Name brand incubators like TechStars and Y Combinator offer fellowship, recognition, and access to investors for startup teams. It’s like getting the skeleton key to the secret clubhouse, they promise. But all is not well behind closed doors.
Startup incubators don’t guarantee that your startup will be successful when you leave the program after three months – although the big profile programs do hint at success through association. Still, when founders discuss incubators, the conversation focuses on which incubator programs they should apply for. Instead, founders need to seriously weigh if participating in an incubator program is a good fit at all.
Incubator programs can hurt your startup. Since 2005, Y Combinator has funded 460 startups with only a handful of big wins. The rest have faded away, been acquired quickly without growing out of a feature company, or continue to hang on as zombie companies, which are not dying, but not really doing anything either. Who knows how many of these companies could grow into something bigger without the pressure of generating a return for early investors in just a few short years.
It doesn’t help to dwell on what could have been. There are concrete examples of how some startups have been seriously damaged thanks to their participation in startup incubators. Before you fill out that application for the next class, consider these possible negatives to participating in a startup incubator:
Some incubators have better access to mentors than others, even though every incubator touts your access to world class mentors as a selling point of their program. Take a look at the list of current mentors on the program’s website, and try to identify businesspeople that you admire. Do you recognize at least 50 percent of the names? Are there mentors who have proven themselves in your industry? For example, if you are working on a streaming video startup and the program’s mentors have zero track record in streaming video, they won’t be able to give you critical advice. These folks might be good to know after you have launched your public beta as you start to look toward raising a Series A round, but they won’t be helpful in the beginning stages.
Also, be wary of the mentor to startup team ratio. Paul Graham notes that Y combinator doesn’t have formal mentors but rather advisors that you can meet with, including himself. The amount of time that you get with someone who can truly help you is more valuable than the experience of the mentor if you get just one quick check-in per week. If your mentors flake and have no time for you, the value of getting into the incubator is diminished.
If no one is interested in your startup immediately after demo day, you most likely won’t get additional funding. Investors call this “signaling.” Think of investors like a flock of headless sheep, paying attention not to your product, but rather who else is biting on your offering. Investors typically look to see who is “leading the round,” which means that if a high-profile investor is betting on you, then they can convince others to invest based on the their name and reputation alone.
Notable Boulder-based venture capitalist Brad Feld has addressed the issue of signaling on his blog, but he frames the conversation around seed investors who don’t want to contribute to the Series A. This is similar to what can happen when investors aren’t interested in your startup after demo day.
Maybe your pitch wasn’t convincing, or maybe investors already have a competing product in their portfolio. Maybe they don’t view your market as big enough, or your industry as “hot” enough (social mobile local apps, anyone)? Either way, it’s not your team’s fault that you don’t get immediate investment. However, this will be held against you when you do start to pique the interests of investors down the road. They will wonder why other investors passed it up.
Lying on stage at demo day
Startups are coached to death when it comes to their demo day pitch. The pitch has become so formulaic, it’s almost laughable when you get in a room full of startup founders who are participating in an incubator. The formula goes like this: I had a personal problem, here is the story. I couldn’t find a solution, so I had to work on it to fix it myself because I am so passionate. Here is the solution. Here is how it works. We are so successful, that now we are working with xyz partners on a few deals that we are excited about.” Sometimes, the pressure to uphold this formula can cause founders to stretch the truth, or even worse, lie outright on stage.
That’s what happened at the most recent TechStars New York Demo Day. The CEO of 4G hotspot provider Karma, Robert Gaal, recently lied about a partnership with mobile car service company Uber on stage. Shortly after, the CEO of Uber, Travis Kalanick, took to Twitter to call out Gaal’s lie. In a later blog post, Gaal also admitted that during the same presentation, he overstated a partnership with American Airlines. The media latched onto Gaal’s overstatements, and now it will be hard for investors to trust his projections in the future.
Publicity that you can’t control
Just as startups are in competition for users and funding, startup incubators are in competition for brand equity. The more reputable the program, the more quality startups are clamoring to get into them. This can cause some incubators to pull a few shady moves for publicity. Take for example the TechStars reality show on Bloomberg TV.
The first class of TechStars NYC had a documentary show sprung upon them when they were accepted into the program. The show made many startups look bad for drama’s sake when it turned into a reality show style program. ToVieFor founder Melanie Moore has publicly renounced the show as damaging her reputation due to editing decisions that misrepresented the timeline of her company. ToVieFor shut down soon after the the program ended.
When incubators need publicity, they use the stories of the individual companies in their programs to tell an overall story about the brand. When your startup can’t control the story that is revealed and how much is revealed, the incubator could actually harm the perception of your startup for future investors.
The stress of relocating could harm your team
To be a part of any startup incubator, you’ll have to relocate for the length of the program. Packing up and heading out to New York City or Silicon Valley for a few months can be so stressful that it might take your focus away from building the best company that you can. Teams that are worrying about subletting apartments, moving pets, and taking care of their family’s security can cause additional stress during an already stressful time.
Paul Graham has equated relocating for Y Combinator with moving for college. If you are anything but an 18-20 year old with few financial obligations and a taste for adventure, the process is a little bit more intense than moving into a dorm.
Steve Jobs wouldn’t last a day in a startup incubator. He didn’t want input from people who had been there and done that.
If you are headstrong and unwilling to compromise, then you may spend more time fighting to keep your original vision than working on your product. Plus, the incubator owns part of your company, so you can’t get rid of them easily.
For some companies, admission into a startup incubator has connected them to the investment community in ways that were previously unimaginable. Yet for every startup that has thrived, there are plenty more who should have weighed out their options ahead of time. If you are thinking about accepting an offer from your dream startup incubator, think like a real entrepreneur and make your decision accordingly.