Why do startups fail? – Term Paper

How many startups fail

Studies based on different countries and sectors have shown that about 60 percent of new businesses leave the markets in their first five years after establishment. For instance, a recent study based in the U.S. found that the incubated firms often surpass their peers about sales and employment growth potential but often fails later (Hackett & Dilts, 2004, p77). Very few studies also explore the performances of businesses after the incubation period. Despite the fact, the graduation from incubation for a business may be easy, the post-graduation effect after often complicated to sustain by many business enterprises. This is based on the internal challenges as well as unforeseen negative externalities within the environment that a company operates in. Another study based on the German incubators also discovered that high risks affect graduates in their initial three years of graduation where approximately 20 percent of the overall graduates hardly survive (Bruneel & Groen, 2012, p 114).  

While appreciating the fact that there exists an upsurge of graduates into the scene of startup incubators, most ventures do not point towards careers in investment banking. It becomes attributed to the fact that mentality of most scholars of business is rapidly changing. With this regard, the quantity of tech incubators has exhibited rapid growth hence resulting in grave concerns by entrepreneurs due the widespread impact depicted in business excellence. In particular, the skyrocketing startup from incubators through incubators gluts has created a significant problem in the tech industry including the emergence of similar companies with unhealthy competition for talents. Clear examples of famous incubators showing accelerated growth include the Hatch (India), Techstars (USA) and Angelpad just to mention a few. Even as some incubators exhibit growth, it becomes worth noting that there instances where they can also face failure. One reason for failure shows that there are so many companies that equally undergo little mentorship. The presence of a portfolio of companies and the provision of capital is insufficient for the majority of incubators to excel. It is essential for the experienced business community to learn the prospective of developing ideas into a business where great ideas passed through incubators fall off the track before their execution. The latter failure is attributable to the absence of mentorship (Ndabeni, 2008, p269). Other than mentorship, it is also noted that very many companies pursue a similar noble idea. Many startups make innovations every moment from a different perspective. (Berge, et al. 2011, p94). The divergent approach taken by companies executing similar ideas from incubation centers through innovations often cause majority of businesses to lose focus on the actual idea. Similarly, a high number of incubation centers leads to a situation typically referred to as, ‘incubation gluts’ which is the main cause of natural overcrowding that naturally results into excess capital,bubbles and eventual busts. Inexperience in this side of investment may therefore make great ideas that could highly propel the incubators become unreliable. When the company has experienced personnel and ample capital in the contrast, it becomes set for success.

The Need For Business Incubators

With the increase in demand for accelerated startups, the use of incubators comes in handy. With reference to the amount of money required, incubators take shares of a given equity existing in a startup, it there charts the way forward to raising of funds. The use of incubators also aids the founders in accessing various investment networks appropriate for development of the startups. With regard to the need for individuals who can also motivate, the use of incubators gives room for networking whereby conferences and even boot camps become essential in provision of the skill required in running the startups.  

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Concept of a Business Incubator

Focus on Incubators:

The development of business ideas based on the incubators has been a significant advancement in the modern business world. However, despite tremendous growth in business incubators globally, the impact has been mixed. Ideas developed from this study wishes to determine the impact of a robust increase in business incubators. In essence, the process has been characterized with new interventions including research. Business incubators have been growing more sporadically in modern business environment as it has been credited with increased generation of business ideas globally. The concept of incubators was initially developed widely in the 1980s. It comprised of organizations that had been providing programmed workspaces in a science park as well as enterprise estates. Nevertheless, within the past one decade, there has been full exploitation of new economies and a rapid rise in technology alongside development of virtual incubation models. The development of virtual incubators is often developed through research in universities characterized with ability to operate in a building settings or otherwise (Carayannis & Von Zedtwitz, 2005, p98).

The concept of virtual incubators uses internet in generating and manipulating customized support and instruction which is also considered an efficient method for customers within its sphere of influence. For the incubator to effectively contribute to the gains from its environment in an internet based segment, customers must be computer literate and proficient in communicating online. Besides, customers seeking chances to network with financial corporate, incubators are not always the correct match based on integral needs.

Industry focusing:  

The industry today has too many business incubators as they (incubators) have become an industry segment by their own right. Due to the high influx of business incubators, it is estimated that about 90 percent of incubators are deemed to fail in future. This implies that they are highly unlikely to yield positive returns for money invested. Research also shows that hundreds of incubators are start-ups while the often cited rule of thumb has been that for every ten startups, nine of them fail. It has been argued that the startup incubators are no different and therefore subject to fail too (D’Costa, 2007, p61). As a result of these prevailing circumstances, the startup incubators will ideally fail to make significant returns to their investments while at the same time shutting down or pivoting into a different form of investments.

Research into the Cuban market, for instance, shows that there is an excess number of incubators. Too many incubators hurt the entire set of ideas development. Many entrepreneurs also posit that getting into a business incubator implies having accomplished a business deal. This is however not the case. On the contrary, this scenario has been presented as a fake sense of confidence typically referred to as;incubator inflation; (Voisey ; Thomas, et al. 2006, p439). In the contemporary development, there has been increased number of business incubators, which has an impact of reduced efficiency of business development and eventually result into incubators inflation and a bubble in the market.

Primary Developing External Ideas:

When business models function as incubators without a specific location, they often serve clients as simple facilities or resources facilitated by internet. It therefore calls for development of external ideas which provides services in an e-learning perspective.;When lack of shared physical space in traditional forms of incubators becomes a hindrance to customers from joining incubations, it is only networking that develops good relations with one another in the working environment.;Here, experts also emphasize that people motivated into developing incubators do not aim at networking with customers but focus towards achieving knowledge and financial benefits (Grimaldi ; Grandi, 2005, p112). ;With ease and cheap technological advances, virtual incubation models are advantageous across different industries.

Two basic principles characterize successful incubation regarding both traditional and modern perspectives. Initially, incubators aimed at providing positive implications of economic growth through maximization of benefits attributable to development of new companies. In addition, incubators are widely dynamic in nature with a basic objective of achieving sustainability and efficient business operation (McAdam ; Humphreys, 2006 p459).