Business incubation support is vital to our economy – but it needs to be better

by | Dec 14, 2021

By Chand Chudasama, Partner at Price Bailey

Price Bailey’s recent report on ‘True Venture’ funding in the UK identified that despite the reported buoyancy of the UK Venture Capital (VC), only 114 True Venture deals on average per quarter take place in the UK. Significantly less than the number of businesses seeking venture funding. Additionally, significant hurdles exist for ‘would-be’ True Venture stage to overcome to secure meaningful VC investment of £2m+. While the nature of these hurdles will unlikely be surprising, the extent to which they restrict would-be True Venture from accessing necessary capital is concerning.

What more can be done to boost quality transaction volumes and values in this space? One potential solution is improving the quality of incubation and accelerator support in the UK.

Incubator and accelerator support

Incubators and accelerators support the development of high-growth potential businesses in the UK; offering access to resources, skills, mentoring and, often, to investment support and funding. Incubators are more suited to earlier-stage businesses; their purpose is to incubate ideas and ensure the idea is backed by a business model built on robust commercial foundations. Whereas accelerators advance the growth and success of existing businesses.

Similar to the True Venture deal data, significant skew exists within the incubator and accelerator space in terms of:

1) Location – a significant proportion of incubation and accelerator programmes exist within the London region.

2) Business stage – less than half of them support later-stage venture businesses, focussing instead on the pre-start-up to early-stage ventures.

3) Success – there is significant skew in the UK market as lots of success is coming from a very small proportion of incubators and accelerators.

Good companies and founders gravitate toward the best programmes. Consequently, the higher quality mentors also gravitate toward the best. So, how do we improve the attractiveness and success of the remaining majority?

Improve VC credentials

Whilst most accelerators have networks in the VC community, this doesn’t always translate to having direct experience of VC deal making or how to succeed in that environment. A gap exists in deal experience, understanding the process and the terms on which VCs typically invest, and knowing how to scale a business up to and beyond the point of attracting a suitable VC investor. If you don’t have direct experience of doing deals in this space, it is very difficult to know whether you are appropriately preparing businesses for investment.

A possible solution

It is notoriously hard to be relevant in the early-stage advisory space, and while there are not a lot of True Venture deals happening the number of good quality, experienced mentors that would choose to work for an accelerator are limited. By ‘experience’ here, we mean mentors who have put their own capital at risk or founded a business and put their own shares at risk in order to create a meaningful level of value which subsequently led to a successful exit. True Venture businesses need to create a capital gain, so the right mentors will be well versed in how to do that. In order to encourage more mentor engagement with extended Seed businesses, the Government could find a tax incentivised way that encourages organisations and individuals of this nature to provide mentorship to entrepreneurial businesses in return for a tax credit on income or a corporate tax liability, similarly to the Louisiana Mentor-Protégé Tax Credit Program in the US.

Improve the quality of education to founders

There’s no shortage of good businesses seeking support, but in today’s environment being a good business does not necessarily mean you’re appropriate for equity funding. This is both a realisation that a lot of business owners need to come to terms with, and is a major gap that a lot of accelerators and incubators are not addressing. Both can be successful, but it is important to understand whether your business is VC investable or not, as the funding and growth profiles for each differ distinctively.

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