Though Silicon Valley continues to point to its big portfolios and the industry's high valuations, a look at how incubator start-ups are doing shows what's really happening in the tech world. Today The Wall Street Journal's Jessica E. Vascellaro informs us that there's an incubator glut -- too many small start-ups, not enough innovation -- that has some tech investors worried. "The proliferation of start-up 'boot camps' is creating problems for the tech industry, such as a glut of similar companies and too much competition for talent," she writes. So, investors like Pay Pal co-founder, Max Levchin, are taking their money elsewhere, he told Vascellaro. But it's not just Levchin's support that's fleeing. A deeper look at this incubator glut shows that not only are these talent hives squashing innovation but they aren't exactly attracting money.
When looking at Silicon Valley funding as a whole, some argue that the money is still there. When we wrote about this supposed "cash crunch" a few weeks ago, investors pointed to lots of seed money, high valuations, and tons of investments. Yet while there initial dollars come in, the money stops after that level of funding, as we can see from this incubator glut. Six months ago, Business Insider looked at the success of start-ups out of Tech Stars, a popular incubator. Overall, BI reported that these start-ups were a success, citing only four failed companies and $40 billion raised dollars, which corroborates the Silicon Valley is A-okay theory. Yet, a closer look shows a troubling trend: Funding for these companies is waning. For example, In the Fall 2010 class, only two of the eight companies had raised money for a grand total of $418,000. The earlier class did better, with $8,903,042, but again, most of those companies raised no money at all. Comparatively, all but one of the 18 Summer 2009 start-ups raised something. So overall, these incubator programs look successful with few failures, but over time, investment money has started to dry up.
Others have confirmed this trend that incubators haven't been able to draw big-funding, long-term. Looking at another incubator, Y-Combinator, San Francisco entrepreneur Elad Gil recently discovered that the money stops coming in after initial funding. He notes that over the years the number of these start-ups getting seed funding has gone up, while the number of "legitimate VCs" doling out dollars for the next round of Series A funding has not. Data from TechCrunch's Crunch Fund confirms this, with seed money up 33 percent since 2008, but the next level, Series A down 9.6 percent during that same time. While there's more interest in incubators -- Vascellaro notes that applications to TechStars has almost doubled since last year -- the money's not there to match it.
This article is from the archive of our partner The Wire.