Equity · Compensation

What are critical elements for a new incubator's success?

Jennifer Wagner Advisor - AgTech Incubator at Royse Law Firm

April 2nd, 2015

I have read that incubators face a 90% failure rate which may be on the low end. We are a new incubator and want to learn from your experience with the few successful business models out there. I would like to get feedback on the key elements of these incubator business models that make them successful where others fail. I suspect that it mostly boils down to compensation structure. Would you agree? If so, what are those key elements of successful models that drive the desired results (for the incubator long-term) from incubator managers to the mentors and advisors?
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Ben Sweat Director, Product at Idealab

April 2nd, 2015

I work at what might be the oldest tech incubator, Idealab. Every incubator I have known say the main problem is finding talent to run the companies. It's hard to find people excited about your ideas. They like their own better. For most entrepreneurs it makes more financial sense to incubate it themselves on the side rather than take capital at the riskiest stage. But for some it's perfect. So you need a great pipeline of candidates or some unique value add in a niche or specialty. Also, I'm assuming you are not meaning accelerators, which I'm sure are a different beast. Sent from my iPhone

Ben Sweat Director, Product at Idealab

April 3rd, 2015

I alluded to this in my earlier response. I think it depends on one's definition of an incubator. I consider accelerators to be things like Y-Combinator, 500 Startups, Launchpad.la and some hardware specific ones. There is an existing team, often with a product and even some funding. They apply. They are admitted into a 3month program or so. Surrounded by mentors, but probably more useful as a way to pitch to a lot of VCs that you wouldn't otherwise have seen. All for a little bit of cash for a little bit of equity.

Incubators in my world, are trying to creating companies from nothing. They may have a specific area of expertise or interest. They may not. Generally, they come up with the ideas themselves. Nurture them with time, attention and money. If it begins to grow, they bring in someone to care for it. And then send them off into the world with money and their love. :) In exchange, the entrepreneur gives up more equity than they otherwise would have because the incubator bore the risk in the earliest, riskiest stage. 

In some incubators, like Science in L.A., they are more like a movie studio or producers, where they put together teams and attach them to projects.

It's worth thinking about what variation you are. And by the way, I'd never think an incubator or accelerator know more about your business than you do. They help with all of the other stuff. Oh, but they may be able to connect you with somebody who actually does know more about your business than you do. But that's just a bonus.

Karl Schulmeisters CTO ClearRoadmap

April 2nd, 2015

One thing I've heard over and over again from incubators and angels as we did our initial Dog and Pony was

"that's interesting but not in our wheelhouse"

IOW because this is risky, ONLY do the things you understand.  This is part of why disruptive innovators have a tough time getting funded:  disruption inherently tends to be "outside of what we know".

So if I were building an incubator, I would start by incubating only companies who's businesses and markets my teams intimately understand

Karen Leventhal

April 3rd, 2015

To add on in terms of quality mentorship. There are couple of kinds of mentors, that can be helpful.  1) Someone who knows how to think. They may not know your area, but they know how to ask the right questions .  2) Someone with specific technical or topical expertise  3) Someone who has been through the start up process before and really understands the pitfalls from an insider, in the trenches, perspective

Karen Leventhal

April 3rd, 2015

To speak candidly as an entrepreneur, I had trouble finding a incubator that provided the value we needed. Many are residential but want to accept companies from all over the country. However, by the time you (as an entrepreneur) factor in moving/housing expenses any cash investment from the incubator is often expended and doesn't go where it's needed, which is the running of the business. What that amounted to in the end, is that I was giving equity away for "training".  And it was hard to know the value of the training ahead of time.  What I've experienced is that most entrepreneurs are pretty smart and they know their specific market better than any incubator or mentor assigned to them will. As someone else mentioned above, if you are doing something brand new or disruptive, the challenge is that not many other people are really going to know that much about it.  I'm not a tech person, but the technical folks I have worked with are pretty resourceful and self motivated when trying to solve a technical problem.  This is not to say that start up don't need help, guidance, resources and support. They absolutely do, but from my perspective its about giving starts ups what they really need and not what you think they need.  A recent college graduate might need a lot of training, but an older person like myself and my team, might need a different approach.  We eventually joined an accelerator. It worked really well for us. There was a combination of distance learning, regional workshops, local mentors that were assigned, and a business competition (which we won). The best part what they had us self progress through a process to de-risk our business.  It was lot of homework for us, but that's what moved the business forward in the end. 

Rob G

April 3rd, 2015

From the entrepreneur's perspective i'd say #1 by far is the quality of and access to mentors/advisors.  #2 would be access to capital, but a distant second.  An incubator isn't much without quality mentors and the greatest advisory pool isn't worth much if your companies can't spend time with them.  In the few we looked at in the past we just weren't impressed with the advisors.  It was clear that we and our advisory board had more expertise than the incubators.  Most we ruled out simply by researching the advisors/mentors (and their LinkedIn profiles).  If your stable of advisors averages less than 10 years out of college or has little real-world success building and growing companies or at least the key sub-functions (technology architecture, sales, business development, marketing, legal, fundraising) then an incubator simply has nothing to offer a reasonably experienced team other than space and some peer networking.   If your target is young teams with limited experience or with skills limited to only 1 or 2 core disciplines then that's a different matter.  My advise would be to clearly define the profile of the startups you intend to mentor (incubate), clearly articulate that to your audience and thoroughly vet your advisors/mentors and have a solid plan for how those mentors WILL interface with your startups. 

Jennifer Wagner Advisor - AgTech Incubator at Royse Law Firm

April 6th, 2015

I'm getting a ton of great input. Thank you! There is still a lot of mystery around recruiting the right advisors/mentors and putting effective structure and incentives in place. I am beginning to believe that a balance in volume of companies becomes key to this in addition to establishing the types of startup companies you are focusing on. This is even more challenging in a 'hot' market where investors are trying to hedge all over the spectrum.