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

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Incubators and accelerators 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, mentor driven, follows a script, and feels less personal but is more in line with how VC’s work (TS) (right in the middle is where I would place 500 Startups – 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. 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. For a startup this little difference could be a big one if you are concerned about managing expectations of outside investors as you go through 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. The character of the TS program can vary because it is so mentor driven and puts the onus on the startup to engage those mentors. There is a big plus to this approach as you are more likely to find a good fit in the large mentor pool for you and your company. 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

The current culture of education focused incubators started 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 or startups fully 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.

 

Why I think Higher Education should experiment with an incubator model

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In Canada the rise of the incubator choices is quite noticeable. The success of the Y-Combinator (YC) model is hard to ignore, it seems to be the accepted way to grow young tech companies at the moment. However, it isn’t clear if the model works anywhere but YC and TechStars, these programs cost a lot of money to run so does the math hold up for everyone?

How many companies make it a big enough exit (assuming you need a $30 million exit per incubator) and in what time frame? In Canada there is a trend that shows some crazy growth in exits but how many are in that ‘big enough’ range or more that haven’t been around for 5-10 years or more? I think one maybe two. It isn’t just Canada though, how many exists are there in a year for any tech startup anywhere? Likely not enough to sustain the current number of incubators globally.

The talent pool is half empty

The limits on size, depth, and overall health of the talent pool is a problem for incubators if you assume that they simply tap the current talent base and help them be successful faster. If the number of exits isn’t currently there then you have to look at ratio of incubators to exits and figure out how many companies it takes to fill the gap (what is the current market and what do you have to create? Yup, it is basically a product you are creating). At a guess, the current level of incubators needs to create a lot of brand new entrepreneurs from those that would normally go work for someone.

There is talent out there but they aren’t being developed in any sort of formal educational process. A VC backed/run incubator might not be the best place for young guys and gals to receive this education for the first time. Not saying it couldn’t work, I think Y-Combinator was initially successful not because of the money or location but because an educator runs the program. In 2008, Mashable was claiming that “Y Combinator is the premier university of Internet startups.” I agree. What motivates YC though? Paul Graham’s comment on my post in StartupNorth offers a bit of insight as well (also with a bit more on why in his Why YC post).

When we started YC, the returns seemed completely unpredictable. (They still do actually.) What allowed us to do it was that we didn’t care if we made money.

An incubator that is about educated the ‘student’ is a lot like higher education and should not be about profit. That might be a values based statement but it is something I believe. If you are measured by the success of the student and not by the profit margin, the student has a better chance at success.

Herein lies the opportunity for Higher Education. Not unlike engineers or scientists, there is a demand for entrepreneurs (or if you are Richard Branson you want intrapreneurs). It isn’t good enough that students have the technical chops, they need to be creative and look at solutions to problems in a way that is willing to take more risks. This is soft skill development we are talking about — you can’t engineer an entrepreneurial process. Being entrepreneurial pretty much requires you laugh at the limitations or restrictions and find a way to succeed. You can engineer an education process that offers some perspective on that but that requires some entrepreneurial thinking to design and implement.

Higher Education needs to look outside of courses and modules, entrepreneurs shouldn’t be measured

Traditionally to address a skills gap in a student a course would be created and the student would receive a credit. This just increases the cost of education for students and if you have been paying attention, there is a bit of higher education bubble according to Peter Thiel. What I have seen from students is that they absolutely are against another course that is outside their specific discipline for various reasons. Enter the incubator model in higher education (or in VeloCity’s case the dormcubator).

Create an environment where innovation, networking, competition, and experience is shared as well as celebrated. Create it  outside of the traditional academic course model. Support it institutionally so the quality and knowledge is passed on (doesn’t disappear when students graduate). Then try to connect it back into the classroom. Leverage institutional Alumni networks for mentors and other forms of support. Don’t be afraid to fail a few times.

There is no set way to execute on this model but you need to try, iterate, and keep going. My belief that in order for higher education to remain relevant it needs to experiment with these different ways of learning. Students will not only appreciate it, I bet they will have a better experience and years later the institution will benefit by having them re-engaged.

Footnote: the incubator model

For those unfamiliar with an incubator or accelerator model, the easiest way to explain it: an incubator is where a group or individual provides resources (money, mentorship, space to work, expert services, a network of people) to an early stage company in exchange for equity or another arrangement. Generally it is always equity but in Canada we have publicly backed models (the Accelerator Centre for example) that charge rent for services or in the case of VeloCity you pay what you pay anyway to live in residence and it is a service offered to students.

The entire explanation of the VeloCity model is another post.

More on incubator in Higher Ed: To Be or Not To Be: University Incubators