The Market for Credit and Supporting Entrepreneurs

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Over the last few years of growth in Accelerator or Incubator programs, the overall media coverage of early stage tech startups has increased in Canada. The lack of coverage before the programs existed made media coverage a metric of success. For any entrepreneur support program to be relevant there is a requirement to be mentioned in the media resulting in the Alumni Success Metric as a key metric used to identify success of any program.

I think we need to find a better way to measure these programs and the effect on the problem they are solving.

As more and more programs compete on this metric they spend more on marketing to rise above the others which results in an increase in the costs to deliver a program. I believe competing on this metric can foster animosity between programs and hurts collaboration between a large number of extremely talented people.

What is the problem?

Founders are taking advantage of everything offered to them (as they should) which results to this common scenario in Canada (not based on any particular company).

  • Founders went to University of Toronto (and/or Waterloo and/or Ryerson and/or WLU and/or insert school here) and worked out of Banting and Best (and/or the Garage and/or the DMZ and/or any coworking space).
  • Someone else on the team took a pre-accelerter or some other community education program.
  • They are clients of MaRS and Communitech and Halton Innovation and…
  • OCE has awarded them a grant., MaRS IAF will invest in them, IRAP might have had a role.
  • They might get into another accelerator program before they finally get a few key investors at the table and start to grow.

When they get VC funding or something big worth a media push, what happens? Up to 10 organizations want to be listed and each of them release a story about how proud they are. Few if any list the other organizations or programs or people that helped (because the list is huge).

How this may hurt entrepreneurs?

Funding and product announcements aren’t success, they are a milestone that is blown way up in the local media as a result of everyone getting excited (excitement is good, celebrate the good things). It is possible that the positioning of programs media releases could confuse the market that the company needs to reach.

That said, the media coverage froth is likely localized to Canadian media so it probably has no effect on where the companies market likely is: the United States.

This intense market for credit can be frustrating for everyone who delivers programs. In reality it takes a community to raise a startup. From funders that have done it before to programs designed to focus attention, lower the risks associated with getting started, and build peer groups. We should all celebrate the entrepreneur and collectively be excited there is so many people out there helping them.

The metric is good for something.

Where I think the Alumni Success Metric does work is that helps inspire new founders. Knowing that good things have happened for those that come before them in the same program is the same metric Higher Education uses to recruit undergraduate and graduate students.

How do we avoid the zero sum game around credit?

The metric is not useful for defining the success of any program as most of the support happens in parallel in accelerators or incubators. It is extremely difficult to know what helped and when and where or what made the difference. It creates something for programs to compete over when they should be collaborating.

The stories about companies growing shouldn’t be “x program’s y company has done z” but instead be about how the company achieved this milestone and all the people that helped along the way.

A metric needs to exist that can demonstrate how effective a program is without having each program battle it out with marketing.

Step #1 is that we have to stop thinking of service organizations or accelerators or incubators as startups. They aren’t. They are philanthropic organizations offering a support group and networking services for founders, funders, and service providers.

The main goal is not to build sustainable models around these organizations (how can most realistically generate revenue outside of an education or philanthropic model?) but build a sustainable ecosystem that doesn’t require the current level of philanthropic support. Every philanthropic organization should hope that one day the problem they are solving is no longer a problem. That should be no different with supporting entrepreneurs and everyone should work together to achieve that outcome.

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)?

Teaching entrepreneurs with less mentorship, more apprenticeship or why YC works

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I believe that humans have and always will learn better by doing. We can label it experiential learning or project based learning (not case studies) but at a very simple level it is learning through doing something with an “expert” guiding the process. Learning by doing is essentially apprenticeship but we don’t use that label because we have strictly narrowed it down to the trades which ignores the historical context:

Each age tends to create a model of apprenticeship that is suited to the system of production that prevails at the time. In the Middle Ages, during the birth of modern capitalism and the need for quality control, the first apprenticeship system appeared, with its rigidly defined terms. With the advent of the Industrial Revolution, this model of apprenticeship became largely outmoded, but the idea behind it lived on in the form of self-apprenticeship—developing yourself from within a particular field, as Darwin did in biology. This suited the growing individualistic spirit of the time. We are now in the computer age, with computers dominating nearly all aspects of commercial life. Although there are many ways in which this could influence the concept of apprenticeship, it is the hacker approach to programming that may offer the most promising model for this new age.

The context of the above quote is a series of posts in support of a book about great masters in history, placing Paul Graham amongst them. The article gives some great insight into Paul Graham’s path to building YC and how it represents a model for modern day apprenticeship. This, I think, is lost in the proliferation of YC clones that are now being targeted as a bloated trend destined for a shake out.

What has bothered me for a long time with the proliferation of structured mentor programs throughout startup ecosystems is just how overworked the mentors are. One mentor could have 30-50 ‘companies’ assigned to them. On the other end the entrepreneur has to compete for attention and insight as well as deal with contradictory information that usually comes out of context from the wrong person (btw, I think Clarity.fm is going to help fix this). It’s hard, takes a lot of thinking, and I believe the return is low outside of very specific situations.

When TechStars cloned the Y-Combinator model it missed one important detail:

“Paul gives these kids money, but he also gives them a methodology and a value system,” YC investor Fred Wilson said to Inc. about Graham. “I don’t mean this in a negative way, but Y Combinator is more like a cult than a venture capital fund. And Paul is the cult leader.” – Inc.com

By being a cult of a certain ‘group think’ YC is exploiting peer mentorship, expert mentor opinion, and the master/apprentice relationship it is kinda like grad school. Where the student enters many years learning how to be a researcher like their supervisor. The best Phd supervisors are the ones that also imprint their methodology and value system on their students. I believe you can identify them by the personality similarities in their grad students and the peer relationships that are formed between students that last a lifetime. Their own path to true mastery continues past their graduation.

Retooling that process of building great researchers to building great founders is something that Paul Graham likely did subconsciously as he does have his PhD. He mastered the process, added his own bits, and keeps improving on it.

The methodology and values YC educates is one way, there are others, but there likely isn’t better process to educate entrepreneurs. Those that work closely with one or two “mentors” already know this. In reality they aren’t just a mentor, they are the master and you are their apprentice.

There are no shortcuts or ways to bypass the Apprenticeship Phase. It is the nature of the human brain to require such lengthy exposure to a field, which allows for complex skills to become deeply embedded and frees the mind up for real creative activity.

YC kick starts the exposure and focuses it. Your peer group helps re-enforce discipline, Tuesday dinners gives you a weekly check point with intellectual offerings outside of the thing  you are thinking about all day/week/year, and a due date of a demo day gives you something to work towards. The process continues outside of the 12-14 weeks with the YC team ready to support and guide at any time. The peer group of YC founders stays connected and, I would guess, does the bulk of the recruitment now.

What part of YC is the secret to its success that the clones haven’t copied? It could be the atmosphere and purpose at the start (running out of his living room) created the right culture that mixed with YC’s selection process a it evolved that picks mostly the right people that don’t want shortcuts, want to learn, want to grow. They focus on the founders not the funding or office space or mentors or the demo day. They build a community of like minded people that are constantly learning, perfecting their skills, developing mastery in entrepreneurship.

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

The “Dormcubator” and the entrepreneur by-products of higher education

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Having had a great opportunity over the last year and a half to work at VeloCity I am convinced that the “Dormcubator” (The Globe and Mail made it up, not me, but have you Google’d it?) model in higher education is a hugely important effort as part of an overall student success strategy in higher education. This, in my opinion, is because it leverages a by-product of higher education and therefore is actually easy (with regards to the relative cost of new investment) to make relatively successful but it also essential to consciously enhance the experience for those students that enter University for other reasons than academic development.

The business take of by-products is pretty well explained in this Think Vitamin article, here is my take in the context of what I am doing at VeloCity in Higher Education.

Why are entrepreneurs a ‘by-product’ of Higher Education?

Higher Education is tooled to create more academics, not employees (and yes, the government talks about direct influence on job growth and training but the economic impact of higher education is itself arguably by-product). The process of undergraduate to graduate student to post-doc to finally a prof (with a few steps in-between) is a long held process to find the best of the best academics. It attracts the some of the smartest people in society to push themselves and give it a try. Pretty close to all of those that try don’t go all they way to a PhD but that doesn’t mean they aren’t hugely intelligent and capable people, they just aren’t academics.

This talent that ‘falls off’ after their undergraduate or even graduate experience is what fuels the job market with highly skilled and knowledgeable work force. Those that go on to do research fuel development of new technologies, develop greater understanding of how technology or others influence us and our world, and educate the next generation of talent. Those that don’t go on to become academics and do research and/or teach are a by-product because the primary product that higher education focuses on is the academic or researcher.

At the University of Waterloo it is a bit different. The University recognized early on that Engineers aren’t going into Engineering to be PhD’s — they go to be Engineers. Consciously or not, the University was focused on creating professionals as well as academics and researchers which crosses all Faculties. Developing the worlds largest co-operative education program made perfect sense. The University’s second core product was born, a highly skilled and educated professional worker. The University of Waterloo produces amazing Engineers, Actuaries, Optometrists, Accountants, Pharmacists, etc. All roles that could get PhD’s but it isn’t the primary focus of the program.

Enter the Entrepreneur as a professional product of higher ed

The Entrepreneur is a different professional and much harder one for a University to create a program for. An Entrepreneur tends to not fit in any one program, likely aren’t attracted to or perform well in the lecture style environment, and they come from just about anywhere without a set academic career goal. They likely go to University because it is an interesting and a challenge, not because they want to conform to a system. Waterloo has the coders that are entrepreneurial but we also have the business or medical or physics or math or recreation and leisure entrepreneurs. Even the Co-op program isn’t ideal as it is focused on getting  the student a job and a great experience as an employee. However, my theory is that the Co-op program along with new leading edge academic programs attract some of the most talented and entrepreneurial students in Canada.

Campus culture in Canada and Waterloo is weak

Where the University of Waterloo has fallen short overall is on building a campus culture and experience. The challenge of the co-op grind every 4-8 months (month 1 is apply to jobs, month 2 is interviews and midterms, month 3 is midterms, assignments, and maybe interviews, month 4 is exams, repeat), the constant moving, the lack of real community connection and culture in the City of Waterloo, along with a bunch of other things means the positive experience and culture is difficult to create. A lot is changing though.

Enter the frat house for entrepreneurs that make stuff

Certainly by no means an Animal House, VeloCity is a fraternity of entrepreneurs that share a common goal in life but come from all sorts of different programs and/or streams on campus. The living environment allows Waterloo students to establish solid friendships with future co-founders, expand their network, and find some of the best co-op jobs at startups that are out there. This has been called a “dormcubator” as it mixes a dormitory setting with an incubator like program.

The advantages to students are numerous but I think there are a few core things:

  • Broader base to build relationships with fellow students: connections across educational streams means students meet people they likely would have never met, Computer Science and Software Engineering students rarely go to class together and then we through a Business student in there.
  • A common experience: the experience in the environment gives those that live there a common but exclusive connection even if they weren’t living there at the same time. These connections are stronger than simply the ‘you went to Waterloo?’ connections — which are also fairly strong given the grind all of Waterloo Alumni have experienced.
  • Leveraging connections the University has already: Startups based in Silicon Valley, Montreal, Toronto, Boston, etc have a self selecting group of entrepreneurs to aim for at the start of every term they are looking to hire. This gives the students easier access to learn from other startups and still keep their debt loads down.

The residence, in my mind, is one part of an important shift to improve the student experience outside of the academic streams recognizing that students go to university not only for the lectures and assignments. This is something that is easier for Waterloo to do given the Co-op program is something it is already deeply committed to and it certainly is not an academic process. I would challenge other schools to look at similar ideas.

The Ryerson DMZ is another take on this model in Canada that is really exciting, lets see some more.

There is a likely a PhD in waiting on this topic so yes I oversimplified this but it is a blog post after all ;)