In exchange, they take a share -- often quite a large one -- of the emerging growth company. The fact is, though, that many of these incubators are ill equipped for the job, and it's the start-ups that end up paying the price.
Forbes recently reported Jackpot Enterprises, a Las Vegas-based slot machine operator cursed with a stagnant stock price, had reinvented itself as INet Enterprises, a business-to-business Internet incubator. On the face of it, the transformation was successful: The announcement propelled Jackpot's stock price up 49% in a single day!
National Business Incubation Association statistics indicate the U.S. is currently home to more than 800 such incubators. Incredibly, upwards of 100 of them sprang to life over the past nine months alone.
INCUBATORS LACK EXPERIENCE
More and more, incubators are being established by entrepreneurs looking for a chance to cash in -- to become the conduit through which the next Big Idea will flow. But most of them lack the fullness of experience required to help their proteges build relationships with actual customers.
Flush with cash, incubators can undoubtedly offer entrepreneurs the ability to keep the wolf at bay as strategies are plotted and business plans polished. But isn't more than money required to bring a successful enterprise to market?
Do these incubators really focus on the big picture, enabling embryonic businesses to see past the trees to the forest of a truly successful launch? The answer, unfortunately, is no. Most incubators have proven themselves woefully inadequate to the task of building companies.
All the charts, statistics and MBAs offered up by an incubator won't generate a single sale if the public in the marketplace is not inspired to buy. For a true call to action, it takes something else -- a desired product.
There is a tremendous gulf between the analysis of a potential opportunity and its realization. Building a bridge between lofty dreams and fiscal reality is a fundamentally creative undertaking, in which understanding and vision must always be given top priority.
Financing is important, of course, but it's far from enough. A company hatched in an incubator that exists based solely on its own pretensions and its ability to throw money at an idea can usually be counted upon to fail miserably.
The numbers bear out the trend. According to the Small Business Administration, less than one in 100 new businesses pays back its initial investors; fewer than one in 1,000 goes public. Perhaps that's because an understanding of the connection between branding and profits is often sorely lacking.
THE EQUITY JUGULAR
To ensure their own return in the face of such substantial -- even predictable -- failure, incubators often go for the equity jugular. (Profits are not the point.) Many demand a stake of up to 50% or more in the companies they nurture. That's fine for the incubators, but what of the companies they work with? Shouldn't start-ups be expected to create real and perceived value in the minds of their customers?
For a better batting average, we need a better incubator. A true understanding of marketplace dynamics is what builds a company, not an arrogant display of cash.
No company can expect to grow organically without developing strong relationships with customers. That's what branding is all about. That's also why the new incubator model must bring a holistic attitude to the branding of its companies, rather than treating branding as an afterthought or a hood ornament.
Mr. Chadwick is president-creative director, Chadwick Communications, New York, a brand strategy and development firm.