5 Ways to Vet an Incubator
The age of the accelerator is officially upon us.
Here is but a glimpse into the proliferation of start-up programs in the U.S. and Europe as reported by U.K. research firm NESTA:
Since 2005 there has been year-on-year growth in the number of companies taking this route through their early-stages. Y Combinator has taken on more and more companies each year, but the main driver of growth has been that new programs have been created. Techstars now operates in four U.S. cities and is growing a global network of peers. In Europe, the number of programmes has risen from just one in 2007 to over 10 in 2011.
Simply put: there are a ton of incubators and accelerators to which you can apply. But not surprisingly, as the quantity of programs has gone up, the quality of the aggregate has arguably gone down.
So if you're thinking of applying to an accelerator or incubator, know that they're not all created equal. It's your job to figure out not only which one is best, but also which one is best for you.
In a panel Thursday at the PreMoney conference in San Francisco put on by 500 Startups (an accelerator itself), four leaders in the world of start-up accelerators came together to discuss the business models of their respective companies. It also turned out to offer some pretty good advice to entrepreneurs on what they should be looking for.
The panel included Christine Tsai, a partner at 500 Startups; Thomas Korte, the founder of AngelPad; Garry Tan, a partner at Y Combinator; Sam Teller, managing director and co-founder of Launchpad LA; and Katie Rae, managing partner of TechStars Boston.
Here are five basic principles to keep in mind:
1) Location is key. "Back in the olden days, if you were a scholar of any sort, you would go to Rome and Athens," said Garry Tan. "If you're serious [about tech start-ups], you come to Silicon Valley." It's also worth noting that you should be in the best place for your particular industry. So if it's media or fashion, New York may win out over California. The point is to choose the location wisely--it can have a material impact on the success of your company in its early stages.
2) Look at the growth--and cohesion of the companies who have graduated. Katie Rae, a partner at TechStars Boston, says she judges the success of her classes based not only the growth of the firms that graduate, but also whether or not the teams were able to stay together in the long run.
3) The IRR of the firm. The internal rate of return on a given incubator might not be the easiest figure to come by, but from a financial perspective, it's important to see if the program has a proven track record of producing "winners." Beyond IRR, look at the quality of the engineering talent on-boarded by graduates of the program. That can be a good indicator of the program's eventual success.
4) How much capital raised by portfolio companies. This is a metric you should track, but not obsess about. "We do not tell them to focus too much on fundraising," Garry Tan says. "People get so focused on fundraising that they don't focus on the business."
5) Can the accelerator expand your network? Ultimately, the most valuable thing about an accelerator is the people. Check out who else is involved--both advisors and other entrepreneurs entering the class--and then make them your best friends.