The flaws in the Technology Start-up Incubator trend

The trend over the last few years to encourage young people to come up with ideas for IOS and more recently Android based apps has unfortunately encouraged the same bad habits that created the 2008 GFC in Wall Street.

Incubators are frequently founded by high risk investors who wish to exploit a tech bubble, and by doing so rapidly expand it. Many of the investors who made gains in the stock market, or real estate market before they crashed were lucky enough to have money left over to re-invest. They chose apps based upon a growing trend at the time toward billion dollar buyouts of well positioned companies in California.

The problem is that these initial buyouts were based upon good fundamentals, such as incredibly high customer numbers and massive profits. The initial entry points for developers in the market in 2009 and 2010 were very lucrative. However the market quickly experienced a price shakeout at the beginning of 2011 and app prices fell by 80-90% in most cases. This happened at a time when the market was still a little undersupplied so it did not deter most developers. There were still profits to be made for individual companies, and still the potential for a billionaire buyout.

However, very quickly after that the Wall Street style cowboy investors started pouring in in great herds, often calling themselves “Incubators” or “Start-Up Conventions”. This is where young, creative and idealistic app developers started to become in some ways exploited by the investor cowboys.

Droves of young people headed off to California or applied to start-up incubators in their own country, to compete with each other to obtain that initial investment gold.

But just like the Dot.com boom of the late 1990’s, and so unlike the early app boom of 2008-10, not only were their fundamentals extremely shaky, but their ideas were a dime a dozen.

I’m speaking in past tense here, even though it is still happening in 2013, because the glory days are starting to wane. The young people who went off to the States with big dreams are starting to return home with nothing but a lack lustre idea, a modicum of debt and probably a feeling of “what was that all about?”

The sadness for me is that in the rush for attention no one learnt about business fundamentals. Incubators concentrated on ideas and potential customer numbers…. And most importantly how to pitch to an investor. Note that these investors were high rollers, risking $100,000’s on each new app company hoping that by pure luck, or probability as they named it, one in ten would take off!

This is not business incubation. This does not teach young people how to be sound and well educated entrepreneurs. This is just exploitation of their youthful enthusiasm and naivety, and everyones desire to get rich quick.

I am glad I have been able to experience this phenomenon, because it reinforces the flaws in the modern business models that were exposed by the Dot.coms.

The dangers to modern businesses are the speed at which oversupply can accumulate. To get ahead, you almost need to be the first on the scene, because once the trend gets moving it expands at a global rate of knots and will burst in the nastiest of fashions.