On August 23, 2013, my Harvard Business Review article, The Problem with Incubators and How to Solve Them, was published. At the time, there were 7,500 incubators and accelerators in the market.
There is a very real knowledge gap in the early stage start-up game, on both sides of the table. First-time entrepreneurs lack the seasoning to captain a steady ship through turbulent waters. Inexperienced friends and family (and, increasingly, crowdsourced investors) lack the ability to gauge the viability of a business, or to mentor naïve entrepreneurs.
This knowledge gap, I have come to believe, is best filled by savvy incubators. However, there are over 7,500 business incubators around the world. Most of them fail.
I don’t know what the number is today. I do know that the phenomenon has now spread globally.
Startups are mushrooming globally.
So are incubators and accelerators.
So how do we ensure that all these incubators and accelerators end up delivering on their promise of helping entrepreneurs succeed?
I have summarized a few questions based on our experience running the One Million by One Million global virtual accelerator since 2010. I would love to brainstorm with those in different parts of the world who are managing accelerators.
1. Are you taking Equity? The matter of Equity is a lot more complicated than some make it out to be. Not all great businesses are great investments. If an accelerator takes equity in a company that is better run as a cash business, then that equity is not going to result in a large exit. So, before deciding on equity as compensation, try to understand whether the business is fundable/salable. In fact, in designing your accelerator, whether or not to take equity is one of the most important decisions. If you take equity, then, by definition, you are focusing on the less than 1% startups that will be fundable and qualify for a reasonable exit.
2. Are you offering Funding? Is that Equity-based (dilutive), Debt-based (non-dilutive) or Grant-based (non-dilutive)? If you’re offering equity-based funding, you are effectively acting as a venture fund. So, your success metrics are the same as those of any VC fund. How do you define success?
3. Do you have a diagnostic methodology to determine whether a startup is Fundable? Clearly, over 99% of the ventures are NOT fundable. So, if you are offering funding, you need to find fundable deals. Deals that can either raise follow-on funding from angels and/or VCs. Or, deals that can find an exit without needing further funding.
4. Do you have a diagnostic methodology to determine whether a startup is VC Fundable? VCs want to go from zero to $100 million in 5-7 years. That’s hyper growth. And they want billion dollar plus TAM. Neither parameter comes along that easily. So before advising people on VC pitches, try to learn how to diagnose what is and what isn’t fundable. Perhaps spend a few months deeply learning the 1Mby1M Methodology and Curriculum or some other comparable material that teaches the fundamentals of this super critical topic.
5. Are you checking Investor-Entrepreneur fit? VCs are not one-size fits all. They have dramatically different core competencies, preferences, investment styles, investment thesis. Some chase Unicorns. These days, some seek alternative styles of returns, acknowledging the fact that there is way too much money in the system, and way too many of them. Read, view, and/or listen to our investor interviews to become better equipped in identifying the right investor-entrepreneur fit. Just like product-market fit, this too needs to be positioned right.
6. Do you enforce rigorous TAM Analysis? Most TAM models I see are aggressive over estimations, often top down, 30,000 feet level approximations. Without a credible TAM model, investors won’t take a venture seriously. Again, please learn and teach the right methodology. By the way, Positioning drives TAM like nothing else. Get one wrong, the other topples like a domino.
7. Are you teaching Positioning? In my experience, when an entrepreneur is early and still struggling with figuring out product-market fit, one of the most useful types of mentoring (s)he needs is around positioning. Very few people are good at this. Accelerators need to find mentors who can help entrepreneurs with this, and it will be the biggest and most effective contribution they can possibly make. In the 1Mby1M program, the most effective interventions we make in businesses are around positioning.
8. What Methodology are you teaching? For example, we at 1Mby1M have a methodology that operates on the Bootstrap First, Raise Money Later (or not at all) We don’t force our entrepreneurs to raise capital. Not all businesses can or should raise capital. Our methodology takes into account the fact that over 99% of the businesses out there need to be built in a lean, capital-efficient, bootstrapped mode. YCombinator has a different methodology. They focus on raising lots of capital. They’re effectively a VC fund. If an entrepreneur tries to fund a business that doesn’t have what it takes to become fundable, they will fail. I am noticing that accelerators are blindly advising entrepreneurs to go raise money. Please stop doing this. This is misleading, shooting from the hip and a parroting of clichés. While taking an entrepreneur’s money or equity, please try not to lead them down the wrong path.
9. What Curriculum are you following? Entrepreneurs need an Online Curriculum to follow. The first-time entrepreneur’s journey is terribly complex, with a steep learning curve. They need a curriculum that teaches a proven Methodology of how to go from, say, one customer to five customers to 50 customers to 500 customers. Entrepreneurs need to learn various pieces of methodology in an efficient manner. These are the typical strategy questions: The 1Mby1M Self-Assessment. If they get stuck on them, they need a curriculum with which to plug their knowledge gaps. So, those mentoring entrepreneurs should try to standardize on a proven curriculum that works. All are welcome to use the 1Mby1M Curriculum if that is the methodology you want to follow. If not, find one that is well thought through and well designed.
10. Are you teaching Bootstrapping? Whether or not entrepreneurs raise money later, they will have to bootstrap the early stages. Use my free LinkedIn Course on Bootstrapping. It busts a LOT of myths.
11. Are you using Case Studies? Don’t reinvent the wheel. We’re almost in 2020. Case Studies exist for how entrepreneurs have achieved success. Playbooks exist. We have built our program entirely on case studies. Use case studies. It is the best way to teach business.
12. Do you have a Network? Of potential customers? Of potential investors? Of potential channel partners? Of potential acquirers? Of media? Of analysts?
13. Do you generate Visibility for your companies? Startups need social proof to convince customers, partners and investors. To generate inbound leads. To validate. To become fundable.
14. What is your bridge into Silicon Valley? Technology startups inevitably have to address the question: Should we move to Silicon Valley? How do we work with Silicon Valley, even if we don’t move there?
15. What is the Duration of your program? 3–4 month programs typically don’t accomplish much. They’re okay to join IF (a) they give funding grants (Example: some corporate accelerators are giving $10k-$25k in pure grants, no equity dilution involved) (b) they are willing to become customers. Entrepreneurs who join one of these need to often supplement with a real accelerator where they can get the real hand holding, and for MUCH longer than 3–4 months. Some accelerators offer the 1Mby1M program to their cohorts as scholarships. Example: NetApp. They supplement their 4-month grant-based program with 1Mby1M scholarships. 1Mby1M is an annual membership-fee based program and has no concept of graduation. Entrepreneurs can use it for as long as you like. Accelerators can expand the duration of their programs by using it as well.
At 1Mby1M, we have been collaborating with incubators and accelerators around the world. You are welcome to use our Incubator-in-a-Box to strengthen the offerings of your accelerator. You can do your coaching / mentoring on top of the 1Mby1M platform. Use the resources we’ve created. Use the Self-Assessment. Use the Free Public Roundtables. Use the blog. All our case studies are there, available for free. Use the Curriculum. Use the methodology. Use our network, both in Silicon Valley and elsewhere. We’re happy to collaborate.
Photo credit: Bruno Cordioli/Flickr.com.