Accelerators and incubators have become an industry of their own in recent years, with thousands popping up all over the world. The last few years have seen a few coming up in Sri Lanka as well, as Colombo caught the startup bug. Accelerators and incubators – the two terms get thrown around almost interchangeably, but are meant to function quite differently in theory.

Accelerators typically take a small percentage of equity in externally developed ideas in return for capital and mentorship. Incubators generally bring in an external team to manage an idea that was developed internally. Nowadays, some do a mixture of both, blurring the lines between the two.

Last month, the corporate accelerator run by Singapore Press Holdings in collaboration with Plug and Play, a global accelerator, shut down. Their reasoning was that the overcrowded eco-system was making demand chase supply; i.e. more accelerators and incubators than startups worth backing. Obviously, as the leading startup ecosystem in Asia, Singapore is far ahead of us in terms of maturity, but is this a sign of things to come in Sri Lanka as well?

At this point, there’s very few accelerators or incubators operating locally. But, with growth of co-working spaces, many new organisations are likely to join the ranks, coupling their co-working office space with a little bit of capital and mentorship. On the other hand, the number of local startups – particularly ones with committed, full-time founders and scalable business models – that can benefit from such initiatives is limited. More than the low number of qualified startups, the lack of sources for follow on funding, post early seed stage, is a bigger concern. An accelerator or incubator is a collection of startups. Hence, as a company, their financial return is the aggregate return of the startups in their portfolio.

[pullquote]More than the low number of qualified startups, the lack of sources for follow on funding, post early seed stage, is a bigger concern. An accelerator or incubator is a collection of startups. Hence, as a company, their financial return is the aggregate return of the startups in their portfolio. The financial viability of this model is still very much in question[/pullquote]

The financial viability of this model is still very much in question. As a rule of thumb, 90% of startups fail to return their investor’s money. Venture capitalists and others who back startups rely on the winners to go big, to pay off the losers. Accelerators and incubators generally attract young, first-time founders who are more likely to sell their companies early, if they are successful, rather than hold out for a bigger pay day much later. This adverse selection problem further reduces the attractiveness of this model financially.

Corporate incubators have seen a rise in popularity worldwide as startups have started shifting from Greenfield innovation to the disruption of traditional industries like healthcare and finance. Sri Lanka has seen a fair share of these with companies like Brandix, MAS, Hemas and JKH incubating startups within their organisations. Many think of these efforts as a defensive ploy to guard against a black swan event taking over their parent companies, but this is unlikely to be the case. Commercialising a truly game-changing innovation discovered by an incubator would mean cannibalising the core business of the parent entity. Very few companies are geared to pull this off.

Kodak’s fall from grace is perhaps the best example of this phenomena. The popular version of this story is that Kodak completely missed the rise of digital technologies, particularly the camera phone. But in fact, the first camera phone was invented in 1975 by Kodak engineer Steve Sasson. Kodak even acquired a photo sharing website named Ofoto in 2001 and tried to persuade more of its users to print digital images. Their ultimate failure was not in getting caught by surprise by the digital revolution, but in not realising that online photo sharing and digital cameras were the new business, not just a way to expand the printing business.

So do unlikely returns on investment presented by incubators and accelerators mean that Colombo and the rest of the country should have less of them? By no means. Worldwide, being accepted into programmes such as Y-Combinator and Tech Stars is beginning to hold the same amount of weight as being accepted into a prestigious university. These programmes offer relevant, real world experience that will be far more valuable for a would-be entrepreneur than a university degree.

Sri Lanka sorely needs a mechanism to encourage entrepreneurship and innovation among youth, and for this reason alone, we could use more accelerators and incubators. The currently available programmes offer little support for selected startups to go global. Any new entrants to the scene, with global partnerships to facilitate expansion abroad, would benefit the whole startup eco-system.