We have seen a huge rise in startup incubators recently. In fact, some people suspect that there are now more incubators than startups. The incubator hype followed the huge success of Y Combinator, pioneer and godfather of all incubators. I think that most incubators are destined to fail, and I believe that there are only two extremes of the incubator model that make sense.
Here are the two models that are able to win:
That's the Y Combinator model, the one that has been replicated successfully by other accelerator programs such as TechStars. Accelerators are beautiful things. I believe that they create huge value in early-stage inexperienced startups teams. That is because joining a startup accelerator is a magnificent replacement for business school.
In fact, Y Combinator calls a part of its program Startup School. It's better than business school. It's the hands-on curriculum that a startup founder should have. It's the condensed wisdom that helps avoid the most common mistakes that kill startups. What accelerators accelerate is the learning curve of the participating first-time entrepreneurs.
The accelerator's deal is the following:
You join a program for a well-defined limited period of time (usually between three and six months) and within that limited period of time, you get pushed to the limit. You get access to everything that helps you get your startup off the ground in a way an experienced entrepreneur would do it. They provide you with resources, knowledge, and their network. After the program, you can see the horizon, and the accelerator says goodbye. In turn, the accelerator keeps a small stake in your company. It's a fair deal.
The company builder
That is almost the opposite model. In my opinion, there is a reason why company builders aren't called "startup builders". It's because they don't build startups. They build model companies with proven business models. Company builders make a lot of sense when they focus on execution and execution alone. Successful company builders concentrate on a clearly defined market segment or industry, such as e-commerce.
One of Berlin's most (infamously) known company builders is Rocket Internet. Some people call it a "clone factory", a nickname referring simultaneously to their company building strategy (taking business models that have been successful elsewhere and replicating them in untapped markets) and their own company culture (a factory-like adrenaline-driven culture of execution).
The company builder's deal is the following:
You become part of a machine designed to rush pre-defined business models from zero to a hundred as fast as possible. The marriage is carved in stone and the company builder will stay until the company is profitable and ready for sale. The aim is an exit at a high valuation which will help the company builder refinance its operations. The company builder steers and controls the ship, the founder is just another captain. In almost all cases, the company builder owns a clear majority stake in the company and manages the company's fundraising. It's a fair deal for those who like it.
Both accelerators and company builders can be successful. As soon as you enter the middle ground, however, I believe that things get shaky. Accelerators accelerate startups, company builders build companies. There is no way to "build lots of startups" out of a central incubator trying to take too much ownership and staying for too long. Conversely, you can't "accelerate lots of companies" out of a central incubator trying to establish highly effective processes and operations in just six months for a bit of equity.
Mixing the two paradigms doesn't work. It's either an autonomous founding team with an awesome idea and a clear vision, trying to change the world, dedicated for the long term, ready to starve and turn their dreams into a reality, no matter how long it takes. Or it's an execution-driven management team, chasing the money, leveraging shared resources and synergies to execute even faster and on an even larger scale to rake in even more money.
Two games. Two kinds of players. Don't mix them.
If you liked this post or if it gave you new food for thought, then please be so kind to leave a comment below (no registration required) or share it with your network. Your feedback is what keeps me going. Thanks!Sunday, April 21, 2013 at 02:00AM | David Link