Incubators are playing an increasingly vital role in acquiring meaningful investment for first-time entrepreneurs. TechCrunch reported that elite accelerators like Y Combinator receive on average one application every minute, and AngelPad reminds its participants that it is many times more selective than the Harvard Business School.
Incubators ask for a 2 to 10 percent stake in your company, a sum that could alternatively be used to attract a junior co-founder or provide meaningful ownership to the first few engineers you enlist. In return, incubators offer intensive coaching, networking with other founders, and warm introductions to likely investors. Incubators give first-time entrepreneurs and international teams alike a crucial link to Silicon Valley.
In addition to the giving up meaningful equity there are other downsides to consider before participating in an incubator. Most have a schedule that’s built on a demo near the end of the program. While many companies view that external structure as helpful, others can find that working with such a timeline damages their business.
The long lead up to D-Day could mean a delay in fundraising or product lunch, which in turn can translate into missed opportunities. There are other potential pitfalls, from committing too quickly and prematurely to an idea, to trying to scale before properly understanding a market and the company’s place in it. And with any robust community, there’s the danger of succumbing to groupthink. Founders need to remember they understand their market better than anyone.
For most first-time founders, these downsides are far outweighed by the benefits. Below are some lessons I regularly share with prospective entrepreneurs interested in applying to incubators.
1. Know their interest and expertise
When planning to apply to such incubators as 500 Startups, Y Combinator, TechStars or AngelPad, watch any and every online video you can find of incubator leaders outlining what they are looking for and what they can offer your company. Numerous incubator leaders, including Paul Graham, Thomas Korte and Dave McClure, have explicitly mapped out what they can bring to the table and what kind of companies they are targeting.
Know what’s important to the investors: Dave McClure at 500 Startups will want you to have a deep understanding of the micro-economics; AngelPad loves great B2B opportunities; and Y Combinator appreciates founders who have already demonstrated their smarts with submissions on Hacker News. They all will make exceptions, but you should pitch in a way that will resonate with the specific incubator.
2. Understand their challenge
All incubators play an arbitrage game, curating great early-stage startups for the community of larger investors. They need to believe they can readily convince other investors to put in an even larger sum at the end of the program. It is your job to convince them you have the raw material, which usually means great engineers (preferably branded by great universities or companies), beautiful design, strong team dynamics, and an ability to get a meaningful user base. If you have these ingredients, the incubator can help you polish your pitch and get in front of investors.
3. Intros matter
Getting a friendly introduction from someone the incubator knows can prevent your startup from getting buried in the application avalanche. The best intros come from people they trust who have insight into what it takes to start an effective company. Founders, fellow investors or former colleagues (hint: search LinkedIn for shared connections) can help get that needed extra attention. Intros from their friends and family members outside the startup ecosystem will be much less helpful. I got a key intro to AngelPad from the MoPub founders and to Y Combinator through Posterous co-founder Garry Tan.
4. They will be watching closely
Many incubators now require a video submission with your application and will follow up with an in-person or video chat with you and your co-founder(s). While these might cause the incubator to miss great people due to some unconscious bias, they also give a glimpse of confidence, charisma and, perhaps most importantly, your relationship with your colleagues.
The least you can do is ensure that everyone pays attention to whoever is speaking. If the engineer rolls his eyes, yawns or corrects the CEO when he speaks, the incubator might regard your startup as radioactive. If you get a live interview, make sure everyone has defined roles, with the CEO answering all market and business questions, the CTO answering all technical questions, etc. And practice the interview dozens of times. Enlist smart friends to barrage you with questions in rapid succession until you can confidently provide short and clear answers.
5. You’ll get a new Alma Mater
Incubator provides fantastic coaching and rich networking opportunities with other companies and investors during their programs. This is especially helpful for international teams that can boast great products and meaningful traction, but lack connections to the Silicon Valley investor community. But the time in the incubator is just the beginning. Months out, the mentors continue to provide trusted counsel and meaningful introductions.
Our incubator class provided us with thousands of dollars in free services and have consistently been among the first to try our new products, provide honest feedback and give them a five-star rating in the App Store. The camaraderie runs deep, fostered by shared experience and an understanding that each companies’ success will elevate everyone’s status.
Many first-time entrepreneurs succeed without participating in an incubator, in the same way many professionals can have successful careers without going to college. But this will increasingly be the exception. Young companies passing on the incubators can squander time, even years, when they could be building their networks, getting greater market feedback and scale their business with investor dollars.
In the past year, I have seen four great teams with early traction and Stanford founders stagnate while trying to do things on their own. Each had a few connections with the investor community, but they didn’t compare to what the best incubators deliver. Don’t make their mistake — if you want to build a company with world-wide impact, joining an incubator may be your most important early step toward achieving success.
This post was taken originally from TechCrunch.com