Help founders find the best incubators. Help incubators become better.
Paul Graham, the founder of Y Combinator, writes in his blog on How to Fund a Startup:
According to the National Association of Business Incubators, there are about 800 incubators in the US. This is an astounding number, because I know the founders of a lot of startups, and I can't think of one that began in an incubator.
What is an incubator? I'm not sure myself. The defining quality seems to be that you work in their space. That's where the name "incubator" comes from. They seem to vary a great deal in other respects. At one extreme is the sort of pork-barrel project where a town gets money from the state government to renovate a vacant building as a "high-tech incubator," as if it were merely lack of the right sort of office space that had till now prevented the town from becoming a startup hub. At the other extreme are places like Idealab, which generates ideas for new startups internally and hires people to work for them.
Whereas incubators tend to exert more control than VCs, Y Combinator exerts less. And we think it's better if startups operate out of their own premises, however crappy, than the offices of their investors. So it's annoying that we keep getting called an "incubator," but perhaps inevitable, because there's only one of us so far and no word yet for what we are. If we have to be called something, the obvious name would be "excubator."
Sounds frighteningly similar to India, doesn't it? Until you realize that this was written nearly 20 years ago, in 2005. Today, almost two decades hence, it is no longer ambiguous what a good incubator program looks like.
India's incubator model is outdated and needs to change. We need more excubators.
What policy-makers can do
- Exit incubation: Government bodies should not be involved in incubation. All that time and money is better spent making the space easier for private players to enter. For example, India has no simple, two-page convertible instrument for startups to raise money like the SAFE that does not rely on CCPS or need any intervention from lawyers and CAs. Private players cannot solve this without deregulation.
- Terminology is critical: We should consider seriously the terminology we use so that it is not misleading to founders. Grant programs, co-working spaces and skill development initiatives are immensely valuable, but we must label them accurately to prevent misleading founders searching for incubators.
What incubators can do
- Be selective: Low thresholds for admittance benefit neither the incubator nor the founder. A more selective process ensures that only startups with genuine potential are nurtured.
- Invest capital for equity: To align incentives properly, incubators should invest capital in exchange for equity. This return on investment model ensures that incubators are as invested in the startup's success as the founders themselves.
- Skip mentorship: Offer mentorship exclusively from experienced ex-founders. Irrelevant advice from non-founders is more harmful than no advice at all. No advice > irrelevant advice.
What founders can do
- Prefer angels to incubators: Angels are quicker to move, provide capital in exchange for equity, and are highly motivated to help you achieve PMF and beyond. Angels embody what incubators should strive to be.
- Be the invisible hand: Only choose incubators that offer guaranteed capital on transparent terms. By refusing to engage with subpar incubators, founders can pressure these institutions to improve their offerings.
- Transactional awareness: If you choose to join an incubator, remain aware of the system's flaws. Understand that incubators are transactional and approach the relationship with a clear-eyed perspective.
What we're doing
- A public database: At Excubatr, we're working on putting together a database of incubators with an objective grading system to help new founders weed out bad apples.
- A handbook for incubators: Most incubators are well-intentioned but poorly aligned. A handbook helps them standardize to globally accepted best practices in incubation.