Can Start-Up Incubators Really Help You?
It's hard to go even a day without hearing about the successful graduates and investors behind a few well-known startup incubators, including Y Combinator, TechStars and the Founder Institute.
Aspiring entrepreneurs out there may be wondering if the same could happen for them. They could appear at the incubator's door, with their idea on the back of a napkin and, a few weeks later, pop out with investor money to burn. The reality is far different.
It's true that some incubators -- which typically offer to ply young companies with resources and contacts in exchange for a share of equity -- can boast envious success records. Y Combinator, led by Paul Graham, recently claimed success with 172 companies over seven years, which now have a combined value of $7.78 billion. Founder Institute, led by Adeo Ressi, claims the most graduates, with over 650 companies, and 90 percent of these companies are still running.
But with all of the hoopla over the success of incubator-nurtured startups, one has to wonder: Do incubators beget successful startups or are certain startups destined for success no matter what?
In the same way that students who attend top universities may be predisposed to getting higher paying jobs than those who didn't go to college at all, one could argue that the really great entrepreneurs don't need any help from an incubator. They might wind up being even more successful without it.
The rest of us, however, could be the real beneficiaries. Of course, getting into a high-profile incubator is a whole other story. But if you do land a coveted spot, here are several key lessons I assert you can learn from a good incubator:
1. Aptitude-reality check. Adeo Ressi believes his preliminary test of applicants is predicting more and more accurately whether you have the DNA of an entrepreneur, before even being accepted. His tests focus on personality traits alone (ignoring your startup idea), looking for fluid intelligence, openness, and agreeableness. Why spend years struggling and all your money if entrepreneurship is just not your thing?
2. Initial funding. Many incubators do provide seed funding for entrepreneurs selected, usually in small amounts like $10,000 to $20,000, and usually taking 5 percent to 15 percent of your equity in return. This investment can get your startup off the ground in an otherwise impossible financial situation, but should not be viewed as the main reason for joining.
3. Expert mentoring and training. In my view, the quality of incubator leadership is the single biggest potential value provided and learning opportunity for entrepreneurs. Every successful incubator has strong leadership and staff with business and investment credentials. Skip the ones that seem to be offering you space and facilities only.
4. Peer support. In addition to the formal mentoring, the peers you’ll be working alongside at startup incubators provide much more than emotional support. You will find expertise in areas you need, as well as quick advice from entrepreneurs just ahead of you in every phase of the business cycle.
5. Ample resources. Of course, we can’t eliminate the value of affordable office and meeting space, administrative support services and advanced communications technology to struggling entrepreneurs. But don’t believe the myth that incubators are all about ‘cheap rent,’ and avoid business incubators in otherwise vacant buildings.
6. Learn by doing. An incubator allows entrepreneurs to get their ideas out of their mind and out of the classroom, while still retaining a modicum of structure and discipline. That’s as close as possible to real experience, and there is no teacher like experience. It’s an opportunity to succeed or fail fast, with a minimal investment of time and money.
7. Follow-on funding and connections. Success in an incubator means likely access to venture capital and connections to industry gurus and business opportunities. About 80 percent of TechStars start-up graduates go on to raise venture capital or a significant angel-funding round, versus maybe 1 percent of all startups who seek funding.
In the end, there are countless other considerations to make -- for instance, should you even opt for an incubator in the first place -- before you decide to bite the bullet and join an incubator. And while these programs can certainly help some companies, there's no shortcut or substitute for the right mindset, hard work and a real solution to a real problem with a big opportunity.
How did your company benefit (or fail to benefit) from joining an incubator? Let us know in the comments.