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The Web Startup Success Guide (Part 3): Startup Incubators

Posted on Saturday, Jul 18th 2009

By Guest Author Bob Walsh

[After interviewing Aaron Patzer about the founding of Mint.com and Rebecca Lynn of Morgenthaler Ventures about early-stage venture capital, in this final excerpt from his forthcoming book, “The Web Startup Guide”, Bob discusses startup incubators and how they can help entrepreneurs in the US and around the world.]

To close out this section about raising capital, it’s time to have a look at just a few of the startup incubators out there. As I said in Chapter 1, you can definitely make the case that the modern, post-dot-com era of startups began in 2005, when Paul Graham, Robert Morris, Trevor Blackwell and Jessica Livingston founded Y Combinator.

Here’s how Y Combinator works: Twice a year—from January through
March and June through August—some 20 to 30 startup founders,most of them in their 20s, who’ve made the cut and cut the deal move to the San Francisco Bay Area to work full time on their startups, attend weekly dinners with primed investors, startup CEOs, and featured speakers, and get the business equivalent of an immersive language course where they eat, breathe, and drink “startup” 24/7. The deal part of this, in addition to the immersive program, getting these startups properly incorporated, and opening doors to prospective angels and VCs, is that Y Combinator provides something less than $20,000 funding for each startup in exchange for somewhere between 2% and 6% equity. As of May 2009, 118 startups had launched through Y Combinator, including RescueTime.com, whose cofounder Tony Wright talks about the experience in Chapter 7.13. (You might be wondering where the Paul Graham and Jessica Livingston interviews are. Unfortunately, neither Paul nor Jessica was available during the two-month period I’d planned to interview them—totally my fault, not theirs.)

Nor is Y Combinator the only entity out there to realize that there’s
money being left on the table by traditional VCs and angels: providing pre-seed funding of $5,000 or $10,000 in exchange for 5–10% of the founders’ stock might be all that’s needed to make some respectable money. Here are some of the other incubators out there.

  • NextStart (http://www.nextstart.org), based in Greenville, South Carolina, offers a summer immersion entrepreneur program providing startup founders with 12 weeks of office space, Internet connectivity, and professional services.
  • Shotput Ventures, in Atlanta, Georgia, was, as of May 2009, gearing up to help 8–10 teams of one to two persons launch their “capital-light” startups in summer 2009.
  • NYC SeedStart is an eight-week summer program in the Big Apple where 10 groups of two to four founders will find funding, mentorship, and access to New York City–based angels and VCs. NYC SeedStart is an outgrowth of NYC Seed, a public–private partnership focused on promoting manufacturing and technology companies in New York City.
  • LaunchBox Digital, in Washington, D.C., had nine startups in its first summer program, in 2008; five of them have gone on to receive angel and VC funding.
  • Capital Factory, based in Austin, Texas, screened over 250 applicants before picking five companies that would kick off its first summer program, in 2009. Each company gets—for 5% of their stock—$20,000 in funding, $20,000 in professional services, and 10 weeks of intense professional mentoring, culminating in a Demo Day during which each startup will strut its stuff to investors and the press. 
  • TechStars describes itself as a mentorship-driven seed-stage investment fund that each summer will invest in about 20 startups (split between Boston and Boulder, Colorado), who, in exchange for a 6% equity stake, will get intensive help and the chance to pitch to a select group of angel investors and VCs.
  • iAccelerator, proving that startup incubators are not uniquely American, is a four-month intensive program designed to establish successful Indian tech companies by providing guidance, business connections, and funding. It is sponsored by the Indian Institute of Management at Ahmedabad’s Incubation Center (CIIE).

Here’s a prediction for you: There will be more, a lot more, startup incubators. Startup incubators make a great deal of sense for the entrepreneurial investors who want not only to fund startups but to help them succeed. It’s a structured approach to what has in the past been very hit and miss: the process of turning developers into founders.

Managing the Money

If this book were an encyclopedia rather than a guided tour to Startupism, the accounting and general finance sections would be among the thickest and dullest entries. It’s hard to get excited about setting up a chart of accounts, keeping Board of Director minutes, and filing annual ownership declarations.

Online resources abound for this kind of information: In the United States, the Small Business Administration will give it to you straight; Business Link is where you start in the UK; and in the EU, have a look at the EC’s SME Portal. In fact, it’s a pretty safe bet that wherever you are in the world, a local or national government web site is just waiting to help you understand what you’re going to need to do business.

This segment is part 3 in the series : The Web Startup Success Guide
1 2 3 4

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