Fear and Loathing in Tech Incubators
It is no surprise that people are starting to announce that tech startup incubators have reached a precarious bubble. A recent WSJ article declared a glut in tech incubators, citing the fact that there are nearly 100 in operation. While it is hard to verify these numbers, just based on the past 12 months there have been 20 such unique programs based in NYC, and some of those programs graduated multiple classes. Therefore, taken altogether on a global basis, there could very well be an abundance of these tech startup programs.
The question however is not whether there are too many. There is obviously a large poll of willing participants, investors jumping in, and mentors to participate. Anything that can help boost the prospects of early stage startups is not a bad thing. The real question comes down to a personal decision amongst the founding teams as to whether they really need these programs and whether the price and time justifies the value.
In a post I wrote several months ago asking the question of whether joining an incubator made sense, I wrote the following in regards to determining the value equation:
Is an incubator a worthwhile investment? The people that you meet and the network you build is useful. The advice and connections from mentors can help focus your vision and guide your startup in the right direction. However, you have to ask yourself whether the value you receive is worth more than the time, equity and money you commit to an incubator. If you have a solid team, a released product and some decent traction, a program would be more of a distraction. If you simply have an idea and are looking for co-founders or you are part of a two person team with a very early stage product, then an incubator probably makes more sense. The essential question you need to ask, what does an incubator provide that you could not by your own volition and persistence acquire?
In the time since writing that, the value equation has shifted significantly. Y-Combinator companies get $150K as soon as they reach demo day, TechStars companies are now collecting $100K, and Launchpad LA startups receive $50K. Just one year prior, these startup teams received less than $20K. That 5% to 6% that you are giving up previously might have been quite rich, and I believe that founders need to be very careful about doling out equity. Now that stipends are de facto seed rounds, it does weigh the decision to join an incubator more favorable. Coupled with well attended and highly visible demo days providing an inside track to investors, the case for incubators is pretty strong.
All the being said however, there are still important factors to consider. Teams that have traction already could probably do better on their own gathering the resources and contacts they need. Ideas that are too innovative, certain categories of technology such as hardware or consumer products, and sectors that are highly niche may not get as much benefit from the mentors or interest from investors. Single founders, teams that rely on outsourced tech, and folks not already in the location (or social networks) of the incubator program and organizers all face significant hurdles in getting accepted. For obvious reasons, serial entrepreneurs would not get much value from an incubator.
If an incubator can help move the needle in your progress, then go for it. Just make sure that the incubator meshes with what you need, that the value equation makes sense, and that the incubator itself is a quality program. Regardless of what you may hear in the news about incubator bubble and accelerator meltdowns and nuclear winter in startup land, you job is to focus on what is going to make your startup successful. Just make sure to navigate towards your goal.
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