Over the last year we have seen a phenomenal growth in the number of incubators emerging around the world. IdealLab (1996) in Pasadena, Y-Combinator (2005) in Mountain View and TechStars (2006) in Boulder were alone for a while , but with the adoption of cloud and mobile, significantly reducing the cost of starting up companies, incubators have emerged around the globe: SeedRocket (Barcelona), Bootup Labs (Vancouver), Springboard (Cambridge,UK), Seedcamp (London), Startup Bootcamp (Dublin, Copenhagen, Berlin), Innovation Works (Beijing) & H-Farm (Treviso, Italy) are just recent examples. In Europe dozens of incubators emerged over the last 12 months, mainly by former entrepreneurs, who were frustrated with the lack of culture and resources, holding back the development of new startups.
In the US, the number of startups going through incubators annually is expected to reach 300 by the end of the year. The map below gives you a detailed glace at the leading incubators across the US and the number of companies funded by 2010 (source: The startup Factory by NESTA).
So what is an incubator ?
An incubator is usually a short term program that helps entrepreneurs transform an idea into a working product or prototype (and hopefully a fundable company), while giving them resources such as mentorship, funding or access to investors. Why was I careful to use the word usually ? Many people might not be aware but there are different types of incubators:
Pre-seed Pre-idea incubators – These are programs that gather a bounce of talented entrepreneurs with complementary skills and let them identify and address a need. Such programs are very common in markets that lack significant deal flow such as Singapore & Hong Kong, but we have seen such programs in the US as well. IdeaLab and Innovation Endeavor’s Runway program are such examples. These programs are usually less structured and offer the entrepreneurs a base salary as they go through the program, in exchange for equity.
Classic incubators – Most incubators have a 10-13 weeks program, to which groups of 2-3 entrepreneurs apply (acceptance rate to the top incubators is around 2%). The focus of those incubators is on lean business plans what can be prototyped and validated quickly. Incubators offer a range of resources from office space to funding in exchange of equity (usually 5%-8%).
While most people, tend to think that the biggest value of an incubator is in the initial funding (~$12-$20K), the biggest value is in the mentorship and collaboration (which is the reason most incubators tend to select companies that work in adjacent markets). By working with serial entrepreneurs and other executives who are familiar with the target markets, and by engaging in discussions with other startups around common challenges, startups speed-up the learning curve dramatically. Starting a company is a tough journey and so sharing the load also increases their ability to sustain the journey.
The other challenge that most startups face is in getting in touch with investors and conveying their message in a clear and compelling way. Most investors listen to numerous pitches in a given day and don’t have the time to look beyond the communication style and messaging. Incubators provide access to investors through demo days and 1-on-1 meetings. They also work with the entrepreneurs on how to communicate the opportunity. The quality of the investors, though, ranges from one incubator to the other.
Having visited numerous co-working space, the energy & discussions seem to have a positive impact on startups, but top incubators such as Y-Combinator are actually not offering co-working space.
Most incubators are measured based on two factors: The number of companies that get follow-on investments and the financial returns (exits).
Accelerators – Accelerators, a subset of the classic incubators, target companies that have launched a product, but either their growth has stalled or are now trying to target a new market. Many times these are companies still in search for a product-market fit. Plug&Play (PnP), might be considered such a place. Vodafone, recently launched Xone, an accelerator based in Redwood city, to target such companies, assuming they offer a strategic value to Vodafone.
What is the incentive for the mentors ?
Many mentors want to be associated with successful incubators. Some of them later join the board of the companies they really like. It also offers them a glance at where markets are heading. Many of the mentors are also angel investors and so incubators offer access to deal flow and enable the angel investor a chance to get to know the entrepreneurs before making an investment.
VC firms share a similar incentive to attend meetings at some of the incubators: Great access to deal flow and market insights.
Should I apply for an incubator?
If you are a first time entrepreneur, an incubator can be great for you. You should make sure that in 10-13 weeks you can actually launch a product and become fundable. That means:
- You have the right team in place
- You have been working on the idea for a while so you are not in the early stages of the learning curve (unless this is a pre-idea incubator)
- Your product can be prototyped in a short period of time (Most medical devices & cleantech startups are not suitable)
Before applying to an incubator, think about the following:
- What are you trying to achieve? Are you looking for access to investors or mentors ?
- If you are trying to get access to investors: How many investors attended the last demo day ? Did they fund other companies in your space ?
- If you are looking for mentors: Who are the mentors in the program and how knowledgeable are they with regards to your specific industry ? How accessible are they?
- Make sure you talk to other alumni. That way you can filter through the marketing collateral.
Finally, aspects as hands-on/off approach and brand affiliation are also important in your decision to apply to one incubator or another.
Will we see more incubators emerging?
I tend to believe we will see more incubators emerging, but also many incubators shutting down. An incubator needs to fund enough companies in specific sectors to really know that sector and develop a track record, on the one hand, and have enough funds to sustain until they start to see some early exits, on the other hand. They should also have a market with enough alternatives for follow-on investments and eventually exits. Many incubators emerged, but didn’t have enough runway to sustain. Bootup Labs (Vancouver, BC) , DifferencEngine (UK) and OpenFund (Athens, Greece) are all incubators who had to shut down their activity after 1 or 2 rounds.
It will be interesting to follow the pre-seed pre-idea incubators. Most of them are still in early stages and so not enough data is available to assess their track record.
Full Disclosure: The writer is a board member and mentor with a number of incubators.