Avenues for Incubators to direct Entrepreneurial Ecosystems toward Sustainability

Abstract

Sustainability startups (SSUs) are important to help overcome societal challenges. However, starting an SSU or investing in them is a high-risk endeavor. Hence, policymakers are trying to make entrepreneurial ecosystems(EEs) more favorable for SSUs. A critical component of any EE is a financial support network (FSN), through which startups receive investments and business knowledge most importantly from private venture capitalists (VCs), among other finance providers. To be successful, SSUs thus need to become embedded in the FSN. This embeddedness also allows SSUs to serve as network brokers between VCs and other startups, which is beneficial for the entire EE. Incubators can help build a sufficiently dense FSN by introducing startups to other actors. However, there are often not enough promising SSUs in an EE to meaningfully influence the FSN. This places incubators that promote SSUs in the dilemma of which startups to admit: they can either focus their efforts exclusively on SSUs or give their unfilled spots to non-SSUs, with the latter facilitating network brokering among startups. Therefore, we answer the following research question : What is the effect of incubators’ support mechanisms and admission regimes on the number of investments in sustainability startups? Using an agent-based model, we show that incubators are a necessity for EEs with many constrained SSUs, especially when the constraint arises being technology-based. Without incubators, the presence of such SSUs negatively influences the entire EE due to a loss of brokering in the FSN. Incubators can help repair this damage by having the right admission regimes and aiding tenant SSUs in overcoming some of their constraints. Ultimately, the most effective way to do so is to have an admission regime under which only SSUs are accepted but that receive double support from the incubator.