to recreate the successful ecosystems they have seen thrive elsewhere, they rarely succeed. They recreate all the same elements and components but something is different, something is missing.

This “something missing, something different” is due an interesting dilemma: The skills and expertise it takes to create and run these economic development programs are almost the opposite of those required to be an entrepreneur. Like our cargo cult tribal leaders, administrators and government officials rarely have spent time as entrepreneurs themselves. Their main experience is in observing entrepreneurs. So, when they try to recreate a successful entrepreneurial ecosystem, the result is usually a surreal cargo cult recreation of Silicon Valley: Lots of appealing and well intentioned activities, but no cargo dropping from the sky.

It’s hard for entrepreneurs to resist the siren song of the economic development programs. But the evidence shows these institutions are fighting the last war – with older tools. And for entrepreneurs, using economic development resources can be a fatal mistake.

The Cult of the Velvet Rope

I don’t want to belong to any club that will accept me as a member.
– Groucho Marx

Even thirty years later after permanently shuttering its doors, no nightclub more is famous than Studio 54. No movie could exaggerate the importance and the influence this club had on the social scene in the 70’s and early 80’s. Because it was packed with the most famous rock stars, models, artists and politicians, merely being spotted and photographed there could propel one to instant fame or infamy. It’s the equivalent today of marrying a Kardashian.

Getting past the velvet rope at Studio 54 meant you already were a celebrity, or attractive enough to make the club look good. For the fledgling artist or musician, it could be a career-starter. Spending time inside with the other elites raised your social capital a little closer to the A-List. Yes, just getting inside made you a more appealing pop-culture celebrity. Being denied entrance through the velvet rope was a mark of shame, or at least a clear sign that you were not worthy.

During this era many other clubs emerged that were all cut from the Studio 54 mold. Each city had at least one, but you probably never heard of them. They just couldn’t recreate the original. Hanging out at the club probably was fun, but did nothing for your celebrity career.

Inside the brainy, sneaker-clad universe of entrepreneurship, there’s a new version of Studio 54: accelerators, incubators and factories. They evolved from a set of practical techniques for jumpstarting startup ventures, to become exclusive, brand-name organizations. Just being admitted can signal to the world that your startup has made it. It’s like getting admitted into an elite prep school.

The analogy is not a cynical one. It’s the recurring sitcom storyline where parents scheme to get their kids into an exclusive preschool. This, in turn would ensure entry into a private grade school, a prep school – ultimately guaranteeing an Ivy League degree and seven figure career. For struggling entrepreneurs, being accepted to a top tier accelerator could be the first domino to fall.

Accelerators, Incubators and Factories – Oh My!

AIFs: these are the “private” drivers of the entrepreneurial ecosystem. Unlike the public drivers (government organizations) who want regional economic prosperity via job growth, AIFs are focused on the success of a small, hand-picked set of startup ventures. The primary beneficiaries are the company founders, investors and the AIFs themselves. Whatever the motivations, the objective is the same: To encourage and expedite the growth and success of entrepreneurial startups.

When fostering entrepreneurship, government takes a vitamins-and-lifestyle approach, while AIFs use a scalpel and surgery. They are more specific and in-depth. AIFs are each aptly named for their method: Accelerators are designed to speed-up the success of a startup venture and quickly get it to “the next level”; Incubators are supposed to be warm and safe environments where a newborn company can become healthy and strong enough to survive outside in the world; Factories are structured educational and development programs, almost like assembly lines– ideas and entrepreneurs going in – products and companies coming out.

AIFs overlap in that they share aspects or techniques from each other. For instance, there are some incubators that invest in startups as part of their mission, and some accelerators that have formal training programs. More and more they reflect the fast-paced nature of modern entrepreneurship, and cater to startups with a potential for rapid growth.

The highly competitive nature of AIFs (in attracting and accepting the most promising entrepreneurs) has forced them to get better and better at what they do. As we will soon see, the top tier of AIFs perform extraordinarily well for entrepreneurs. Thus the line behind velvet rope gets longer and longer. This has also spawned hundreds of remote “wannabe” AIFs – each with dreams of seeing the cargo drop from the sky.

Incubators

Incubators typically provide client companies with programs, services and space for varying lengths of time based on company needs.xiiixiiiw.inbia.org/resources/business-incubation-faq – The International Business Innovation Association (InBIA) Their defining characteristic is that incubators have a building, charge rent and have no set duration.

The first U.S. business incubator opened in Batavia, N.Y., in 1959, but the concept of providing business assistance services to early-stage companies in shared facilities did not catch-on until at least the late 1970s.xivxiv “The History of Business Incubation,” The International Business Innovation Association, 2015, http://www2.nbia.org/resource_library/history/index.php. Since 1980 the number of incubators has skyrocketed from about 12 to over 1,400. 16

Business incubators nurture the development of entrepreneurial companies, helping them survive and grow during the start-up period, when they are most vulnerable.10 These programs provide their client companies with business support services and resources tailored to young firms. On a conceptual level this makes sense: Provide an environment for a nascent company to become stable and “graduate” to become a profitable, high growth company.
On her journey to become an expert and authority on incubators, Melba Kurman has “crossed the chasm” more than once. As a product marketing manager for Microsoft, Ms. Kurman gained that fast-faced, commercial high tech experience that seems to be missing from the resumes of most economic development professionals. After bringing that experience to bear while working inside a large university, helping to drive technology transfer and innovation, Melba later embarked on a career as an author and consultant. As CEO of Triple Helix Innovation, she writes extensively on the complexities of incubators, and innovation and development programs.

While Ms. Kurman is a longtime advocate of incubators, she concedes that but a simple walk through most incubators reveals that fundamentally they are buildings with office space, with tenants whom they charge rent and business services. While the mission of most incubators is of the highest intent: helping entrepreneurs create high growth ventures that can sustain themselves outside of the incubator. Ultimately their goal is to foster economic growth, prosperity, jobs and create wealth.

Very often, the incubator management will demand and take an equity stake in the tenant company as part of the arrangement. In many ways this can be justified, if the incubator offered some distinct advantages for the tenant startup: Mentoring, infrastructure or services that are otherwise unavailable elsewhere, or even a synergy with other incubator residents. At the very least, a financially struggling brand new startup should expect at least some attractive rates on the lease or the services within the incubator.

Sadly, again, there is a wide gap between the intentions, common sense, and reality. Typical incubators are not likely to have lease terms any more attractive than any other office space. The only advantage is that incubators make very small spaces available, as small as 1/2 a cubicle – with the common areas (lobby, conference rooms, copy machines, coffee/kitchen) shared among tenants – for a fee. When compared on a square foot basis, entrepreneurs typically can get a far better deal within a traditional office building. The one advantage, not surprisingly, is that incubators are typically willing to lease the space on a month-to-month basis, so the entrepreneur does not have to make a long term finance commitment during this high-risk stage of her startup.

Kurman points out that while the current emphasis of incubators is to provide “bricks and mortar” (office space), the physical space is becoming less and less important to entrepreneurial startups today. A decade or two ago, having access to lab equipment or high speed internet was an important reason for an upstart to move into an incubator. Today, internet access is hardly a unique service. In prior eras, a startup may have needed office space and conference rooms to meet with clients or for engineers to collaborate, but now those meetings happen in Starbucks.

Perhaps the real advantage of being located inside an incubator, for a new venture, is the synergy with the other companies (presumably the venture can work with other new companies and share expertise). Or maybe the advantage comes from the mentoring, advice and training – or even introductions to investors from the incubator management. Surely this would be a logical trade off for the extra costs involved.

As it turns out, managers, proprietors of incubators have one overarching goal: To keep the space in the incubator filled with tenants. Certainly if there is a vast choice of tenants, then finding a synergistic mix of tenants is ideal. Nevertheless, no matter what the overarching intent of the incubator, the most visible metric of success – particularly in the near term – is the number of tenants. Thus it is no surprise to find the managers of institutional incubators spending most of their time on outreach and marketing in order to attract new tenants.
And what are the results for entrepreneurs, and to the local entrepreneurial ecosystem? A recent, comprehensive study on business incubators concludes:xvxv Alejandro S. Amezcua, Whitman School of Management, Syracuse University, USA  Boon or Boondoggle? Business Incubation as Entrepreneurship Policy
[…] the effects of incubation are potentially deleterious to the long-term survival and performance of new ventures. Incubated firms outperform their peers in terms of employment and sales growth but fail sooner. These are important findings for policymakers who support incubation as a strategy to increase employment locally and for entrepreneurs who risk their livelihoods in order to earn a decent living. However, claims that incubators are highly successful and serve a significant number of businesses are overstated.
Over the past 10 years there has been a rapid transition to online collaboration – the virtual organization. While established companies may need offices and conference rooms to operate, a startup can develop their product and conduct their business without ever being in the same room – quite conveniently. Ms. Kurman summarizes the point: “Incubators might be selling something their customers no longer need.”

Many seasoned entrepreneurs can’t shake the ingrained notion that they aren’t a real company until they have an office. No doubt many incubators use this in their marketing. And for many entrepreneurs – particularly those building local business or consulting services, having an office is a vital part of operations. It lends a sense of stability and credibility. For “innovation and invention” entrepreneurs – those working on technology-transfer from universities, and those that need initial lab-space or manufacturing space – incubators can be the only way.
But in this new age of entrepreneurship, incubators are ‘fighting the last war’, with a dull tool.

What’s interesting is not the decline of incubators’ relevance in the entrepreneurial ecosystem; it’s what happened next: Entrepreneurship’s default-mode tilted towards the high-growth, high-tech kind of company. These early stage growth companies are less reliant on geography and more reliant on networks of partners and investors. For these companies, connections, traction and speed are everything. In other words,  the decline of the incubators spawned the rise of accelerators.

Accelerators

Startup accelerators play a major role in today’s tech world and new accelerator programs are launched almost every day.

Accelerators support early-stage, growth-driven companies through education, mentorship, and financing. Recent academic studies 3 summarize the four elements that make accelerators distinct from other supporting institutions: they are fixed-term, cohort-based, mentor-driven, and culminate in a graduation or demo day. xvixvi Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
Essentially, accelerators take a group of companies through a specific process over a set schedule (e.g. 3 months), culminating in a public pitch event. Accelerators also generally make seed-stage investments in each participating company in exchange for equity, while many incubators do not make this type of financial commitment. 10 As most accelerators take meaningful ownership stake in a company, typically 5% to 7% percent, the cost of joining an accelerator can be high.xviixvii Samir Kaji, “Are Startup Accelerators Worth It? Here’s How Helpful They Are in Getting Funding,” CB Insights, July 6, 2016, https://www.cbinsights.com/blog/top-accelerators-follow-on-funding-rates/.

The accelerator experience is a process of intense, rapid, and immersive education aimed at accelerating the life cycle of young innovative companies, compressing years’ worth of learning-by-doing into just a few months.xviiixviii Ian Hathaway, “What Startup Accelerators Really Do,” Harvard Business Review, March 1, 2016, https://hbr.org/2016/03/what-startup-accelerators-really-do. According to Techstars Managing Director Natty Zola, “accelerators have become the new business school” – a rite of passage for thousands of entrepreneurs around the world.

The first accelerator, Y Combinator, only started ten years ago. Techstars’ first class was in 2007, DreamIT Ventures in 2008, AngelPad in 2010, and 500 startups in 2011.xixxix Jed Christiansen, “$10 Billion,” Per Aspera ad Astra (blog), June 9, 2015, http://blog.jedchristiansen.com/2015/06/09/10-billion/. YC leverages the personal connections and reputation of Paul Graham et al. Dave McClure is “PayPal Mafia.” He knows people, and more importantly, people know Dave. These programs, through the network of people involved, can make introductions to dozens of individuals – who, in many cases, will fund the startups. That is a competitive advantage,8 and the line behind this velvet rope is very long.

Results vary, but according to a recent study by “angel platform” Gust, the U.S. and Canada still reign as leaders of the accelerator industry with a total of 111 accelerators investing $90.3 million in 2,968 startups. Europe, with a total of 113 accelerators investing $41.0 million in 2,574 startups, closely trails the U.S. and Canada.xxxx US and Canada
Sebastien Brunet, Miklos Grof, and Diego Izquierdo, “Global Accelerator Report 2015,” Gust, n.d., http://gust.com/global-accelerator-report-2015/.

Ten years after the accelerator model was pioneered, Seed-DB has now identified over $10 billion that has been invested in accelerator graduates, and over 300 companies have already exited for a total of over $3.5 billion.5 The total valuation of companies that have come through accelerators reaches in the tens of billions of dollars.xxixxi Jed Christiansen, “$10 Billion,” Per Aspera ad Astra (blog), June 9, 2015, http://blog.jedchristiansen.com/2015/06/09/10-billion/.

With this kind of success, it’s no wonder that the number of accelerator programs has exploded. Entrepreneurs should be fortunate to have so much access to such an effective tool. Sadly, the sweeping effectiveness of accelerators is overestimated. 76% of all venture capital funding of seed accelerators go to graduates of just five accelerator programs: Y Combinator, Techstars, 500startups, Angelpad, and DreamIT Ventures. xxiixxii ibid.
Out of the hundreds of accelerators that have emerged, the vast majority of successes come from the top 5.
The most common model for successful accelerators is to award a relatively small amount of seed money (e.g. $20,000) for each company, provide them with workspace and mentorship for 3 months, in exchange for an equity investment. The accelerator profits by ensuring they graduate quality companies that secure follow-on investments, and eventually have a profitable exit.

Most accelerators cannot afford to fund their cohorts or wait for them to be successful, so they have to rely on other forms of revenue: chasing grants, or charging for office space and services. In fact 91% of accelerators around the globe are reliant on alternative revenue generation models in the short term while 75% plan to continue depending on them for the long term.xxiiixxiii GUST – – Accelerators Report 2015 http://gust.com/global-accelerator-report-2015/

The success of the top accelerators are largely due to prospects of gaining access to funding, or access to A-list partners and mentors from the accelerator-founder’s Rolodex. If the rest of the accelerators cannot reliably offer these as benefits, what can they offer? And how can they stay in business?
As it turns out, the vast majority of accelerators cannot sustain themselves with the same business model as the top-5. Instead these accelerators are evolving into new kind of organization – The Factory.

Factories

Factories are all about education, training and development usually in a fixed program (a short course, series of workshops, prototyping sprints etc.) – for a tuition-like fee.

When the first batch of mega-successful modern dotcom entrepreneurs “exited” their companies in the late 1990’s, many of them had a deep knowledge of how to build products and companies within their domain of expertise. Some of them used their knowledge to start new companies, and others became venture capitalists and angel investors. And others took a hands-on role in guiding entrepreneurs through a specific process – designed to vet the idea, the problem and market; develop the solution or product; create a company and launch the product.

Factories go by a variety of names: startup studio, startup factory, startup foundry, startup school, and innovation lab. IdeaLab was founded in 1996 and is considered the first of its kind. IdeaLab was founded by repeat entrepreneur Bill Gross, and it has created over 150 companies with more than 45 IPOs and acquisitions. xxivxxiv Idealab, 2016, https://www.idealab.com/
Steve Blank, “You’re Not a Real Entrepreneur,” Steve Blank (blog), June 10, 2010, https://steveblank.com/2010/06/10/you%E2%80%99re-not-a-real-entrepreneur/.

But the concept of Factories is diverse, and has evolved rapidly. It used to be about a company or founder’s unique method of developing a product and a company. Ever since the advent of The Lean Startup (developed by Eric Ries, and inspired by Steve Blank’s Customer Development Methodology) – the process of rapid concept-to-product development can be taught by just about anyone who goes through the instructor training program.
For brand-new entrepreneurs, having access to this kind of training is indeed valuable. And for Factories – it reduces the burden of having to provide seed funding, or promise access to investors. And, they can charge for this training. It is, after all, a service.

With the top accelerator programs being located in NY, Silicon Valley and Boulder, entrepreneurs have to relocate just to get past the velvet rope.  Factories are as easy to establish as assembly lines, and every university, and many economic development agencies are setting establishing them all over the country. Factories lack the intrinsic golden-Rolodex of introductions that a celebrity accelerator/founder offers – so they are forced to use mentors, advisors and experts from the local entrepreneurial ecosystem. Often these mentors are all too happy to participate.

With no funding, no premium investor network, and charging entrepreneurs for participation – factories don’t seem all that attractive at first. But for inexperienced entrepreneurs, factories provide structure and a reliable process – and these are invaluable time-savers. They expedite the process of success – or failure (so they can start over).

And factories have an accidental advantage for new entrepreneurs. They offer a way for entrepreneurs to connect with the local entrepreneurial ecosystem. By participating in a factory program, the new entrepreneur is exposed to a local network of entrepreneurs, mentors and advisors – all of whom are potential collaborators.
In other words, factory programs are inadvertently creating something far more valuable – organic communities of entrepreneurs.

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i Spot, God’s Hot. “THE CARGO CULT BELIEF.” God’s HotSpot. May 04, 2016.. https://godshotspot.wordpress.com/2016/05/02/the-cargo-cult-belief/.
ii Richard Feynman, “California Institute of Technology Commencement Address” (speech, Pasadena, CA, 1974).
iii Steinbauer, Friedrich. 1979. Melanesian cargo cults: New salvation movements in the South Pacific. Translated by Max Wohlwill. St. Lucia: Univ. of Queensland Press.
iv The Social Network, Film, Directed by David Fincher, 2010.
v Wang, Christine. “Apple’s cash hoard swells to $237.6 billion, a record.” CNBC. October 26, 2016. http://www.cnbc.com/2016/10/25/apples-cash-hoard-now-nearly-238-billion.html.

vi Steve Borsch, “Startups Aren’t Everything… They’re the ONLY Thing,” Minnov8, August 24, 2010, http://minnov8.com/2010/08/24/startups-arent-everything-theyre-the-only-thing/.

Tim J. Kane, “The Importance of Startups in Job Creation and Job Destruction,” Social Science Research Network, July 2010, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1646934.

vii The concept first appeared in Moore’s May/June 1993 Harvard Business Review article, titled “Predators and Prey: A New Ecology of Competition”, and won the McKinsey Award for article of the year.

James F. Moore, “Predators and Prey: A New Ecology of Competition,” Harvard Business Review, May/June 1993, https://hbr.org/1993/05/predators-and-prey-a-new-ecology-of-competition.

viii David Hochman. dh@tbed.org, https://www.linkedin.com/in/hochmand, Founding executive director of the Business Incubator Association of New York State, Inc., Member of the Board of Directors, New York State Economic Development Council
ix “The 2015 Global Startup Ecosystem Ranking,” Compass (blog), July 27, 2015, http://blog.compass.co/the-2015-global-startup-ecosystem-ranking-is-live/.
x David Brunori, “Admit It – The Start-Up New York Tax Incentive Program Failed,” Forbes, August 1, 2016, http://www.forbes.com/sites/taxanalysts/2016/08/01/admit-it-the-start-up-new-york-tax-incentive-program-failed/#6e89187127eb.
xi Cobra Effect,” Wikipedia, last modified on September 23, 2016, https://en.wikipedia.org/wiki/Cobra_effect.
xii Dane Stangler, “The Ecosystem Trap,” Growthology, April 18, 2016, http://www.kauffman.org/blogs/growthology/2016/04/the-ecosystem-trap.
xiiiw.inbia.org/resources/business-incubation-faq – The International Business Innovation Association (InBIA)
xiv “The History of Business Incubation,” The International Business Innovation Association, 2015, http://www2.nbia.org/resource_library/history/index.php.
xv Alejandro S. Amezcua, Whitman School of Management, Syracuse University, USA Boon or Boondoggle? Business Incubation as Entrepreneurship Policy
xvi Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
xvii Samir Kaji, “Are Startup Accelerators Worth It? Here’s How Helpful They Are in Getting Funding,” CB Insights, July 6, 2016, https://www.cbinsights.com/blog/top-accelerators-follow-on-funding-rates/.
xviii Ian Hathaway, “What Startup Accelerators Really Do,” Harvard Business Review, March 1, 2016, https://hbr.org/2016/03/what-startup-accelerators-really-do.
xix Jed Christiansen, “$10 Billion,” Per Aspera ad Astra (blog), June 9, 2015, http://blog.jedchristiansen.com/2015/06/09/10-billion/.

xx US and Canada
2968 startups acellerated (33.6%)
111 Accelerator programs (28.7%)
$90,295,774 Invested (47% of the global total)
For-profit: 64.86%
Not-for-profit: 35.14%
Exits: 193
Sebastien Brunet, Miklos Grof, and Diego Izquierdo, “Global Accelerator Report 2015,” Gust, n.d., http://gust.com/global-accelerator-report-2015/.

xxi Jed Christiansen, “$10 Billion,” Per Aspera ad Astra (blog), June 9, 2015, http://blog.jedchristiansen.com/2015/06/09/10-billion/.
xxii ibid.
xxiii GUST – – Accelerators Report 2015 http://gust.com/global-accelerator-report-2015/

xxiv Idealab, 2016, https://www.idealab.com/

Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.

Connie Loizos, “A New Accelerator Report Suggests That Independent Work is Most Effective,” TechCrunch, March 28, 2016, https://techcrunch.com/2016/03/28/a-new-accelerator-report-suggests-that-independent-work-is-most-effective/.

“What’s Working in Startup Acceleration: Insights From Fifteen Village Capital Programs,” Aspen Network of Development Entrepreneurs, March 31, 2016, http://ande.site-ym.com/blogpost/737893/242298/What-s-Working-in-Startup-Acceleration-Insights-from-Fifteen-Village-Capital-Programs.

“Incubators Are a Ghetto,” WordPress.com (blog), January 3, 2012, https://stochasticresonance.wordpress.com/2012/01/03/incubators-are-a-ghetto/.

Steve Blank, “Startup America – Dead on Arrival,” Steve Blank (blog), February 8, 2011, https://steveblank.com/2011/02/08/startup-america-dead-on-arrival/.

Steve Blank, “You’re Not a Real Entrepreneur,” Steve Blank (blog), June 10, 2010, https://steveblank.com/2010/06/10/you%E2%80%99re-not-a-real-entrepreneur/.