Think Before You Incubate: How Incubators Can Hurt Your StartupBY: Kathryn Hough | June 28, 2012
Name brand incubators like TechStars and Y Combinator offer fellowship, recognition, and access to investors for startup teams. It’s like getting the skeleton key to the secret clubhouse, they promise. But all is not well behind closed doors.
Startup incubators don’t guarantee that your startup will be successful when you leave the program after three months – although the big profile programs do hint at success through association. Still, when founders discuss incubators, the conversation focuses on which incubator programs they should apply for. Instead, founders need to seriously weigh if participating in an incubator program is a good fit at all.
Incubator programs can hurt your startup. Since 2005, Y Combinator has funded 460 startups with only a handful of big wins. The rest have faded away, been acquired quickly without growing out of a feature company, or continue to hang on as zombie companies, which are not dying, but not really doing anything either. Who knows how many of these companies could grow into something bigger without the pressure of generating a return for early investors in just a few short years.
It doesn’t help to dwell on what could have been. There are concrete examples of how some startups have been seriously damaged thanks to their participation in startup incubators. Before you fill out that application for the next class, consider these possible negatives to participating in a startup incubator:
Some incubators have better access to mentors than others, even though every incubator touts your access to world class mentors as a selling point of their program. Take a look at the list of current mentors on the program’s website, and try to identify businesspeople that you admire. Do you recognize at least 50 percent of the names? Are there mentors who have proven themselves in your industry? For example, if you are working on a streaming video startup and the program’s mentors have zero track record in streaming video, they won’t be able to give you critical advice. These folks might be good to know after you have launched your public beta as you start to look toward raising a Series A round, but they won’t be helpful in the beginning stages.
Also, be wary of the mentor to startup team ratio. Paul Graham notes that Y combinator doesn’t have formal mentors but rather advisors that you can meet with, including himself. The amount of time that you get with someone who can truly help you is more valuable than the experience of the mentor if you get just one quick check-in per week. If your mentors flake and have no time for you, the value of getting into the incubator is diminished.
If no one is interested in your startup immediately after demo day, you most likely won’t get additional funding. Investors call this “signaling.” Think of investors like a flock of headless sheep, paying attention not to your product, but rather who else is biting on your offering. Investors typically look to see who is “leading the round,” which means that if a high-profile investor is betting on you, then they can convince others to invest based on the their name and reputation alone.
Notable Boulder-based venture capitalist Brad Feld has addressed the issue of signaling on his blog, but he frames the conversation around seed investors who don’t want to contribute to the Series A. This is similar to what can happen when investors aren’t interested in your startup after demo day.
Maybe your pitch wasn’t convincing, or maybe investors already have a competing product in their portfolio. Maybe they don’t view your market as big enough, or your industry as “hot” enough (social mobile local apps, anyone)? Either way, it’s not your team’s fault that you don’t get immediate investment. However, this will be held against you when you do start to pique the interests of investors down the road. They will wonder why other investors passed it up.
Lying on stage at demo day
Startups are coached to death when it comes to their demo day pitch. The pitch has become so formulaic, it’s almost laughable when you get in a room full of startup founders who are participating in an incubator. The formula goes like this: I had a personal problem, here is the story. I couldn’t find a solution, so I had to work on it to fix it myself because I am so passionate. Here is the solution. Here is how it works. We are so successful, that now we are working with xyz partners on a few deals that we are excited about.” Sometimes, the pressure to uphold this formula can cause founders to stretch the truth, or even worse, lie outright on stage.
That’s what happened at the most recent TechStars New York Demo Day. The CEO of 4G hotspot provider Karma, Robert Gaal, recently lied about a partnership with mobile car service company Uber on stage. Shortly after, the CEO of Uber, Travis Kalanick, took to Twitter to call out Gaal’s lie. In a later blog post, Gaal also admitted that during the same presentation, he overstated a partnership with American Airlines. The media latched onto Gaal’s overstatements, and now it will be hard for investors to trust his projections in the future.
Publicity that you can’t control
Just as startups are in competition for users and funding, startup incubators are in competition for brand equity. The more reputable the program, the more quality startups are clamoring to get into them. This can cause some incubators to pull a few shady moves for publicity. Take for example the TechStars reality show on Bloomberg TV.
The first class of TechStars NYC had a documentary show sprung upon them when they were accepted into the program. The show made many startups look bad for drama’s sake when it turned into a reality show style program. ToVieFor founder Melanie Moore has publicly renounced the show as damaging her reputation due to editing decisions that misrepresented the timeline of her company. ToVieFor shut down soon after the the program ended.
When incubators need publicity, they use the stories of the individual companies in their programs to tell an overall story about the brand. When your startup can’t control the story that is revealed and how much is revealed, the incubator could actually harm the perception of your startup for future investors.
The stress of relocating could harm your team
To be a part of any startup incubator, you’ll have to relocate for the length of the program. Packing up and heading out to New York City or Silicon Valley for a few months can be so stressful that it might take your focus away from building the best company that you can. Teams that are worrying about subletting apartments, moving pets, and taking care of their family’s security can cause additional stress during an already stressful time.
Paul Graham has equated relocating for Y Combinator with moving for college. If you are anything but an 18-20 year old with few financial obligations and a taste for adventure, the process is a little bit more intense than moving into a dorm.
Steve Jobs wouldn’t last a day in a startup incubator. He didn’t want input from people who had been there and done that.
If you are headstrong and unwilling to compromise, then you may spend more time fighting to keep your original vision than working on your product. Plus, the incubator owns part of your company, so you can’t get rid of them easily.
For some companies, admission into a startup incubator has connected them to the investment community in ways that were previously unimaginable. Yet for every startup that has thrived, there are plenty more who should have weighed out their options ahead of time. If you are thinking about accepting an offer from your dream startup incubator, think like a real entrepreneur and make your decision accordingly.
Join the conversation on HN.
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Kathryn HoughKathryn is a writer for Techli covering ecommerce, social, and the startup hubs of Portland, St. Louis, and Chicago. She is the CMO and co-founder of Huedio, a startup that is currently in stealth mode. Kathryn was an early employee at DailyBurn, a TechStars class of 2008, which was acquired by IAC in 2010. Prior to her foray into startups, Kathryn co-founded the New School Free Press at New School University.
I agree with most of this - if it would use the term "accelerator" instead of incubator. Most of the places mentioned in this article DO give a short runway for "make it or break it" (the 3 month term Kathryn mentions); most of them take serious equity stakes; and most of them get "way involved in mentoring/mastering the pitch" (I almost laughed myself off my chair at the truth, there) as well. BUT - "Incubators" - in the true sense of the word, the 1,800 or so around the U.S. (most of which are non-profit), usually do NOT take equity positions, DO screen mentors/counselors extensively, and give companies 2-5 years to develop - a bit different from the "TechStars" and "Y-Combinators" models mentioned in this article. See www.nbia.org - the website of the National Business Incubation Association - for more information on those - what I would call "real incubators" as opposed to "Accelerators"! Otherwise, EXCELLENT article, lots of "truthiness" in it!
For the US, the article missed some crucial points. Further, at least in the US, the truth about the subject is easier and shorter than the article. In the US, there is absolutely no shortage of investors for a seed round or a Series A. The investors are HUNGRY for what they like, and it's super easy to contact investors. It is important to know what investors want: Far and away what is most important to investors is one word -- traction. For more, they want traction significant and growing rapidly. 'Traction' is users and, hopefully, revenue. Given plenty of traction, investors will jump to write a check to a company founded by an inebriated, one footed, two headed, half-witted chicken. Without traction, they would laugh at a Turing award winner in computer science. That is, given traction, nothing else counts for much. Without traction, nothing else counts for much. Right: You noticed, nothing but traction counts for much. Saying much the same thing is Y Combinator Paul Graham at http://news.ycombinator.com/item?id=4154846 with > pg 9 hours ago | link > Meta-rule: Why VCs say yes or no is less > complicated than they tell you, and possibly > less complicated than they themselves believe. > 1. If you seem formidable and have rapid growth > of a sort that seems likely to continue, few > VCs will turn you down. > 2. If you don't seem formidable, few VCs will > fund you. > 3. If you seem formidable but don't yet have > growth, whether or not you get funded depends > on how convincing you are. His "rapid growth" is his version of my traction, significant and growing rapidly. His "of a sort that seems likely to continue" and "formidable" is Paul trying to be diplomatic by not making the investors look too simplistic, but, given the traction they want to see, the investors have little ability or desire to evaluate these last two considerations. E.g., given traction, they will f'get about a 'barrier to entry' and invest in a company with a product that Apple, Microsoft, Samsung, Amazon, or any of 10,000 other programmers could duplicate quickly -- e.g., InstaGram, Pinterest, Disqus, Etsy, etc. For "mentors", how many of the candidate mentors would you hire as a programmer, lead programmer, CIO, or in any technical position at all? Answer that, and you will have seen what to do with 'mentors'. Want some business advice? The Internet is awash in business advice; there are many books of a wide range of credibility; and the US is coast to coast awash in people who have started and are running successful Main Street businesses. There should be enough advice for you from those sources. So, what to do? Sure, work on your startup and get some traction. Let nothing but NOTHING distract you from that goal. For an 'incubator'? Maybe consider that as your 'coming out party' once you have your TRACTION. I.e., you are ready for your demo and term sheet the first day of the three month incubator. Then you refuse to modify your work and, instead, just enjoy yourself, make contacts, and line up investors. If the incubator is a long way from home, then don't move but just show up only a few days. It's like taking a college course when you are ready for the final exam the first day. It's like a 100 yard dash where you get to start 1 yard from the finish line. It's like entering graduate school after you have already published enough for your Ph.D. dissertation. "Never let them see you sweat" or write any of your code. For the pitch? Start with a graph of your TRACTION, and then little else will matter. Next, yes, I'm glad you noticed: With much traction, just why do you need investors?
Great article. I think you bring up some good points.
I would like to add that not all incubators are same.
We at nReduce :
1) Don't take equity
2) Don't t require teams to relocate
3) Don't force people to demo until they are ready
4) Focus on accurately depicting starts up to investors
Anyway, thanks for bringing up some great points about the status of the industry.
joemellin Great points Joe! Many incubators have different structures. I hope that new entrepreneurs pause and consider what is best for the business rather than getting blindly excited about an acceptance letter. I'll be sure to check out your program and let other folks know about it as well.
Fantastic article, when talking about the short term (3 month) sort of incubators. Lots of answers to questions I've been asking lately, and it really helped me gain some insight.
I do think that the topic of longer term incubators that operate (often in Europe) over years rather than months have very different characteristics.
JohnGBeckett I'd actually be interested to learn more about the European incubator system. Any specifically that I should check out?
kathrynhough If you'd like to know more about the European incubator system, drop me a message on twitter @JohnGBeckett.
There's a great comment on HN that I wanted to share here as well. The comment was longer but my favorite part is below.
"In an era where barriers to entry are crumbling, too many people see incubators as a path of least resistance to success or funding, but the real acceleration will usually be found by networking with your customers and users instead."
@LindsayMorton The fact is, most incubators and accelerators can't help you gain traction with users. Exactly as that quote says, you can do that yourself.
flarb LindsayMorton @flarb I agree. I think that a true entrepreneur will always find a way, no matter what.