More and more entrepreneurs are hearing about the successful graduates and investors queued behind a few well-known startup incubators, including Y Combinator, TechStars, and the Founder Institute. They dream of appearing at the door, with their idea on the back of a napkin, and popping out a few months later with investor money to burn. The reality is far different.
By way of a definition, a business or startup incubator is a company, university, or other organization which provides resources to nurture young companies, usually for a share of the equity, hoping to capitalize on their success, or at least strengthen the local economy. According to the National Business Incubator Association (NBIA), there are currently over 1250 incubators today in the US alone.
The good news is that a few of these do have an envious success record. Y Combinator, led by Paul Graham, recently claimed success with 172 companies over 7 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% of these companies are still running.
Yet success may not be any real indicator of help received, since once could argue that the really great entrepreneurs didn’t need any help from the incubator, and might have been even more successful without it. All the rest of us might be the real beneficiaries, with a lot more to learn. Here are several key lessons I assert you can learn from a good incubator:
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?
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% to 15% 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.
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 who seem to be offering you space and facilities only.
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.
Facilities support. 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.
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 to time and money.
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% of TechStars startup graduates go on to raise venture capital or a significant Angel funding round, versus maybe 1% of all startups who seek funding.
The bad news is that the odds of getting in are still hugely stacked against even the most dedicated entrepreneurs. At Y Combinator, maybe 80 out of 1000 applications are accepted per cycle, and more than half of these fail to complete the program. You can get into less famous ones more easily, but the learning and chance of getting funded at the end go down accordingly.
You also may be hearing more about “business accelerators” as an alternative or improvement on the incubator model. The key difference between them, according to purists, is that accelerators compress the timescale for startups, to drive entrepreneurs from ideas to marketable products in a matter of months. Overall the learning opportunities are essentially the same.
My conclusion is that the best incubators can really help you, but are no shortcut or substitute for the right mindset, hard work, and a real solution to a real problem with a big opportunity. Then it’s time for due diligence on the incubators in your area, to see who has the track record and credentials you need. The success of your career and your business depend on it.
*** First published on Young Entrepreneur on 12/17/2012 ***