The Ultimate Startup Incubator Guide: In this post—the first in our series on entrepreneurship—we explore the complex and often puzzling world of incubators. As we’ll see, not all incubators are created equal. This is vital to understand ahead of time. After reading this post, you’ll know:
• Exactly what an incubator is
• The benefits of graduating from an incubator
• The 10 main pitfalls of incubators to watch out for
• What to look for in an incubator
• How to vet an incubator
With this guide in hand, you can navigate the intricate inner workings of the business incubator scene with ease. Ready? Let’s go.
What is An Incubator?
Incubators provide mentorship, networking and funding to entrepreneurs. Don’t confuse an incubator with an accelerator.
There are some important differences.
• Incubator. An incubator provides support to entrepreneurs in the beginning stages of their venture. An incubator can help an entrepreneur turn an idea into a viable business.
• Accelerator. An accelerator is all about helping an existing business grow. To get the attention of an accelerator, you need to have your business model in place. You need to show via a detailed business plan how you intend to turn a profit.
Incubators have become extremely popular since the early 2000s. But the history of startup incubation goes all the way back to the 1950s, in New York. In the Big Apple, established businesses created programs to provide startups with affordable office space and other shared resources.
The concept evolved in the ‘80s with the addition of focused mentorship. In the mid-2000s, the concept saw another quantum leap with the advent of the Internet. Incubators like 500 Startups, Y Combinator and Techstars became all the rage. Gaining entry to any of these became the thing – especially for tech startups.
In this post, we’re focusing on the strengths and weakness of incubators. But much of what you’ll learn about incubators applies to accelerators and vice versa.
Let’s take a deeper look at the differences before diving into potential pitfalls.
As we’ll discover, incubators are quite choosy, for good reason. These programs invest significant resources into developing local startups. The most effective use of resources comes about as a result of a stringent application process. This helps filter entrepreneurs who aren’t serious. It also eliminates entrepreneurs who lack the work ethic required for startup success.
However, because an incubator has less interest in rapid growth, they’re more likely to value concept over flash.
Accelerators use a much more stringent and formal application process. An accelerator wants to see explosive growth. Consequently, they often provide funding in exchange for equity. They need to see that you have a winner on your hands before they’ll give you time of day.
Many incubators are open-ended, while some have finite ‘graduation’ periods. There is a strong focus on the longevity and survival of the startup. In other words, they’re less likely to be concerned about rapid growth. Accelerators, on the other hand, operate within a set time frame.
Both incubators and accelerators offer an environment of collaboration, support and mentorship. The key difference is that an accelerator may provide funds. With these funds, you can retain your own consultants and other experts should you choose to do so.
The goal of an incubator is to provide you with that mentorship so you don’t have to look for it elsewhere.
Both incubators and accelerators may provide offices in which you can work and collaborate.
Most incubators do not provide investment capital. But nor are they likely to demand equity. An accelerator, on the other hand, may provide investment capital in exchange for a chunk of equity.
Today, many business owners see the incubator as the fast path to success. Incubation allows you to retain full ownership—usually.
But more important is the fact that an incubator can make you more likely to succeed. The reality is, over 90% of startups fail right after their first round of funding.
The goal of any incubator worth mentioning is to improve that figure.
The Many Pitfalls of Incubators
There’s no doubt an incubator can catapult you along the path to success. But there are downsides you must be aware of before seeking entry. If you don’t consider these points, you may lose money, time or both.
For many established entrepreneurs, relocation is the number one reason they wouldn’t do another incubator program.
You’re most likely to find an incubator in a large city.
In Europe, for instance, roughly half of all incubator programs are based in an urban setting. In the U.S., 45 percent of such programs are located in big cities. In the United Kingdom, roughly two-thirds of all programs are in London.
Granted, the Internet makes it possible to telecommute and collaborate. But consider the situation in the UK as an example. If two-thirds of programs are in London, only 6 percent of the population can take advantage of a local incubator.
Many people who get into an incubator program have to relocate. Traveling adds complexity and cost to the equation. If you decide to go to the big city to enter a program, you may be geographically isolated from the rest of your team. Yet if your entire team goes with you, you’ll all be isolated from friends and family. This could mean that you’re isolated from your target market, too. Not ideal.
The entrepreneurial life is already taxing enough on relationships.
Of course, there can be upsides, too. Some areas, such as silicon valley, foster a strong culture of innovation and collaboration. That can pay dividends.
In the end, it’s up to you to decide whether relocating is viable or even desirable.
In order to accept entrance into the 500 Startups accelerator program, Agu De Marco, founder of Wideo, had to move to Silicon Valley from Argentina. Today, Wideo is a popular video creation platform.
The CEO of YouGift, Efrem Weiss, relocated his entire startup team from New York City to upstate New York. Things didn’t work out, and Weiss moved back within two weeks. Imagine if the move had been cross country instead.
Zoli Honig was invited to 500 Startups by its founder, Dave McClure. There was just one condition: he would have to relocate. Honig had a wife and young child to consider. They chose to make the move, and in this case, it worked out. But it doesn’t always work out that way. Carefully consider all the factors so you can avoid potential head and heart ache.
# 2 Fees & Costs
While incubators typically don’t demand equity, they may charge fees. Always read the fine print and ask about fees up front. In the U.S., for instance, an incubator may cost hundreds to thousands of dollars per month. If you’re looking for a free incubator, you’re likely out of luck. Your best bet is to find a local mentor who is willing to take you on.
Here’s a term you should become familiar with: omnibus charge.
An omnibus charge is a fee that covers things like rent, utilities and maintenance. If you expect to gain access to facilities owned by an incubator program, expect to pay an omnibus charge, or fee.
While incubators are a bit more laid back than accelerators, you should still have a fleshed out business plan. You may need to show a prototype, too. This can result in unanticipated costs or fees.
Worse, some programs cut you loose with no understanding of how to keep the funding train going for yourself. A good incubator program will help you differentiate yourself by demonstrating that:
• Your valuation is accurate and is not too high
• That you have and can keep traction
• That there isn’t too much noise in your segment and that you stand out
#3 Acceptance Rate
As mentioned, incubator programs are exclusive – even in the Fintech world or Blockchain landscape. Most programs have very low acceptance rates—between one and five percent. There are only 9,000 incubators in the world, give or take a few. But there are around 280 early-stage entrepreneurs. Assume that each incubator takes on 20 startups at a time. Demand exceeds supply.
Not all incubators are created equal. Some are little more than a means for established businesses to collect fees. Here’s how to spot a low quality program:
• The focus is on swag instead of product. An incubator should not be overly concerned about explosive growth. The program should not encourage you to spend a lot of money on startup branding, advertising, startup brand identity or anything else. The focus should be on getting the fundamentals down.
• The incubator pressures you to spend more on omnibus services. An incubator shouldn’t encourage you to spend a lot of money on office space or equipment you don’t need. Your office doesn’t need to look like Google headquarters.
• The incubator is obsessed with vanity metrics. Your incubator shouldn’t focus on app downloads per day, website visits, etc. These metrics can be important, but focusing on them too much is a red flag. It may indicate that the incubator has a cookie-cutter approach. Such an approach may not benefit your startup.
• The incubator is unable to help you make touch decisions. Sometimes, as an entrepreneur, you have to be the bad guy. An incubator should guide you through these tough decisions, offering sage advice based in experience. Some incubators are lacking here. They can’t offer you advice because they don’t have the experience they claim to have.
The value of an incubator depends to a large degree on its management team. If management is lacking, everything else will suffer. This is a trickle-down effect. Bottom line: poor management means that an incubator won’t live up to its side of the bargain.
The worst case scenario is that sub par management runs the incubator into the ground. If this happens, you’ll have to vacate the premises.
Remember that everything exists on a bell curve. There are some exceptional incubators, and there are some horrid incubators. Most are average. But the point is to be on guard for signs of incompetence.
Just because a program is exclusive doesn’t mean it’s worth your time.
The best incubator managers tend to share certain traits. For instance, a good manager will ask you certain questions at your first interview, or will do so somewhere in the application process. These questions are:
• Are you innovative?
• Are you scalable?
• Are you coachable?
The first two pertain more to your product or service. But the second comes down to you. A mentor, coach or manager knows that if you aren’t willing to be coached, you’ll gain little from the incubation process. If you have all the answers and just need funding, seek acceptance into an accelerator.
Of course, your answer to all three of these questions should be a resounding ‘yes.’ But take some time now to really think about them. Is your product actually innovative? What sets you apart? Are you really scalable? Providing numerous concrete examples will make a good first impression.
As to the third question, expect them to want examples from you that demonstrate your willingness to learn. It’s a good idea, therefore, to seek mentorship of some kind before you try to get into an incubator. This way, you can point to this past experience and spell out how you benefited from it.
A good incubator manager has the mentality of, You can lead a horse to water, but you can’t make him drink. Demonstrate that you’re willing to do what needs to be done.
In a similar vein, a bad manager will try to be your friend. They’ll try to help you too much—to the point that they’re doing your work for you. This may seem like an advantage on the surface, but it isn’t. If your manager handles every issue that arises, they rob you of the opportunity to learn through first-hand experience.
Sometimes, the best way to learn is to make mistakes.
A good manager understands that there’s a fine line between helping an entrepreneur find their way and doing the work for them.
In other words, your managers should teach you to fish.
A bad manager talks—or rather, they love to hear themselves talk. A good manager listens.
Imagine that your manager starts every meeting by rattling off the programs and services available until your eyes glaze over. That’s a red flag. Instead, what you want is someone who takes time to figure out who you are and what makes you tick.
Finally, some managers get into mentorship from a place of ego. They long ago had their ideas validated, but now that they’re getting older and may be less relevant, they need their egos validated. These managers are best avoided, but sadly, avoidance is not always possible.
Potential interference is an issue related to management. Many incubators take a hands on approach. This is understandable since they’re offering mentorship. However, it can go a bit too far, threatening to squash the entrepreneurial spirit.
It’s the rare incubator that offers funds in exchange for equity or a seat on the board, but it does happen. If this is in the cards, beware. These incubators assert more control over your day-to-day operation.
This means you’ll lose some agility. But if the incubator suffers from quality issues, you may also be exposed to poor advice.
In his book Startup Communities, Brad Feld makes the point that the startup community is made up of leaders and feeders.
Entrepreneurs are leaders.
Everyone else, from schools, to incubator management to government, are feeders. The role of an incubator is to provide tools, connections and encouragement. These assets allow entrepreneurs to do what they’re naturally inclined to do: lead and innovate.
But a poorly run incubator tries to go from feeder to leader. it tries assert too much dominance over the day-to-day operations of the companies under its tutelage.
Another gotcha to look out for is the incubator that has too little influence. These are often said to be like frat houses. There are no rules. While a laid back environment can be conducive to idea generation, it can also produce waste, and it can contribute to inefficiency. A good incubator understands that there’s a balance they must strike between structure and free flow.
#7 Lack of Focus
Eager to prove their value, many incubators keep a full schedule. But a crowded itinerary can mean quantity over quality. Your incubator may organize training sessions, seminars, and mentoring workshops. This is a good thing, but you want to make sure that these events add value. You should come away from each event having learned something concrete.
If possible, talk to someone in the program to find out if the events were worth their time. Remember, your focus should be your startup.
#8 May Focus on Profits & Not on Value
Not all incubators have fixed durations. But no startup can remain in a program forever. You may find that you’re ready to graduate from the program early.. But you are still valuable to the incubator. You’re paying fees, providing testimonials, etc. The incubator may want to maintain the status quo even if you’re ready to move on.
Indeed, many incubators are businesses. There may be potential conflicts of interest. If they’re a for-profit organization, they have their own profit projections to meet. Even if they’re a non-profit, they still have concrete metrics they need to hit. Assume that the incubator is answerable to someone.
Often, these things align with your own interests. If you succeed, the incubator looks good. But an incubator may put a lot of focus on rapid growth. Recall that this is more the purview of the accelerator. But some incubators have been known to get carried away. You may find yourself in a position where you’re pressured to hit arbitrary growth goals. What if high-speed growth isn’t what’s best for your startup?
#9 You May Become Dependent
Some entrepreneurs become dependent on the structured environment of the incubator. They’re afraid to move on, so they try to stay in the program forever. It’s possible to become dependent on:
• Your mentor
• The incubator management team
• Other members
To be sure, the incubator environment promotes growth. But if you overstay your welcome, your growth will stagnate.
Yet it’s important to know what to do once the incubation process is over. If you don’t have a clear idea of what to do from the outset, you run the risk of becoming dependent on the support that incubators provide. Here’s what to do.
Keep In Touch
Make sure to keep in touch with everyone you met during the networking phase of the incubation process. You’ve met with investors, founders and CEOs. Don’t let all that elbow rubbing go to waste. Have a plan in place to reach out to these people as appropriate, and keep track of who you have contacted.
If your incubator provides shared resources such as a Slack team, Facebook group or spreadsheet, use them.
Once your incubator is over, take a bit of time off—but not too much. Use this time to reconnect with friends and family. This may not seem like the time to cool your heels, but recharging your batteries at this stage is important. At the same time, reach out to fellow entrepreneurs in your community. Share what you’ve learned. Compare notes. You may get ideas or figure out ways to optimize your existing processes.
But stay focused on your project. Remember the old adage: you’re the average of the five people you spend the most time with.
Keep up the Pressure
After the reconnect phase, jump back into things. This will ensure that you build momentum. Consider everything you just learned from your incubator program and see how you can apply it to your operation. What optimizations can you make? Really sit down and think about this.
#10 A Cookie-Cutter Approach
Many incubator programs have a pre-defined structure. This may not be ideal. After all, your startup is unique. Many mentors tend to lump startups into broad categories. They often have a set strategy for each. This isn’t the best approach. A mobile dog groomer’s strategy will differ from that of a brick & mortar operation. They have different costs and may have different short-term goals.
Your incubator should value your startup for its unique attributes. It should help you come up with a tailored strategy that plays to your strengths. When evaluating an incubator, get as much info as you can on the program and structure. Make sure you won’t be spending time or money doing things that won’t benefit you.
What to Look for in an Incubator
So you still think an incubator may be a good fit for your startup. That’s great! Though any incubator program can have a few rough edges, the concept is proven. All things being equal, an entrepreneur in such a program stands a better chance of success than someone on their own.
Any incubator worth your consideration should offer all of the following:
• Mentoring. You can gain access to experts in your space, industry or market even if you are a novice startup. Mentors can offer idea validation and market analysis.
• Tailored office space. An incubator can offer tailored workspace for you and your team. The rent tends to be lower than you’ll find elsewhere. What’s more, your landlord will understand the unique needs of a startup team.
• Fund Raising. Most programs won’t fund you directly. But they can help with your fund raising efforts. Any quality program will have access to venture capitalists, angel investors and other sources of early funding. Once in the incubator ecosystem, you’ll find it much easier to raise funds.
• Tech. Many incubators provide high speed Internet, servers and other tech solutions so you can focus on your startup.
• Networking. The program should offer ample networking opportunities. This way, you can form strategic partnerships early on.
• Training. A good program provides training by in-house personnel and outside experts. Training in taxes, legal issues and intellectual property are especially valuable.
In the same vein, a stellar incubator solves three problems for you.
#1 Validates Your Ideas
One of the main benefits of these programs is that they help you quickly validate your idea without asking for a chunk of equity in exchange. A good incubator program has a long duration and is not focused on explosive growth.
#2 Provides One-On-One Advice
You’ve probably heard that you’re the average of the five people you spend the most time with. This can prove problematic for business owners. Most people are content to work a nine to five. How, then, can an entrepreneur get advice about starting their own business from friends and family?
An incubator should solve this problem by putting you in touch with folks who are proven successful.
If you’re in the enviable position of being pursued by more than one incubator—hey, it happens—you may want to give preference to the organization that keeps a small client list. They may charge higher fees, but you’ll get more one-on-one time in exchange.
#3 Bring You Out From the Cold
As mentioned, incubators should put you on the radar of angle investors and venture capitalists. But more than this, an incubator should teach you the value of networking. You should always strive to expand your network. At the end of the day, building a robust network makes you more agile.
There are three things you must take into account before you apply.
You’ll be expected to go through a specific curriculum, so make sure you can commit. Training is usually in the form of seminars or webinars. You’ll be provided with a schedule ahead of time, and you may be expected to hit a certain attendance minimum.
#2 Your Pitch
The application process will be highly structured. But you should still be prepared to give your elevator pitch on the fly. This is good practice anyway since you’ll never know when you’ll be given the opportunity to pitch to an angel investor. Your pitch should, in some way, demonstrate that you’re a doer. You should demonstrate an ability to execute.
#3 What Will You Pay?
Before seeking an incubator or accelerator, decide what you’re willing to give up. If you’re given an unexpected offer, it’s easy to become flustered. At a minimum, you should decide how much of your company you are willing to give up in exchange for mentorship or funding.
How to Vet an Incubator
In this section, you’ll learn how to evaluate a given incubator program. As mentioned, not all are created equal. You should take your time when evaluating these programs as they may take several months or even years to complete.
# 1 Location
Each industry has its geographical center, and these centers can change over time. Know yours. Your job is to find out which incubator is best. But you must also find out which is best for you, as mentioned earlier. Don’t move to silicon valley if doing so will cost you relationships. This is the surest path to burnout or worse.
#2 Growth of Graduates
Find a list of companies that have graduated from the program and look at their growth. The bigger your sample size, the better. But remember, it’s normal for some of these graduates to fizzle or even go out of business. That’s a reality of the market.
When speaking to former graduates, keep in mind that their bad experience may be your ideal challenge.
# 3 IRR
Look at the IRR—Internal Rate of Return—of the incubator. Does it produce winners? In addition, look at the quality of talent that graduates attract. Often, this can be an indicator of a maturing company’s health.
How much capital have graduates raised? Looked at as a whole, this can provide you with a good idea of whether a program is worth your time.
But don’t just focus on dollars and cents. If an incubator can expand your network, that can be extremely valuable.
We hope this guide has provided you a better idea of the pitfalls of the incubator. You should now be well equipped to appraise any incubation opportunity that comes your way.
If this post has helped you, would you consider giving it a share? Thanks!