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What Do I Need From An Incubator?

Posted on Wednesday, Apr 7th 2010

By guest author Nari Kannan

As an entrepreneur, what do I need from an incubator?

Of late, there has been a lot of discussion in this forum about incubators, what measures they use for their own success, their business models, and so forth. In this post I discuss five things that I, as an entrepreneur, need from an incubator.

I fully understand that there are incubators sponsored by a state, county, or city, sponsored by a university or a country, or that non-profit or for-profit. In this case, I am only talking about a for-profit incubator that does not take any subsidy from any government or university. Its sole agenda is to enable the companies that it incubates become “successful.”

By an incubator’s success I mean precisely this: to enable the incubated company raise enough money either from organic growth or by raising additional investment monies from angels or venture capitalists to move out of the incubator. I also define an incubator is some entity that helps an entrepreneur or a team to develop a business out of ideas on paper and then send it out to face the world on its own.

Now given all of these, here are the five things I need as an entrepreneur, in order or importance:

  1. Angel, seed, or early-stage capital: There are businesses that can be bootstrapped successfully if they have a cash flow profile established early enough with quick sales cycles. Most services come under this category, as do even some software-as-a-service (SaaS) plays. Unfortunately, many consumer-oriented companies do not have an option other than raising some early-stage capital from angels or friends and family if they can afford the money being raised. To me, for the kind of business I am building, this is a must.
  2. Networking, advice, and early validation contacts: When building a consumer-oriented business like mine, networking and advice from others who have done it in the same or similar spaces at the early stages of the company is invaluable. If it is a business-oriented company, contacts for early validation, the first five difficult customers to line up, is the next most valuable thing for me.
  3. Engagement and being vested in fellow graduates’ businesses: I would love an incubator that encourages a founders’ pool of shares where all fellow graduates of the incubator get a small stake in each others’ companies. Sitting around the incubator conference room and trading tips for free when you have time is fine, but nothing will build camaraderie like being vested in each others’ businesses. Entrepreneurs may have many years of experience and ideas to share among them. If they are given a vested interest in each others’ success, the whole will be definitely greater than the simple sum of the parts.
  4. Access to deferred, low-cost, shared, and guerrilla-mode servicesaccountinglegal advicecompany identity designWeb 2.0, design servicesmobile design, and contract programming services could all be useful if the incubator has a list of vetted and committed service providers. These should be providers who are open to deferred payments or even willingness to take options instead of cash, at least for part of the cost.
  5. Shared space, coffee, and meeting facilities: Many incubators start with this, but the space-for-rent model does not make much sense anymore with an increasing number of companies being distributed geographically. For some entrepreneurs this may be more important but for me less so.

Ask any entrepreneur like me, and they will tell you that access to early-stage capital is the most important resource for startup companies in any part of the world but unfortunately one that is dwindling. Also, I wish that incubator selection panels would make it so that a better mix of companies is being housed in their premises at any time. Increasingly, incubators pile on more and more of the same kind of companies. I don’t think this makes for a very beneficial environment for incubated companies. This kind of approach will just breed more group think. If I am incubated somewhere, I would like the other companies to be in completely different areas and addressing other segments of business. This way I can get completely new ways of thinking about my own business and find new solutions to my company’s problems.

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Seed capital. I cannot stress the important of the seed funding enough. In India it is rarity to find seed funding.

Freelance Developer

Chris Wednesday, April 7, 2010 at 5:58 AM PT

As I read 3. Engagement and being vested in fellow graduates’ businesses, I thought, that is how I feel about 1M1M initiative.

For those who don’t know 1M1M is an initiative launched by Sramana to help 1 million entrepreneurs to reach $1 million in revenue each. I am one of her 1M1M Global Ambassadors. And what inspires me the most is the magnificent work that Sramana herself puts into 1M1M and the earnest effort that other Ambassadors put into it. It really feels that we are building something great together and it is up to us how great that something will eventually become.

irina patterson Wednesday, April 7, 2010 at 10:24 PM PT

There is a problem with broad based equity distribution both for incubators and 1M/1M. In my opinion, equity should only be given to people who actually add value, not to free riders. In any program like this, lot of people join the program, but not necessarily do the heavy-lifting needed, even though they are supportive of the program. I do not believe people who simply support a program in spirit deserve equity. Equity, otherwise known as sweat equity, is for people who actually put in work.

So while I am in favor of equity incentives, it is not as simple as you lay it out to be, Nari. Also, entrepreneurs tend to like to focus on their own ventures, not spray and pray. AT least the most successful ones do. By taking equity, you are suggesting that they get into a “binding” commitment to “deliver”. I don’t think this is necessarily desirable for entrepreneurs who have their own ventures to run. To have a large number of commitments like this.

And for 1M/1M, Irina, I share the same sentiment. Only who add value and deliver serious results deserve equity or any other form of financial incentive if there is one to be had.

Sramana Mitra Thursday, April 8, 2010 at 7:45 AM PT

about 4 – have you ever thought about partnering between the startup-incubators with some freelance platform – like oDesk, elance etc for finding international participants for your projects, working from home and giving advantegeous prices? I started working with oDesk soon mainly because it gives me access to more diverse and interesting projects than one local market could give you. I’m happy with the platform and the opportunities it gives me and dream about having more and more interesting projects there 🙂

Svetlina D. Thursday, April 8, 2010 at 5:14 AM PT

Actually, what I am suggesting is some compensation for founders time when they are all in the incubator and ostensibly contributing to each others’ success. Isn’t that one of the promised benefits of incubators? Otherwise, how is it different from an Office Park? I think they would be better inclined to spend some time sincerely than if they get nothing from another graduate’s success. Entrepreneurs would and should spend every waking minute working on their own success. But if they depend upon advice, contacts, validation, user testing, etc from other graduates in the same incubator, why would they do it if they do not have any vested interest? They might if they have time and the inclination but the chances are better if they can benefit somehow down the road.

Also, the confusion comes from conflating an Incubator with 1M/1M. The latter is a much broader program and equity compensation may not make sense in that context. I am completely NOT suggesting that at all!

narikannan Thursday, April 8, 2010 at 7:54 AM PT

Nari, the most effective system for what you are suggesting is a barter system. You give because you also want to get.

There is an interesting chapter called “Currency Of Influence” in David Bradford’s book, “Influence Without Authority”. I recommend that you read it.

Sramana Mitra Thursday, April 8, 2010 at 9:25 AM PT

Nari,

Would you elaborate more what you meant by this:

“Unfortunately, many consumer-oriented companies do not have an option other than raising some early-stage capital from angels or friends and family if they can afford the money being raised. To me, for the kind of business I am building, this is a must.”

, please ?

Technology and the internet has provided the opportunity to test consumer markets, and validate new offers with actual customer purchase transactions less expensively than ever before.

So, I would invite you to reconsider. A most recent example to support the contrary can be found by listening to one of the presenters on the Strategy Roundtable call yesterday, which can be found here ( https://bit.ly/bnOlYk ) ( @ 27 min. + ).

Hope that helps.

Best,
David Bookout

EFFETTI Friday, April 9, 2010 at 11:48 AM PT