Influence of economic crisis on the performance of incubated companies: the Israeli case

During financial crises, entrepreneurs find difficulties in raising investment especially from Venture Capital funds (VCs) which are more sensitive to economic changes in the private sector than governmental programmes, such as the Israeli Technological Incubator Programme. Since VC investment does decrease, we expect an increased deal flow of companies to incubators, permitting them to select better companies. By comparing the performance of incubator companies, incubated during financial crises, to the performance of graduates, incubated during the non-crises time, we found that unexpectedly the performance of companies being accepted to incubators during crises time is decreased. A possible explanation for these findings is that start-ups that fail to raise VC investments during financial crises blame the ‘economic situation’, even though some of them would have failed to obtain VC investments due to their low technological level. These start-ups prefer to postpone their business launch until the economic environment stabilizes instead of approaching incubators as alternative investors. This leads to a decreased deal flow faced by incubators and causes their managers to select an even lower level of companies.