To Incubate or Not - That is the Question

I read a post last week by Pascal Finette on the merits (or potentially lack thereof) of joining an incubator program. I'm an alum of two incubators* (Idealab, eCompanies), one accelerator (MuckerLab) and based on my experiences I do agree with many of his points.

From a financial perspective, signing up with an incubator can be incredibly expensive in terms of how much of your venture you release in exchange for the services provided by the incubator. Pascal has this example:

Say you go through the incubator and pay your 7% club membership fee. You go on and raise a seed round which will dilute your company by 25%. You're awesome, work hard and get lucky - you raise a series A. Your stock goes down another 25%. And then you exit. Hooray - you sell the company for a neat little $10M. Let's see how much you paid for that help your incubator gave you, shall we?
Assuming simple dilution in each round your incubators 7% are diluted down to about 4% (3.9375% to be precise). That's $400,000 in hard cash for a little more than $13,000 they put into you. 30x their investment. Not bad for them. But is it really that good a deal for you?
Compelling to see when it's worked out this way. Your chosen incubator better deliver something that you couldn't otherwise get on your own. That is the point where I feel Pascal misses.

For the uninitiated, fund raising is really difficult. Sure you can secure a friends and family round, cobble together $100-$200K. But when it comes time to raise that serious first round of venture capital; where do you go? Who do you talk to?

VC have so many companies to vet each and every week that as a budding entrepreneur you can't just walk up to one and say "hey, check this out". Like many other industries, the venture community is one of connections and if you don't have them you have just multiplied your chances for failure.

Connections then, are incredibly valuable. Whether it is to a design firm who wouldn't normally work with your pre-revenue company or to an insider whose Erdős number is 1 with your target VC.

It would seem that quality incubators are more than just "a bit of money, and a desk in a co-working space". Yes it's true that they can be an expensive proposition - but if you are never able to raise your follow on round, how much money did you end up saving by not signing up with one?

*I did have good outcomes as both incubated ventures were able to successfully IPO.