Corporate incubators are marketed as the ideal boost for small businesses. Incubators offer SMEs resources to enable business growth. This can include office space, mentorship, funding, networks, and access to markets as one package. This can be a lifeline for many South African entrepreneurs.
However, how effective are business incubators in reality? Fortunately, this article will dive into that. We will break down the research to give a clear picture of how business incubators support or fail SMEs in South Africa.
1. Incubators Can Reduce SME Failure Rate
Research suggests that SMEs can benefit from business incubators by experiencing improvements in business processes, revenue growth, and access to networks, potentially resulting in a reduced SME failure rate.
Successful incubators often set out a structured curriculum that empowers participants with practical skills in areas like lean startup methodology and digital transformation. When business incubators focus on providing valuable training, actionable knowledge, and mentorship from successful business owners, the chances of producing resilient and successful SMEs are higher.
Furthermore, access to shared resources, such as office space and high-speed Internet, allows SMEs to spend less on operating costs. This opens room for SMEs to allocate more capital toward core business activities.
However, while businesses can reap benefits from incubators, there are critical issues in the SEM landscape that persist. This includes market challenges, financing gaps, financial literacy, and operational barriers.
2. Misalignment Between Incubator Goals and SME Needs
There is a gap between incubator goals and the needs of SMEs. Are corporate incubators more focused on meeting corporate objectives?
Companies that run incubation programmes may focus on pilot projects, technology transfer, or strategic partnerships that serve their own innovation goals. The contrast is in the fact that the SME might not find value in what the corporates are prioritising.
For SMEs who sign up for incubation programmes, they might have the urgent need to gain clients, gain knowledge and skills on financial literacy, access markets, and more. According to research by Msimango-Galawe and Hlatshwayo (2014), incubator services in South Africa often don’t align with these core SME needs.
3. Providing Strong Technical Support and Weak Business Fundamentals
Many incubators prioritise product development and technology. They provide labs, technical resources, and prototypes, but tend to neglect the basics of running a successful business. They either assume SMEs have a strong grip on fundamental business aspects or place too much focus on tech and product innovation.
The basic aspects of running a business include financial management, marketing, sales, human resources and client relations, among other factors.
In determining which factors affect the success of business incubators, technical support can be valuable for science-based or tech startups; however, SMEs in sectors like retail, services, and creative industries often fail because of gaps in business fundamentals.
4. Program Timelines Are Too Short
Incubators often operate on short-term programs, ranging from three to 12 months. These programmes also often need to meet reporting deadlines for funders or corporate sponsors in a short time.
The mistake that many business incubators make is in how success is measured. Merely measuring incubator success through the output of SMEs who graduated from the programme, or pitches made, is not a true reflection of the success of a business incubation. Instead, the focus should be on long-term growth of the business.
It can take years to build a sustainable business, and measuring its success based on a few months of incubation participation gives us no insight into how successful the programme was and how it affected the business.
5. Mentorship Challenges
Mentorship has its place in propelling business growth. The role of mentorship on SME success lies in the value being given to the business owner. Unfortunately, incubation programmes don’t have the best reputation in providing valuable mentorship.
Businesses have different niches, and placing them under one box or providing generic mentorship does more damage than good. Corporate incubators sometimes provide mentors assigned based on availability rather than sector expertise.
Research by Fukugawa (2015) shows that targeted, industry-specific mentorship drives better outcomes than generic advice. SMEs mismatched with mentors may spend months implementing advice that doesn’t apply to their business model, slowing down growth, wasting time, and frustrating founders, along with their clients.
6. Market Access Limitations
Incubators often provide visibility through demo days and networking events, but may not ensure pathways to paying clients. This demonstrates either a reluctance to share networks or a limitation in incubators’ ability to build strong relationships with industry players.
South African studies indicate that while incubators improve internal processes, their impact on long-term SME survival is limited because businesses still struggle to access clients and markets.
This further emphasised the misalignment between the goals of corporate incubators and those of SMES. SMEs participate in incubators with the hope for business growth, evolution, and access to life-changing opportunities. Unfortunately, these businesses leave without new doors opened, leaving them the same or worse off than they were when they started.
7. Funding Restrictions
When incubators offer money, the money that incubators offer often comes with some very strict conditions attached. These funds are typically reserved for costs like doing market research, developing a product or paying for the odd extra staff member. But if you want to spend some cash on getting the word out, building a sales team or winning some new clients, that’s most likely not going to be included in the deal.
For a lot of South African SMEs, that’s the only place left to get cash from. Without a steady stream of clients and some decent revenue coming in, even the most brilliant product is going to struggle to make a go of it.
Entrepreneurs are then stuck between a rock and a hard place – they can’t even try out different pricing strategies, get some proper lead generation going or tweak their business plan to meet changing customer needs. And as a result, growth comes to a grinding halt, and the whole point of using an incubator in the first place gets thrown out the window.
Getting your hands on that first bit of seed funding remains one of the biggest hurdles that South African startups face. Even if they do get accepted onto an incubator scheme, many of them still struggle to get the money they need to keep going.
