2017 IEEE Technology & Engineering Management Conference (TEMSCON)
Startup Incubators and the Role of Social Capital
Cesar Bandera
Martin Tuchman School of Management
New Jersey Institute of Technology
Newark, NJ, USA
bandera@njit.edu
Abstract - A value proposition common among
startup incubators and clusters is they provide
firms with an environment that is more supportive
than the open market, for example a high
concentration of startups can be conducive to the
building of social capital and tacit knowledge by
tenants who, upon graduation from such sites,
impact the regional economy.
The positive impact of social capital on startup
survival has been well described in the literature,
but the impact of startup incubators and clusters
remains inconclusive, with some researchers
reporting that the survival rate of firms graduating
from incubators or clusters is worse than that of
startups that never participated in such sites. The
lackluster performance of graduating firms is all
the more striking given the opportunity for social
capital diffusion in these high density sites, and the
importance of social capital to startup success.
Empirical tests using the Kauffman Firm Survey
find that being in an environment in which social
capital is readily accessible does not imply that the
startup will engage it. We also find those startups
that collaborate with other agents (universities,
industries, and government organizations)
outperform startups that do not. This result is
moderated by industry, i.e. low- versus high-tech.
I. INTRODUCTION
One goal of startup incubators and regional
clusters is to develop robust business and social
networks [1] [2]. These networks can offer on-site and
off-site agents for innovation and commercialization
and include investors, business service providers,
university and government labs, and other startups.
They also can lead to the sharing of tacit knowledge
and building of social capital. However, the concept of
social capital in entrepreneurship remains fuzzy and
our understanding of the processes involved in
attaining it are limited [3].
978-1-5090-1114-8/17/$31.00 ©2017 IEEE
Ellen Thomas
Martin Tuchman School of Management
New Jersey Institute of Technology
Newark, NJ, USA
ellen.thomas@njit.edu
A company’s social capital is a measure of its
relationships in its ecosystem, relationships that can
facilitate coordination and collaboration for advantage
[4] [5]. Social capital has been found to correlate with
entrepreneurial success when the startup is in an
innovation cluster or location [6] [7] [8], and is more
indicative of entrepreneurial success than intellectual
property [9].
Clusters are geographic concentrations of
interrelated companies in a particular field that
compete but also cooperate [10]. It has become
accepted wisdom in the organization-of-markets
literature that similar businesses will cluster in
physical space [10] [11] [12] due to the fact that firms
benefit from access to resources, specialized staff,
venture capital, suppliers, and support services [13].
Proximity also has the benefit of stimulating
communication and scientific exchange of ideas [14].
While logic supports the above in industries where
supply chain costs are substantial (e.g., transporting
supplies and finished goods), the fact that we accept as
true geographic clusters in high-tech industries, such
as Silicon Valley, is less clear. In this case, we would
not expect geographic location to constrain the extent
of social capital and the exchange of tacit knowledge.
However, in their study on the biotech industry
Stuart and Sorenson [12] found clustering plays an
important role in high-tech industries because the
social relationships give startups access to needed
resources. In addition, although high audiovisual
quality teleconferencing is becoming ubiquitous,
communication can still be difficult; emotion and body
language are not well conveyed, participants must
coordinate actions more precisely, and by not
facilitating low-latency interaction, it can impede
important spontaneous discussion [15]. Therefore,
understanding the relationship between social capital
offered by co-locating geographically, social capital
utilization, and firm performance for all companies is
an important research question.
Clustering firms tend to represent a wide range of
development phases with different needs, therefore
 2017 IEEE Technology & Engineering Management Conference (TEMSCON)
access to knowledge may be different from what is
needed, leading to a difference in social capital access
and utilization. In addition, while Stuart and Sorenson
[12] found that clustering plays an essential role for
entrepreneurs, they suggest that although
entrepreneurs may prefer to establish new firms in
geographic concentrations, the most productive new
ventures are not located in regional clusters. They
speculate this may be due to the highly competitive
environment that exists in geographically concentrated
locations. They also speculate that the benefits from
clustering may disappear as the geographic reach of
firm’s social network expands.
This is illustrated in Fahey and Prusak’s [16]
critique of the knowledge management discipline, the
second most common error committed by researchers
and practitioners is “emphasizing knowledge stock to
the detriment of knowledge flow” (pg. 266). The
density of a cluster is indicative of the large amount of
tacit knowledge therein, but not of its mobility within.
Our findings suggest that benefits offered by
startup incubators such as clustering and the
availability of social capital do not necessarily lead to
startup survival. This seems to confirm that while
clusters offer conditions conducive to new venture
creation; they do not support their growth. Our study
also finds that the availability of social capital does not
have a significant relationship with the utilization of
social capital. In other words, while startup incubators
can offer the many benefits of clustering, it does not
guarantee that firms will actually capitalize on those
benefits. Finally, we find a positive relationship
between utilization of social capital and survivability,
more so for high-tech firms.
II. FRAMEWORK
In order to better understand the role startup
incubators can play in startup success, we investigate
the relationship between a startup’s access to social
capital, the startup’s use of social capital, and startup
success (Fig 1).
Research found that startup density or geographic
clustering can lead to performance benefits. For
example, Audretsch and Feldman [17] argue that one
of the greatest insights in innovation is that geography
matters, and that “a long tradition of analyzing the
innovative process within the boundaries of the firm
and devoid of spatial context has given way to the
incorporation of spatial context” (pg. 31).
Theories as to why geography matters include that
the concentration of firms improves production
efficiency and allows easy access to needed resources,
a highly competitive environment can encourage firms
to be proactive and quickly build needed competencies
Access to Startup
H1
Social Capital Survival
(density of ecosystem) (revenue)
H2 H3
Utilization of
Social Capital
(collaborations)
Fig 1. Conceptual framework of the study.
[18], and knowledge flows are particularly strong
within the same region [19]. Technical knowledge
spillovers from collocating was found to positively
influence product innovation [11] and entrepreneurs
can learn about potential partners and opportunities
[20].
In their work on knowledge spillover theory of
entrepreneurship, Audretsch and Keilbach [21]
investigate entrepreneurship context acknowledging
that regions with high knowledge investment
experience high knowledge spillover while regions
with low investment experience low spillover. They
found that a high knowledge context generates new
ideas whereby entrepreneurial opportunities are then
generated when spillover is exploited. We thus
propose:
Hypothesis 1a: Social capital availability is positively
associated with startup success
Battisti and McAdam’s study of graduate
entrepreneurs [22] found that while access to networks
of external professionals and advisers was available
and valued, they were not relied on. Therefore, it
appears that access to social capital may not
necessarily lead to utilization of it. This may be
because although social capital is available it may be
difficult for entrepreneurs to locate the right individual
in a complex network [23]. In addition, Shaw [24]
found that although social capital can provide new
firms with access to a diverse set of resources, firms
need to be motivated to access these resources and
patterns of utilization can be complex. Moreover,
Tornikoski and Newbert [25] found that it was actively
networking and receiving outside help that lead to
emerging entrepreneurial firms.
We therefore propose that the use of social capital
is a mediating factor between access to social capital
and success:
Hypothesis 2: Social capital availability is positively
associated with social capital utilization
 2017 IEEE Technology & Engineering Management Conference (TEMSCON)

Hypothesis 3: Social capital utilization is positively Table 1. Descriptive statistics of startup density
associated with startup success (number of firms in the same ZIP code as the
startup and with similar NAICS code)
Social capital offers a complex system of relationships KFS Mean
Year Std. Dev. Min Max
that are relevant to both low-tech and high-tech Startups Density
industries and social capital can be quickly 2004 4,830 76.65611 104.6649 1 1409
accumulated in both [26] thus we would expect no 2005 4,257 73.9354 101.557 1 1416
2006 3,747 76.3811 101.872 1 1421
differences across industry type.
2007 3,345 78.13901 101.633 1 1508
2008 2,931 76.70556 104.0773 1 1481
III. METHODS AND DATA 2009 2,659 75.72847 105.3536 1 1488
2010 2,342 77.06789 106.3266 1 1469
This study uses the confidential version of the
longitudinal Kauffman Firm Survey (KFS) of 4928 capital and tacit knowledge through collaborations
companies founded in 2004 and surveyed annually therefore a startup’s use of social capital is measured
between 2004 to 2011 [27]. The KFS dataset is by counting the collaborations that, in the opinion of
augmented with the County Business Patterns (CBP) the company founder(s), contribute to the startup’s
dataset of the United States Census Bureau such that market competitiveness. These collaborations are with
for every firm in the KFS we obtain the number of agents offering complementary resources requisite for
companies in its ZIP code with the same North commercialization, including intellectual property,
American Industry Classification System (NAICS) production, sourcing, distribution, marketing, and/or
sector code. The CBP augmentation provides this financing. This measure distinguishes the use of social
information for every year from 2004 to 2010, and it capital from merely having access to social capital
is used as a measure of the geographical density of the (i.e., density).
startup’s industry at its location. Note that the number The KFS classifies collaborative partners into three
of firms in the startup’s ZIP code, without filtering by categories: other companies, universities, or
NAICS code, would not yield an industry-specific government labs starting in the 2007 survey (Table 2).
density measure. For this study, density serves as a This data does not describe the nature of the firm’s
proxy for a startup’s access to social capital. network in detail, such as the topology of strong and
Therefore, density is defined as the number of weak ties. However, respondents self-reported that
companies in the same geographical area that work in collaboration impacted the firm’s competitive
similar markets. Density is thus measured with respect advantage [28].
to the startup, and the companies counted include the Hypothesis are tested with Stata v14.1 using
startup itself, its regional collaborators, suppliers, structural equation modeling (SEM) and event history
service providers, and competitors. For example, the analysis (EHA). Unlike traditional regression
density of software companies would be higher in a methods, SEM provides information about the
technology park than in a residential environment. consistency of the mediation model, including the
Table 1 presents descriptive statistics for density, simultaneous nature of the indirect and direct effects
i.e., the number of establishments in the ZIP code of of collaboration, to the KFS data. The addition of
each startup in the KFS with the same two-digit event history analysis tests robustness of results.
NAICS code as the startup. Density does not vary For SEM, startup success is defined as revenue, in
significantly over time, but does vary significantly particular balance sheet items that reward successful
spatially. For example, every year at least 75 startups opportunity exploitation, i.e., sales revenue, loans,
are the only establishments of their two-digit NAICS grants, and equity investments. We exclude funding
code in their ZIP code (density=1), and several from the founder, friends and family because this often
startups are one of over 1000 establishments in the precedes the opportunity exploitation phase and thus
same ZIP code with the same two-digit NAICS code.
Density also varies significantly by NAICS sector Table 2. Percentage of startups (excluding non-
code. For example, agriculture, forestry, fishing and responses) that collaborate with other agents
hunting industries (sector 11), traditionally rural has Year University Company Gov. Lab
the lowest density; the number of startups equaled 11 2007 7.3% 25.5% 2.9%
and average density equaled 2.3. At the same time, 2008 5.9% 27.4% 2.7%
professional, scientific, and technical services (sector 2009 7.8% 30.6% 3.4%
54) had 1203 startups with an average density of 2010 8.0% 28.8% 3.8%
128.8. 2011 7.8% 28.7% 3.6%
Literature claims that entrepreneurs build social
 2017 IEEE Technology & Engineering Management Conference (TEMSCON)
cannot be used as a measure of it [29]. Different
markets can require different durations for startups to
incubate (e.g., pharmaceutical product development
takes much more time than mobile app development)
and can involve different magnitudes of initial
revenue. In an attempt to normalize these differences
in the definition of success, we use the number of years
that the startup posted revenue instead of the actual
dollar amount.
Innovation and entrepreneurship are two different
things [30]. To distinguish successful entrepreneurs
from successful researchers we exclude from the
definition of success those intangible assets commonly
associated with opportunity discovery, such as issued
patents, even though such accomplishments may
subsequently facilitate funding for opportunity
exploitation.
KFS also provides the income of each startup. The
revenue status of the 4928 startups is illustrated in Fig
2, revealing the traditional exponentially decreasing
survival curve of startups (“No Response” includes
failed companies).
Density and revenue both fail the normality test
with very high skewness and kurtosis. Moreover, the
long tail of revenue impeded the structural equation
modeling from converging to a solution (e.g., in 2006
the mean revenue was $835K but the maximum
revenue was $800M) and does not account for the fact
that some businesses scale more rapidly than others by
the market they serve irrespective of social capital
utilization. Thus, instead of using revenue directly as
a measure of startup success, the number of years
between 2004 and 2011, inclusive, in which the startup
posted revenue was used.
Because the dependent variable spans all the years
of the KFS, we likewise measure a startup’s social
capital utilization over the KFS time frame,
specifically as the number of years that startup
engaged in collaboration that impacted its competitive
advantage. For example, if a startup considered
collaboration with companies in 2005, 2006, and 2007
helped its competitive advantage, as did collaboration
with a university in 2004, the startup has four
collaboration-years of social capital utilization.
For EHA, startup survival is commonly described
as exponentially decreasing with time, i.e., a risk
function that is constant over time. Therefore, startup
survival is fit to an exponential parametric model
because this model permits straightforward analysis of
the effect of covariates on company survival.
The KFS records the state each firm as (1) refused
to participate at the current time, (2) previously
stopped operations permanently, (3) stopped
operations at the current time, (4) merged or sold at the
current time, (5) temporarily stopped operations at the
5,000
4,500
No Reponse
4,000
Revenue
3,500
NUmber of Firms
No Revenue
3,000
2,500
2,000
1,500
1,000
500
0
2004 2005 2006 2007 2008 2009 2010 2011
Fig 2. Revenue status of KFS firms.
current time, or (6) continues to operate. Of these six
states, only the third is considered a death event. A
firm in the second state would have been labelled as
being in the third state at some previous time in the
survey. A merger or sale of a company is a negotiated
exit strategy, which we do not consider to be a death
event. Firms in states 1, 5, or 6 in 2011 are considered
right censored.
The long-format multiply 5-times imputed version
of the KFS dataset merged with CBP ZIP and NAICS
code data (from which density is computed) was
analyzed. The imputed version reduces the effects of
missing values and produces in a five-fold count of
firms. A life table model was first conducted to
visualize the relationship between survival and social
capital. A parametric exponential model of startup
survival was then conducted to evaluate the
relationships between survival, density, and
collaboration; this type of model was selected for the
ease in which the model coefficients can be
interpreted.
IV. RESULTS
The SEM model was run with 500 bootstrap steps
to account for the lack of normality in the data, each
time with a different random seed; results were
consistent. The comparative fit index of the resulting
structural equation model is 1 and the baseline vs.
saturated likelihood ratio is 31 with a p<0.001.
Hypothesis 1, predicted social capital availably is
positively associated with startup success (β = -.005, p
< .10), hypothesis 2 predicated social capital
availability is positively associated with social capital
utilization (β = .061, p < .05), and hypothesis 3
predicting social capital utilization is positively
associated with startup success (β = -.097, p < .01).
Calculation of the indirect and total effects of
density and collaboration-years on the number of years
posting revenue also found the direct effect of density
on revenue is unsupported and in fact slightly
 2017 IEEE Technology & Engineering Management Conference (TEMSCON)
negative. However, when collaboration is added as a
moderator, the effect of density on revenue is both
positive and statistically significant. H1 is unsupported
but H2 and H3 are supported.
A life table analysis confirmed that collaboration
improves the survival rate of startups. Moreover,
companies that collaborate with more than one type of
collaborative partner (companies, universities, or
government labs) have improved survival. To
visualize this disparity in survival, Fig 3 plots the
survival as a percentage of companies alive in 2007
(the year that KFS begins to collect information on
collaboration), distinguishing by the number of types
of collaborative partners. This does not distinguish
between the number of collaborations with partners of
the same type.
An exponential parametric model is fit to the KFS
startup death events, using as time-varying covariates
the number of types of collaborations (0, 1, 2, or 3) for
each company for each year this is measured by the
KFS, and the market-specific firm density for each
year this is reported (and linked to the KFS) by the
Census Bureau. The parametric model is a good fit
and confirms the statistical significance (p < .01) of the
relationship between improved survivability and
collaboration.
It also indicates that high-tech firms benefit from
collaboration more than low-tech firms (p < .05).
Density has a small and statistically insignificant
impact on startup survival.
100%
95%
90%
85%
80%
75% No Collaboration
70% 1 Type of Collaboration
2 Types of Collaboration
65%
3 Types of Collaboration
60%
2007 2008 2009 2010
Fig 3. Startup Survival (relative to companies in
business in 2007)
V. DISCUSSION
This work contributes to incubator best practices
by highlighting the importance of social capital
sharing to startup success, and by suggesting that
administrators promote collaboration, particularly for
high-tech firms. This is supported by Singh [19] who
argues for “the deliberate cultivation of interpersonal
networks” as a tool for encouraging knowledge flow
and innovation. There are a number of reasons social
capital may be available but not utilized. For example,
entrepreneurs may not have the specialized skills
needed to capitalize on their network ties [22] or the
necessary social competence, i.e. the ability to interact
effectively with others [31].
In contrast to building human capital with subject
matter experts, which is expensive and difficult to
scale, many startup incubators have already built the
social capital stock desired by their tenants. Our study
indicates that incubator administrators should proceed
directly to promoting its utilization in a distributed
fashion, leveraging the startup density it has amassed,
and addressing any skill gaps. Startups that collaborate
with more than one type of partner have a higher
survival rate.
The lack of support for H1 reflects the conflicting
findings of Stuart and Sorenson [12] in that high
density environments attract the initial establishment
of startups but are not where revenue-generating firms
tend to be located. This also shows that simply being
in a higher-density environment does not by itself lead
to higher revenue; the startup must make an effort to
exploit the available social capital through
collaboration. This empirically demonstrates the
distinction between knowledge stock and knowledge
flow” [16].
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AUTHOR BIOGRAPHY
Cesar Bandera is an innovator, entrepreneur, and
Assistant Professor of Entrepreneurship in the Martin
Tuchman School of Management of New Jersey
Institute of Technology. His research interests are
business incubation and experiential entrepreneurship
education. He is also the recipient of federal and
state awards for his achievements in
entrepreneurship.
Ellen Thomas is an Associate Professor of Marketing
in the Martin Tuchman School of Management of
New Jersey Institute of Technology. Her research
interest focuses on innovation management,
entrepreneurship, and new product development,
including architecture selection, knowledge transfer,
and integration and collaboration strategies.