StartupNorth

Author: Ron Piovesan

  • What is the problem accelerators are solving?

    There is currently a preoccupation with accelerators in the entrepreneur world resulting in a large increase in programs.  Arguably, the result of this frenzied growth is that ‘entrepreneurship’ is as commoditized as college. Unlike college, it is extremely hard to know which programs are adding value and which ones are wasting everyone’s time. This doesn’t mean investors aren’t in the know and they are favouring the programs they like – example, YC or TechStars.

    It could become (or has already become) virtually meaningless to be an accelerator born internet entrepreneur so why would you give up 6-12% of your company to do it? For investors it is really hard to cut through the noise. I think this is because few people actually know why accelerators exist at all. In some cases I fear that the people that are creating new ones aren’t likely clear on why they are creating these programs either.

    How does anyone know which ones work? What problem are they solving? What metrics should they be tracking in order to get better at what they are doing?

    Defining the problem(s) accelerators solve.

    There are three problems I think accelerators are trying to solve:

    1. Investors need to identify talent.
    2. Talent needs to find the right investors and coaches.
    3. Education system failure.

    The first is a relatively easy problem to solve. It is hard for investors to identify talent at an early stage, accelerator programs offer a filtering tool for investors as they can take the top talent that applies and narrow it down to those that have the highest potential based the criteria of the particular program. If an investor trusts the filtering job done by the accelerator than that accelerator is providing value.

    A suggested metric for this: measure how many alumni of a program receive funding, from what type of investor, and in what time span?

    The second problem that talented people and teams have is finding the *right* investors and coaches. By the right investor I mean someone that will give you enough money and coaching that you can slowly de-risk your startup a little more and build momentum as you grow towards being a sustainable business. Founders need coaches to apprentice under while they build their company. The right investor is someone who will put in enough of their own money and time and they can help you get your business through the major milestones it faces. This likely means that party rounds are bad. What I think should be the goal are 4-6 investors and/or an individual (not a VC) has a 1/2 to 1/3 of the total round.

    This should result in the person(s) who put in significant capital also have a board seat and have their sleeves rolled up ready/able to help.

    A suggested metric: track who put in the most personal money in the round and are they on the board of directors or some other significant role in the company? How much time a week/month do they spend with the founders?

    The failure in education is a much harder problem to solve. Is it the traditional silos that are limiting education or is it the expectation that you go to school to be trained for a job or a bit of both or something else? Is the failure the education system (K-12) or is it the students or both? In higher education you have environments that are designed to encourage independent thought that is backed by facts and thinking. You should be exploring and developing your networks.

    At no other point in your life will you be surrounding with that much leading edge research and thinking. Just because a school doesn’t hand you your first startup with funding and office space does not mean the education system is failing entrepreneurs!

    There is also already a process for very smart people to apprentice under others that have already developed their ability to take massive amounts of information and focus it on an outcome. It also happens to come with a filtering mechanism built right in that improves the likelihood that the person that finishes is relatively in the top few percent. It’s graduate school. The process is not perfect but it is a process that works.

    Educating people is hard. Coaching people is harder still. If an accelerator is going to solve the failure of the education system in educating entrepreneurs it should take that part very seriously and not dismiss the education system as having nothing to offer.

    A suggested metric: Does the accelerator have qualified educators and coaches that put in a significant amount of time (more than 1 hr a week) with each entrepreneur? Are there measurable outcomes expected on the entrepreneur? Are there consequences for not meeting expectations?

    Accelerators should be more than marketing to the entrepreneur and placing them in a zoo for the public to see them in action. Education is serious business and it is about people’s future. Entrepreneurs need to have realistic expectations and enter with a clear idea of what they want out of the opportunity.

    Everyone around accelerators is still learning about how to make them work and figure out for whom do they exist. It is an exciting time in education — just be sure to track stuff that matters while you run the experiments!

  • A Perspective on Investor/Mentor Whiplash

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    The other day Fred Wilson posted an opinion and some tips on Investor/Mentor Whiplash. He took the position that that is a big problem for accelerators as well as early stage and seed environments. Brad Feld took this as a bit of a misunderstanding on accelerators, he insists that TechStars creates an environment where early stage companies can learn to manage the whiplash. Brad Feld states:

    I disagree with Fred. It’s not a big problem. It’s the essence of one of things an accelerator program is trying to teach the entrepreneurs going through it. Specifically, building muscle around processing data and feedback, and making your own decisions.

    On the surface this seems correct. A problem (one of many) new founders face is the overwhelming barrage of mentorship (good and bad) and information mixed with the inability to filter. An accelerator should be able to provide the environment where a strong group of peers with some guidance can help to build the “muscle around processing data and feedback.” In the last 6 years I have noticed that is a common problem founders face and their ability to manage it is important to their success. It wasn’t until I experienced the whiplash myself a 2nd and 3rd time that I fully appreciated the damage it can do even if you are prepared for it.

    Generally what I tell early stage founders:

    • Only talk to customers once you have something to show them — but that shouldn’t take you a long time, don’t go heads down for months. Asking people what they want and not focusing on something specific they can touch/feel is a path to busy work and infinite sadness.
    • Avoid the mentor parties/socialization. Find two (or three) good people with opposing views and bounce specific data off them but only when you have done something that requires fresh eyes to advise you how to interpret the results.
    • Focus on what isn’t working when getting feedback from mentors. Founders need to be positive but you need to focus on the bad things when talking to your close mentors that have been through it already. If they can’t help you with the tough stuff why are you spending a lot of time with them?
    • Don’t expect a direct answer. Experienced mentors know you are the best person to run your company, not them, and they have developed a way of not telling you what or how to do things but instead challenge you to figure it out in a positive way.

    Whiplash from mentors doesn’t just happen in startups, it happens everywhere people are giving you advice or have something to gain by influencing the decisions you are about to make or the opinion you develop on something.

    Being prepared and learning to manage the whiplash isn’t just the essence of accelerator programs, it is the essence of education that culminates in the top level you can achieve to filter information – a phd program. At the phd level the filter muscle is almost too strong but that is a topic of a whole other blog post.

    The scary thing for entrepreneurs is that accelerator programs are too often run by people that don’t know how to effectively educate people and/or they have something to gain financially by the decisions founders make.

    I think this *is* a big problem in accelerators. I wonder if the ability to teach that skill to founders (or select founders that already have that skill) is the difference between a successful accelerator (which is really only TechStars and YC) and one that isn’t (pretty much everyone else)?

    [Editor’s note: This post was originally posted on Jesse Rodgers’ Who You Calling a Jesse blog on July 31, 2013.]

  • Startup “ecosystems” in Canada are doing well but…

    Editor’s note: This is a guest post by Jesse Rodgers. Follow Jesse on Twitter . This post was originally published on November 21, 2012 on WhoYouCallingAJesse.com.

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    The Startup Genome released another report mapping top startup cities but this time a bit more specific than it’s heat map from April of this year. Canada did well depending on how you interpret it with Toronto at #8, Vancouver at #9, and Waterloo at #16. In its previous report, Startup Genome ranked Toronto at #4, Vancouver at #16, and Montreal made the list at #25. Oddly Waterloo wasn’t listed in the previous ranking but made it into the top 20 in the new report while Montreal remained outside of it.

    Focusing on my Ontario centric nitpick – the separation of the Toronto and Waterloo “ecosystems” when they are anything but separate is not going to give an accurate picture of Canada’s awesome startup communities. They are unique communities but their strength comes from how they work together in the same ecosystem. The emotional energy (and money) burned in defining how they are different is holding Canada back from an even better and sustainable growth curve. That energy is in the report.

    In the report:

    “Toronto competes for startups with regional competitors such as NYC, Boston and nearby Waterloo.”

    Then in the Waterloo profile:

    “In the near future, it will be interesting to see whether Waterloo is able to hold on to its talent base or whether it will be sucked into Toronto.”

    Would you say that about Palto Alto sucking talent to San Francisco and vice versa? No. It’s the valley. A huge area that is far more developed but very similar to the Toronto – Hamilton – Waterloo. The problem, I think, is that at some point in the past when local economic development groups were competing on a similar scale for tax dollars (and manufacturing plants) they narrowly defined regions (Golden Triangle, Golden Horseshoe, etc) where everything above the escarpment is barbarians and the urban modern folk live below next to the cold blue lake.

    There can be (and there are) distinct communities inside the larger Toronto – Hamilton – Waterloo ecosystem. Each community has its strength. Each success in the larger ecosystem helps the entire ecosystem.

    The big problem the ecosystem faces (in Toronto):

    Startups in Toronto receive 71% less funding than SV startups. The capital deficiency exists both before and after product market fit. Toronto startups receive 70% less capital in Stage 2 (Validation) and 65% in Stage 4 (Scale).

    The ecosystem most likely lacks a sufficient quantity of all kinds of startup capital sources: angels, super angels, accelerators, micro VCs, VCs etc. As a result Toronto startups rely more on self-funding, or rounds from family/friends.

    The other big problem (in Waterloo):

    Waterloo has a funding gap (96% less in the second stage) for early stage startups before product market fit, probably due to a lack of super angels and micro VCs. There are high numbers of accelerators and much lower numbers of super angels and VCs than SV.

    Solving the funding problem in Toronto also solves the problem in Waterloo, more companies that able to find the money and the talent to scale in either or both communities helps both or am I missing something?

    Building a strong economy, community, and ecosystem isn’t a zero sum game.

  • The gale of Creative Destruction at University of Toronto

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    University’s play a role in startup communities. Brad Feld’s Boulder Thesis (and I bring it up because he is coming to Toronto on October 30th) says that the people that attend and work at the university are the most important contribution to the startup community a university can make. The institutional components (labs, programs, and technology transfer offices) are less important according to Feld and when they are done wrong they are more damaging than helpful to startups.

    In Toronto you have a number of schools to feed the community; Ryerson, George Brown, York, OCAD, Sheridan, and of course the University of Toronto.

    The University of Toronto is the top ranked school in Canada and around the top 20 mark globally according to various rankings. As one of the oldest institutes of higher learning in Canada where some of the proudest scientific discoveries in the country’s history have been made (Insulin, stem cells, etc) there is a lot to talk about in terms of research. It is 21st globally in engineering and computer science yet it feels like it is hardly part of the conversation with regards to the startup community in Canada. That should be ok, they are a feeder to the community as Brad Feld defines it. I disagree with it being ok. I believe if there is a lack on entrepreneurial activity on campus that campus likely does not feed the community anywhere close to its potential.

    Beyond those that would feed the community there are many potential leaders on the campus from faculty (many have founded companies and had exits) to students that are confined by the silos that naturally occur in large institutions. Outsiders might point to MaRS as the main effort related to the university, it’s not, although it certainly has helped. There are a load of new programs that are working on building entrepreneurial culture on campus. The following is a non-comprehensive list:

    • Hatchery – The Entrepreneurship Hatchery is a hothouse for the best ideas of entrepreneurial undergraduate engineers.
    • UofT Hackers – a community of University of Toronto students who build great products.
    • Techno – “the flagship event of the IOS’s entrepreneurship education program, which also includes year-round programming for physical sciences and engineering students, faculty, and alumni at the University of Toronto.” This program has some amazing science focused companies.
    • Techna – “to shorten the time interval from technology discovery and development to application of such technologies for the benefit of patients and the health care system, and to facilitate the convergence of basic investigation, technology development and translational research”
    • UTEST – recently announcing it’s first cohort, UTEST “provides nascent software companies with start-up funding, work space, mentoring and business strategy support.”
    • Creative Destruction Lab at Rotman – Is focused on helping people build massively scalable companies. Folks like Nigel Stokes, Dan Debow, Dan Shimmerman, Tomi Poutanen, Dennis Bennie, Nick Koudas.

    All of these programs represent a positive focus on entrepreneurship and commercialization that is gaining momentum. The last one, Creative Destruction Lab, is particularly interesting (disclaimer, I am involved there) because it is located in the Rotman School of Management and is being designed to build a bridge across the silos as well as into the Toronto startup community. It also hosted a DemoCamp event at Rotman for the University community that attracted over 300 people (two thirds engineers) and 44 people applied to present in September. More are being planned and applications to be part of the lab program itself are open to all UofT students and Alumni until October 14th.

    As the entrepreneurial momentum builds on the University of Toronto campus I believe it will fill one of the gaps that currently exists in Toronto’s startup community by both educating students that feed the community and attracting faculty (and their spouses) from abroad that could be globally connected leaders in the community.

     

  • Meaningful metrics for incubators and accelerators

    Editor’s Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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    Incubators and accelerators are businesses just like the businesses they intend to help develop as they travel through the startup lifecycle. As with any business, there are indicators that they can measure to give them a better idea of how they are performing besides the big public relations buzz around a company being funded.

    You need to measure these numbers so that when a success happens you can hopefully gain some insights on how to help the other companies better. The problem is that even though the model of an incubator or accelerator is generally known, how to take 10 companies and have 10 successful growth companies come out the other side of the program is not.

    The issue of what metrics to use is an important but complicated problem to solve.

    Set the baseline at the application process (pre-program)

    There are far more applicants than slots offered in an incubator or accelerator program. However, it is at this point that a program is gathering it’s best intelligence. You need a baseline measurement at the start of the program that you can measure every team against. What you should be tracking:

    • Who applied to the program that you didn’taccept (this is your control sample)
      • Track their progress on Angellist, Crunchbase, and/or go back to their web site in 3, 6, 12 months.
      • Keep a ratio of who is still in business and what their status is.
    • Maintain, in a CRM system, information on the applicant founders and their team members.

    Measure the incubator/accelerator clients (in-program)

    At this point there are X number of startups with Y number of founders and maybe Z employees. What you want to measure are things that demonstrate they have improved (or not) and which are things you would expect to see improve as a result of the services provided by any incubator or accelerator:

    • Current customers and revenue per customer (for most that will be 0 at the start) that will work across revenue models: CAC, ARPU, churn rate.
    • Sales funnel – do they have leads? How many? Are they qualified leads? What are they worth?
    • Average user growth in the last month.
    • What mentors or advisors did they meet through the program? What role did they take with the company?

    Run these numbers at the start and at the end of the program. If you are a pure research focused incubator, ignore this section. You have a much longer time to see success – but few are truly research focused.

    Monitor the graduates: Alumni (post-program)

    This is a very important thing an incubator/accelerator can do — build and maintain its alumni connections. These folks not only help at every stage of running future programs but their success lifts the profile of the program, just like how alumni of prestigious business schools make the business schools prestigious.

    There should be reporting milestones at a set interval (probably financial quarter based) where you gain the following insights on the company:

    • Customer growth percentage: CAC, ARPU, and churn rate all expressed as percentage growth.
    • Sales funnel growth expressed as a percentage.
    • Average user growth in the last month.
    • What mentors or advisors are currently active with the company?

    Ideally you should have a position that is equivalent to a close advisor or board observer with the company once it graduates from the program.

    Defining success

    If an incubator or accelerator program is successful, the graphs should be heading up and to the right at a much faster pace than they would have been had startups not entered the program.

    The only baseline data I know of is from the Startup Genome. In their report they explain the stages and the average length of time it takes a company to go through them. For an incubator or accelerator to demonstrate that they work, I would expect a successful company to move through the stages faster than the average. I would also expect them to fail faster than the average.

    Tracking metrics puts a lot more overhead on an accelerator. It is likely more than they budgeted for to start. However, if you want to know if the program is successful it is worth the investment of an admin salary to track and crunch data. This is just a baseline, track more and figure out what the indicators of success are for you.

  • Waterloo’s Next Five Years

    Following on with Jevon’s original post of Canada’s Next Five Years, I want to discuss Waterloo.

    Five years ago, I organized the first StartupCampWaterloo. It built on the great community and open space tools from BarCampWaterloo and focused participants around startups. Simon Woodside, Ali Asaria, Mic Berman, and myself felt like we needed to something a little different to get the grass roots high tech startup community moving in Waterloo. It was a year after the Accelerator Centre opened and the community was just finding its feet. Waterloo felt bold and creative with a strong core of startups but it was small.

    With the aggressive growth of RIM and Open Text, the Waterloo community has spent the last five years building a strong and diverse tech community. In addition to the homegrown companies, the community was fuelled by a few California based companies making some big purchases in Waterloo Region. These three purchases resulted in the parent companies building a larger presence in the Waterloo Region:

    In the last couple of years Communitech grew beyond simply being a promoter and connector for local tech companies. Communitech has established a home base for startups in downtown Kitchener. They took the bold move to put a vibrant space for startups in an old Tannery complex, which has also attracted the likes of Google and Desire2Learn, each with hundreds of employees based in the building. The Communtech Hub is a strong message to entrepreneurs that the community is there to support you.

    However, the next five years are where all the attention the Waterloo region has drawn to itself is going to have to transition to results and further momentum growth. This will depend a lot on the companies that have been founded in the last five years and includes some that are now YC-backed.

    Looking at what Canada needs to do, what role does Waterloo play in that?

    Education

    Waterloo is home to arguably the top Engineering School in the country, the University of Waterloo. With programs like REAP, CBET, and living environments like VeloCity it is committed to educating and supporting students with regards to entrepreneurship. It is also focused on having them experience it through the Co-op program that allows students to work anywhere in the world with many choosing to work at Facebook, Google, Twitter, Apple, and a ton of different startups in the valley. This results in students that have a big head start in terms of building a network as well as learning about problems that could turn into great product ideas. That experience and opportunity is a big win for Canada’s startup community. We can see the rise of Waterloo alum lead startups like Vidyard, Kik, Upverter, Well.ca, TribeHR, LearnHub, Thinking Ape, Pair, and others.

    And it’s not just UWaterloo, Wilfrid Laurier University and Conestoga college are also doing their part. The MBA program at WLU has a focus on entrepreneurship and they are leveraging the Communitech Hub environment. Conestoga College is educating the work force in the region making it a very important partner in ensuring there is a workforce for growing companies.

    Community as the Framework

    The Waterloo Region has a ton of tech oriented events. A lot of folks assume the trick is to find time to attend all the events you want to attend. The real trick is figuring out which events you should attend, and how to make the most of your attendance. Are you attending for education? recruiting? to find funding? to be part of the startup scene?  More entrepreneurs need to clearly identify their desired outcomes from each event, and they participate accordingly.

    What there needs to be, is a greater focus on founders and information sharing.  Peer mentorship, breakfasts with friends at Angie’s, or just chatting at the end of the day. We should avoid gossip, we don’t want or need a ValleyWag for Waterloo Region. Building a company is difficult enough that we don’t need to be hindering each other. Entrepreneurs need to be able to establish trusting relationships with each other, to build I see it happening more and more but there isn’t enough peer mentorship going on.There are a large number of entrepreneurs that have been through the ups and downs of a startup. It includes fundraising, business development, channel partner discussions, contract gotchas, etc. We need to help entrepreneurs build connections with each other.  There is a huge opportunity for entrepreneurs to build trustworthy relationships and share their experiences.

    Tighter connections to elsewhere

    Jevon calls for tighter ties to Silicon Valley. But it’s more broad than that. Canadians need to get out of Canada. We need to build stronger connections in New York, Boston, Los Angeles, Buenos Ares, London, Mumbai, Shanghai, Eastern Europe.

    We are doing a pretty good job at getting exposure in Silicon Valley. We have companies going to YCombinator (Vidyard, Allerta, Upverter, Pair and others). The C100 has done an amazing job identifying Canadian expatriates and connecting them across the country. The C100 has expanded to NYC and to the UK. Entrepreneurs need to expand to.  We have startups raising money from NYC (Kik raised from USV), Boston (TribeHR raised from Matrix Partners). We need to get out of the local ecosystem and build products for global customers.

    I would be remiss to ignore the need for tighter connections to Toronto as well. Whenever anyone says “Toronto is better than Waterloo for…” or “Waterloo is better than Toronto for…” a kitten dies. Stop it. No one really cares and outside of Ontario people think it is just one big region. Lets build stronger ties and use both cities for everything they have to offer.

    Policy

    Beyond establishing the Hub, Communitech has done a lot of work on building connections with all levels of government. They have a big role to play with influencing policy as does Canada’s Technology Triangle Association.

    Grow Like Hell and Don’t Stop

    Hootsuite is mentioned but Waterloo is home to tech companies that have taken the long path to growth. RIM, Open Text, and Desire2Learn are examples of rapid growth (over a 10 year period) tech companies. What Waterloo needs is more of that. The challenge is going to be getting the talent that knows how to work sales funnels, marketing, etc to live in the Region in sufficient numbers.

    What I would guess is going to happen initially is that US VC-backed companies that started in Waterloo will have to find a way to balance having their product teams in Waterloo and marketing/sales teams in major US startup hub cities. That means an office in Waterloo and one of Palo Alto, Mountain View, San Francisco, New York, or Boston. This allows them to hire developer talent outside of the higher salaries zones that is on par (or better) but feed on the energy in those cities. The US market and understanding it quickly is key to many of the current fast moving startups in Waterloo.

    For the Region of Waterloo to live up to the expectations, in the next five years these companies will need to attract that marketing/sales talent to move here for work or be able to use Toronto for that.

     

  • Early stage companies don’t need money, they need customers

    Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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    The popular belief in Canada is that the tech startup world has been fairly light on investment dollars relative to other industries in Canada. Because there is such a disparity in seed or angel round investment size in Canada vs the US people tend to point to that as a reason people go south. The perceived result of the funding problem (and likely the weather) is that there are 350 000 Canadians in the Valley. No one can argue the talent to build global calibre tech companies exists in Canada (or at least has Canadian passports) but you can certainly argue Canada lacks that certain something to keep them here.

    Five years ago Paul Graham observed that the total cost to get a tech startup started had dropped dramatically and will continue to do so.

    So my first prediction about the future of web startups is pretty straightforward: there will be a lot of them. When starting a startup was expensive, you had to get the permission of investors to do it. Now the only threshold is courage. – Paul Graham, 2007

    There is a lot of attention around getting young people money but does that help them? Does that keep them in Canada? I would argue that the ones that do need and can use capital don’t pull up stakes and leave town for the investment. They leave town (or the country) because they are missing something more valuable than money — customers, mentorship that helps them get customers, and a network of peers.

    Know thy stage

    The problem with comparing funding deal levels in Canada and the US is that it ignores the stage the company is in relative to the stage of US startups raising money for the first time. The Startup Genome report 01 and the Startup Genome Compass offers startups an excellent way to measure themselves against a benchmark of over 3 000 startups. In the report there is a table (shown below) that gives you some overall averages for all startups.


    From the Startup Genome Report 01.

    In last seven years of being involved in the Canadian startup community (mostly in Waterloo) and in the last three years leading what is arguably the best student focused incubator in Canada while founding my own startup. I saw dozens of companies peek into the Discovery phase, a few move on through to the Validation phase.

    What I have seen happen before the discovery phase:

    • Talk of raising money is used to pull in a large group of talent.
    • Focus is not on customers, it is on technology or raising money.
    • There is little help by way of mentorship that takes the time to understand the dynamic of the group.
    • Mentors focus on finding a way to get them money so they can work full time.

    What founders fail to do:

    • Define the problem.
    • Find out what people are looking for.
    • What else do they need in a system?
    • Determine what they might pay for it by getting them to pay for it and talking to our customers.
    • Measure, iterate, repeat.

    Startups need to focus more on customer acquisition and growth in Canada, enough talk about raising money

    There are so many business plan and pitch competitions one could make a career out of attending them. This gives a false sense of success because the ‘winner’ is determined on a lot of factors except their ability to actually get customers. The game becomes about (and has been it feels like) how to put together a report on an idea (business plan) and present in a way that makes you look confident.

    The game is really about getting lots of people to give you their money because you provide value to them. What makes you better than others is that you are chasing a much bigger problem that will provide value to a full percentage of the world’s population. Bonus points if you change the world.

    Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

  • There are two types of startup incubators in the world: YCombinator or TechStars

    Note: This is a guest post by Jesse Rodgers who is a cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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    Incubators and accelerators [Eds note: and cyclotrons] have but one purpose: move startups along in their life cycle at a faster pace than they would normally and increase the likelihood of a return by providing that service. If you are a startup looking at applying to an incubator you need to understand that the differences in how these programs differ go beyond the money they give you in exchange for equity.

    An oversimplification of the incubator/accelerator space is to classify them as either a Y-Combinator (YC) or a TechStars (TS). If you really look at the booming world of incubators for high tech startups you see a model that either based on education and peers that is driven by a strong personality (YC) or a model that is more institutional, follows a script, and feels less personal but is more in line with how VC’s work (TS) (I would place 500 Startups right in the middle between YC & TS which is arguably representative of a third type). There is plenty to be found about the differences but here is a bit of a deeper exploration into the differences.

    Startup lifecycle

    Startups have a number of key phases in development that is best outlined in Fred Destin’s presentation on startup lifecycle.

    1. Start
    2. Launch
    3. Build
    4. Chasm
    5. Scale

    With the 12-14 week cohort models, like YCombinator and TechStars, the focus should be on moving through starting and on to launch phase. There may be some that get into a build phase. The incubator or accelerator hopes that once they are done a 12-14 week program the startup will be in a much better position to move quickly through the build stage and at least take on the chasm phase.

    Where I see the key difference between YC and TS is that YC seems to be able to get companies to go through stage 1 to 3 and they accept companies mainly in the start phase. TS seems to not attract a cluster of companies in a particular phase or not care about what phase a company is in.

    The basics of an incubator/accelerator (whatever you want to call it)

    Within the execution of any incubator or accelerator program there are, in my mind, 4 core stages in a typical cycle:

    • Recruitment
    • Onboarding
    • In the program
    • After the program

    Within each of these of these stages there are a number of specific activities that all incubators do but in general they aren’t all that different.

    Recruitment

    YC currently leads the thought leadership with Hacker News, Paul Graham’s (PG) blog, and it’s success. Applicants fill out a form and once told they have an interview, travel to YC in Mountain View for an interview. They get just 15 min with a small panel and the panel does a bunch of tricks to the founders like carrying on side conversations – there are a lot of blog posts about that.

    TechStars has adopted a more consistent process over it’s many affiliated programs (it appears) but they lack YC’s Hacker News or thought leadership (although they would claim otherwise). With Techstars there appears to be an affiliation with the Kauffman Foundation and the role they are taking in promoting the incubator model in general they have made themselves an authority in the space. From people I know that have been in the program it is a fairly standard process similar to raising Angel capital.

    Onboarding

    I am not sure on TS on-boarding but YC has a very short interview to decision to start of program window. YC has a little book that is like a long Wikipedia article written by Paul Graham that offers insights and baseline knowledge. From what I have been told the YC machine is pretty much immediately available to you when they say “you are in” — startups decide when to tell others. What is really interesting is that YC doesn’t announce it. They generally let a company know they are YC funded on the interview day but they don’t make a big announcement or anything.
    Not having a big incubator announcement is a key difference here though. I will assume that with TS it is just like YC in that they have decided to fund you, they are now available to you. However, TechStars (it appears) doesn’t approach announcing the cohort in the same way as YC — they announce them ahead of the program.

    In the program: peer mentorship, startup culture

    Each program runs for roughly 3 months, 12-14 weeks, where mentorship, various events, and a demo day to close it off normally occur. Each week is important given that each team only has 3 months. Over three months there are phases you can generally identify:

    • Teams becoming familiar with each other, their mentors, and what they need to do (first 2 weeks).
    • The heads down getting stuff done phase (8-10 weeks).
    • Funding mode going into Demo Day (2 weeks).

    Other incubator programs are fairly similar with any given week involving office hours (optional or required) and a speaker/dinner. The office hours are used to check in and place goals on the teams. Throughout the term there are demo nights, which are used by YC as a way to put peer pressure on other teams that might not be moving as fast as others.
    Where they differ here is in the education of the founder(s). From everyone I have talked to that has gone through YC it seems to me it is a very challenging but rewarding relationship for a certain type of founder. That would make sense as a certain personality type will work best with Paul Graham’s way of doing things and will excel. I am not entirely sure it is simply a hacker/coder persona as most assume. I think it is a personality and learning style that goes a bit deeper.
    TechStars has a co-working model with parts very similar to YC. The key difference is that TS doesn’t have the Paul Graham approach to educating founders so you will get very different details depending on who is running the program. TS also gives the startups a place to work where YC leaves them to find a house and work out of it.

    After the program: Alumni network

    The key value any incubator or accelerator provides after the program is the alumni network of companies that are now a few steps ahead (depending on the age of the incubator there could be alumni with very large companies) of the current cohort in the program. Over time these alumni are your best mentors and connectors.

    It is at this phase where the greatest value is for the startup, I believe. You now have access to what the old folks call a big rolodex (social graph) that will open many doors which essentially leaves it up to the entrepreneur whether their company will succeed or not. There are few to no barriers, generally speaking.

    Any alumni of YC or Techstars still have contact with the folks in their cohort and all cohorts along with Hacker News. Techstars Network is so big they have a conference just for alumni while YC taps its alumni for all kinds of things. Also, founders seems to find going through the program a second time is different but just as valuable. These massive networks of successful alumni with a flock of high profile admirers is very similar to that of Higher Education alumni networks, so much so it convinces me that this entire process is a form of higher education.

    Programs that work copy YCombinator, even TechStars did

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    The current culture of education focused incubators started in my mind with YCombinator (started in 2005). I believe what we are seeing with the success of YC and TS is new take on graduate school. Both are different, both work, and people can have strong opinions either way. They feed a need that I don’t think people outside of incubators quite understand yet, learning to be a founder is really hard. Being a successful founder is even harder. The bet is that if you help young founders focus on what is important they will see success earlier or just simply see what success looks like.
    If you are looking at an incubator anywhere (there are lots of great programs out there) you need to understand that the money is secondary. You need to find a program that will fit with the way you learn and has companies that you want to work with. It is just like how you picked your University or College except this time it can cost you a lot more (in equity) if you are successful.

    Note: This is a guest post by Jesse Rodgers who is a cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

  • Trying to understand incubator math

    Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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    Incubators are not a new addition to the financing and support for startups and entrepreneurs. On the surface, incubators and accelerators seem like a low cost way for VCs and government support organizations to cluster entrepreneurs and determine the top-notch talent out the accepted cohort. The opportunity to investing in real estate and services that enable companies where the winners are chosen by the merits of the businesses being built. It feels like a straight-forward, relatively safe bet to ensure a crop of companies that are set to require additional growth capital where part of the products and personalities have been derisked through process.

    However, its not as simple as putting small amounts of investment into a high potential company. An incubator is a business and it’s sole purpose should be to make money.

    What are the basics of an incubator?

    The basic variables in setting up an incubator business are:

    • Cost of the expertise, facilities, services and other overhead
    • Amount of $ to be invested/deployed
    • Number of startups
    • Equity being given in exchange for cash
    • Return on the total investment

    There are cost of operations: real estate, connectivity, marketing, programs and services for the entrepreneurs, and the salaries of the individuals to find the startups, provide the services and build successes. These costs are often covered by governments, in exchange for the impact in job creation and taxation base. We’ve seen a rise in incubators that are funded on an investment thesis, where an individual or a set of “limited partners” provide the initial investment in exchange for an investment in the companies being incubated.

    How much do incubators cost?

    The goal is to efficiently deploy capital to produce successful investments. I’m going to explore how incubators make money by making a few assumptions based on the incubator/accelerator models we’ve seen in Toronto, Montreal, Palo Alto and New York.

    Basic assumptions:

    • Capital Investments: 10 startups x 20k = 200k invested with an assumed ‘post-money valuation’ of $2.2MM
      • This means you now own 9.1% in 10 startups each with a post-money valuation of $220k
    • Support Costs: 10 startups x $10k = $100k
      • This is the cost of real estate, furniture, telecommunications, internet connectivity, etc.

    Alright, we’re planning to deploy $200k and it need to provide approximately $100k in services just to provide the basics for the startups. We’ve spent $300k for the first cohort and and that is before you pay any salaries, host an event, etc.

    Additional costs:

    • People:
      • $100k per year salary for one person to rule them all. Call them executive director or dean or something.
      • Assuming you’re not doing this to deploy your own capital, the person or people in charge probably need to collect a salary to pay their mortgages, food, etc.
    • Events – Following the model set forth by YCombinator or TechStars we have 2 main types of events. Mentoring events where the cohort is exposed to the mentors and other industry luminaries to help them make connections and learn from the experience of others. The other event is a Demo Day, designed to bring outside investors and press together to drive investment and attention in the current cohort, plus attract the next cohort of startups.
      • Mentoring event: $1k for food costs with 25 founders
      • Demo Day: approximately $5k
      • Assumption: 10 mentoring events plus a demo day per cohort adds $40k.

    The estimated costs are approximately $340,000/cohort. Assuming 2 cohorts/year plus the staffing salary costs, an incubator is looking at $780,000 that includes 40 investments and a total of $4.4MM post-money valuation. If we assume that I’m a little off on the total capital outlay, and we build in a 30% margin of error this brings the annual budget to appromimately $1MM/year to operate.

    How do incubators make money?

    Incubators make money when the startups they take an equity stake in get big and successful. The best exits for an incubator come when one of their startups is acquired. Why acquired? Because the path to getting acquired path is shorter than the path to going public which would also allow the incubator to divest of their investment.

    Let’s do the math. If your running an incubator hoping to get respectable returns on the $1,000,000 you’ve laid out above, let’s say it’s not the mythical 10 bagger but a more conservative 3x, the incubator needs one of the companies to exit at near $30,000,000. It can be one at $30MM or any combination smaller than that totalling $30MM. This needs to happen before any dilution and follow-on funding for your cadre of companies. You have to assuming that they can make it to acquisition on the $10,000 and services you’ve provided. For more on incubator math, check out there’s an incubator bubble and it will pop.

    The bad news is that it isn’t as simple as that. Startups are not just something that exist in a vacum. There are a lot of unknown variables that can make or break an incubator.

    • percentage of startups that fail (or turn into zombies) in the first two years after investment
    • time frame return is expected
    • how many startups currently produce that kind of return annually
    • total number of startups that receive investment in any given year
    • total number of acquisitions in any given year
    • avg. number of years a startup takes to get to acquisition (because they aren’t going public)
    • avg. price a startup sells for (I bet those talent acquisitions drag the average way down)
    • what do VC’s currently spend on their deal pipeline?

    It is the unknowns that are where the gamble exists. You can tweak the numbers all you would like but assume startups have a no better fail rate then any small business. The common thinking on that is 25% of businesses fail in the first year, 70% in the  first five years? If just more than half of those companies are alive in one year you are doing well. If one out of those 20 is acquired in 5 years and you get 3x return do you succeed? Do you have to run the incubator for the 5 years at $1MM/year to be able to play the odds?

    Maybe this is why so many incubators focus on office space, it’s easy to show LPs what they are getting for their $5MM for 5 year investment, plus an impressive number of “new” startups that have been touched by the program (often without an exit, you know the way incubators make money).

    What am I missing?

    Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

  • Going over the falls together in barrel

    Editor’s Note: This post was written by Jesse Rodgers. Jesse is the  CEO of TribeHR, the Director of the VeloCity Residence at the University of Waterloo, organizer of StartupCamp in Waterloo and an allround great guy.

    Jesse stopped by my offices in Toronto to chat about sales, marketing and PR (convenient of @jevon to write about the same topic recently). Jessementioned that the TribeHR team had left Waterloo and were holed up in a hotel room in Niagara Falls. They were living together, working together, writing code and being more productive than they could with the distractions of family, friends and the strong community in Waterloo. I was amazed at the commitment of the team to step away from their personal lives and get the next version of TribeHR built before they head to SxSW for the Small Business Party. You can read the update or watch the caffeine and other stimulant-driven vacation summary. There’s lots startups can learn about improving productivity by going on vacation together.

    Barrel to go over the Falls

    Over the month of February the TribeHR team has been taking advantage of low hotel prices in Niagara Falls and turned a suite at the Hilton into our office (we were at the Marriott, but the Hilton is $20 less a night and has king size beds). The goal for this little retreat to the romantic city of Niagara Falls: get TribeHR polished off, implement our new user interface, get our go to market strategy figured out, and start executing on all cylinders.

    If it works, we will be a stronger team (who can put up with each others snoring) and will have made some awesome progress. If it fails, then we know our team isn’t as good as we thought.

    Other cities we thought about were Montreal and Toronto. Toronto would have far too many distractions for us so we had settled on Montreal (we would have loved to work out of the Knotman house). The problem there was that those of us with young kids would be too far away to head home if we had to. So here we are in Niagara Falls, in a tiny hotel suite, working our asses off.

    Room with a view in Niagara Falls by TribeHRIn terms of work hours put in, when you do this, it’s pretty crazy. While in a hotel room, assuming you ignore the casino across the road, you work from around 8am to 12am, take out eating time, it is around 14 hrs or so of ‘work’ per person. It is a crazy amount of focus and the results are great, at first. Once all the easy stuff is taken on, we then have to address the bigger problems and we start to slow down. But we can work through it and it’s a heck of a lot easier when you have completely removed yourself from your routine.

    At the end of week 2 we have learned the following:

    • It takes 5 min to turn a hotel room into an office but the wifi sucks, the tv can’t use a PS3, and anything but pizza is way overpriced.
    • Not having kids wake you up at 6am doesn’t mean you won’t be awake at 6am.
    • The US side of the falls gets a rainbow in the afternoon.
    • The Starbucks coffee is never hot, Tim Horton’s wins
    • As a team we can take each others grumpy moods and swear it out until everyone is laughing again.
    • Hotel chairs spin really well, and provide a great distraction near the end of the day

    Why have we done this? Because we are still a very much a bootstrapped startup with plenty of distractions (wives, kids, other commitments) in Waterloo, and if we are going to get anything done while things are still so early, we have to immerse ourselves and get to work. It’s uncomfortable and exhausting, but it’s productive, energizing and we love it.