So you have taken the first step and created a great new product or innovation. That’s great!
You’ve even pitched to your family, your friends AND they love it. Fantastic!
You’ve made a few sales, gained some traction, and now you are looking at growing your vision. But you realise you may need some funds for marketing and growth. You do some research, and you see lots of success stories on the internet about incubators. But what are they? And how can they help?
When I started my first startup, I was in the same situation. But having been accepted into a few incubators for a few products, I can tell you it is a worthwhile experience. Just be aware that not all incubators are the same and you have to choose wisely to see if they are a good fit for you and for your venture.
So what is a startup incubator?
An incubator is simply an organisation that has been created to help a startup grow and succeed. It accomplishes this by providing access to a network of resources like co-working spaces, direct mentorship, access to investors, distribution networks and possibly an injection of capital. All this is in return for a small equity stake in your company.
Joining an incubator is a bit like applying to join an Ivy League college. You need to fill out an application form, go through an interview process and be accepted before finally starting the program. Then the real work begins with you having to build your product, attending workshops and adhering to various set deadlines. Incubators generally take several companies in so-called batches, where the intake number is variable depending on many factors.
The length of the incubation period can be anywhere from 3 to 12 months, depending on the individual incubator. The program aims to prepare and fast-track the founders’ knowledge and to solidify the path of the business for growth. Generally, at the end of the program, there will be a “pitch day”. This is where all startups for that batch would make a public pitch to investors about their products in an attempt to secure further investment such as seed or series A funding.
What are the benefits of incubators?
The right incubator can help accelerate the growth of your company and open doors that were just not possible on your own. You need to only look at the successes experienced by DropBox & AirBnB as examples of how a correctly aligned incubator can have exponential benefits to the success of your startup.
You will have access to investors with capital, networks of distributors and partners who are now willing to work with you now you have the vetting of the incubator. Sometimes the success of your venture is determined by who you know and not necessarily what you know.
Each incubator will be uniquely different, but below are some of the many benefits they can bring to the table.
- Access to free or subsidised workspaces, phone and internet
- Provides more accessible access to mentorship and expertise from experienced entrepreneurs
- Access to business workshops, networking events and conferences
- Provide a structured curriculum and weekly deadlines to help you keep focus and grow
- Teach you how to pitch and present your product and service in the best light
- Provide access to marketing or distribution channels, and in some cases even introduce you to your first customer
- Introductions to Venture Capital firms and individuals who are willing to take that next step with you
- And probably the best of all, you will be immersed in an entrepreneurial environment where everyone around you is like-minded and is building and pursuing their dreams each day
Some downsides to incubators to consider
So you’ve signed up for an incubator. You’ve spoken to the decision-makers and passed the interview process, and they are keen to have you on board. Everything seems to be in line – and they are getting their legal team to send out the final contract within days.
But before you go and sign on the dotted line, keep in mind there are also numerous downsides to be aware of as well. An incubator, like an investor at the end of the day, wants to make money – and sometimes how they want to achieve that goal may not be the path you wish to take.
Furthermore, what most people also do not realise that statistically, 9 out of 10 startups fail. And any incubator program you get into already knows this statistic already.
“… statistically, 9 out of 10 startups fail”
Take that in for a while… they are expecting you to fail and if you don’t – it will be a pleasant surprise for them.
When incubators were less known as they are today, they would often have a stricter selection process and only a handful of companies could join their programs.
So they could focus their time on nurturing the companies and founders. They would provide more tailored support and advice and were genuinely interested in the success of what you are trying to achieve.
Fast forward to today, it has become a pure numbers game – a percentage chance. It is not uncommon for incubators to take in batches of 20-50 startups or more with a view that they only need one to succeed.
Their rationale is simple – if only one startup succeeds at being the next Facebook, Instagram or Dropbox – it would more than cover the cost for the entire batch failing.
Ironically some incubators would even put terms in there to protect themselves from your failure, offering you nothing more than debt for the opportunity.
“”… some incubators would even put terms in there to protect themselves from your failure, offering you nothing more than debt for the opportunity””
I remember having a discussion with an incubator director once, who expressed to me that their fund expected a majority of their intake to fail – and given that expectation, they had additional terms they were going to put into the agreement. We got accepted into the incubator, and they provided us with a contract to review.
No surprises that upon a more in-depth inspection of the terms, we noticed steep fee management and for the use of their facilities, their mentorship and training. A figure amount in the low six figures – which was payable at the maturity of 7 years. Some were smart to waive this figure or negotiate some other terms – a wise move if you were going to join the program. However, I am sure numerous other startups were caught out.
The incubator was guaranteed to make their money regardless if you succeeded or failed. With a win-win opportunity for them, they had less incentive to go that extra mile to help you succeed and open the doors you need the most when you are starting out.
Of course, each incubator will be different, so the above should not be taken as a generalisation. Be aware that each incubation deal will be unique to your startup so it would be wise to get a lawyer to look over the terms. In particular, you want to look for any “hairy” or questionable clauses that could severely impact your venture down the line. And remember that negotiation is almost always possible – do not always take the first deal you are presented with.
There is no debate that the right incubator can accelerate and grow your business in ways you are not able to imagine. However be careful and choose your incubator carefully – as your startup journey could come to an end before it begins.
In this article, I’ve shared some of my experiences with incubators and how they can benefit you in the early stages of your startup. However, each incubator is different, and you have to be prudent and select the incubator, which is the right for your character and entrepreneurial vision. I am always open to conversation, so feel free to reach out to me to chat about anything and everything.
See you on the other side!
– Jeff Chin