It’s not all about accelerators.
We live in the age of the accelerator.
It seems like the 10-12 week “batch” model has completely taken over the pre-seed market.
And it’s all Y Combinator’s “fault”. They launched their Summer Program in 2005 and immediately started spurring copycats.
But was YC’s success attributable to the summer batch model or just to their hustle, product insights, marketing and connections?
I think the accelerator model doesn’t make too much sense outside of YC or a couple of other example. Aside from being really hard to self sustain financially, the reality is that most accelerators can’t quite accelerate a company like PG and YC’s current partners.
It’s time to face that YC is in a league of its own.
The death of the incubator
Before accelerators were all the rage, there were a number of traditional incubators, oftentimes sponsored or run by big corporates or universities, where companies were actually “incubated”. Companies would be accepted on a rolling basis and would be offered office space as well as general help and services.
Starting companies today has become much cheaper and easier than before, and this factors have led to a slow but steady decline for incubators. Why give away 20%+ more of your equity if you can just go out and raise a million dollar round for the same amount?
But the reality is that getting to product market fit and scaling a company are much harder than it seems. Everyone can get started, but getting started right is fairly hard.
When incubators make more sense than accelerators
In my opinion though, incubators can actually be better structures for some type of businesses and entrepreneurs.
To make sense, the founder and the incubator each need to have very strong complementary knowledge and skills, just like in any traditional co-founder relationship.
For example, the incubator could be vertically focused on e-commerce and the founder extremely knowledgeable about and connected in the outdoors community.
Or the incubator could be vertically focused on fashion, and could accept teams with experience in data, logistics, marketing, e-commerce and so on.
The incubator I’m envisioning becomes really close to some foundry models, but those usually don’t accept external ideas for a variety of reasons. In my opinion, accepting external ideas, and most specifically founders who are really passionate and knowledgeable about a space and an idea is instead one of the great opportunities for incubators.
Strong, aggregate knowledge
The incubator needs to aggregate the most possible knowledge from all of its companies and redeploy it on all of them.
Being able to see patterns of errors and best practices amongst many companies is a privilege usually left to VCs. An incubator should do the same.
A shared HR practice, as well as accounting, legal, EA, recruiting, etc. can help the companies focus on product market fit in the early days and reduce premature scaling problems.
Starting a company, even if less riskier than it once was, is still a bold and risky decision for most.
People have families and other commitments which in my opinion are preventing great companies to be created.
Incubators can target this specific niche of entrepreneurs and remove their risk by hiring them, while getting compensated in equity.
TL;DR — this is what a modern incubator should look like in my opinion:
- Vertically focused on a specific business model or vertical.
- Accept founders with complementary skills and knowledge.
- Aggregate the most possible knowledge, best practices and connections.
- Aggregate and provide basic company functions such as bookkeeping, tax, lawyers, HR, EA, etc.
- Only accept founders/ideas where the incubator’s knowledge and services will have a positive impact.
- Work with 2-10 companies at any given time.
- Act as a full cofounder for at least 12 months.
- Provide office space.
- Aim for 10-40% equity stakes.
- Hold a board seat, but without weird vetos or controlling provisions.
It’s not so simple.
Incubators are hard. Some of the biggest challenges in my opinion are:
- Getting to financial sustainability. I’d treat an incubator almost as a traditional VC fund. The capital required to start something like this is non negligible, if you want to really help the companies and attract the best teams.
- Attracting the best talent. The best people usually have no trouble in raising capital for their companies, and may not be interested in the additional services if it means giving away a huge chunk of equity.
- Transitioning out the business. Not super easy to cut loose all ties with the incubator, but if done gradually can be sorted out.
- Follow on investments. Getting VCs to invest in businesses spun out of incubators is a bigger challenge than clean cap tables.
I might write a post on these challenges in the near future, but I think they’re all solvable.
In the meantime I remain a big believer in nicely executed foundries and incubators.
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