How to Avoid Startup Incubators That Do More Harm Than Good
6 questions to ask before applying to an incubator
You have an idea and want to make it a reality.
Incubators and other programs like them are often among the first organizations you’ll encounter on your startup journey. As a result, they often seem like a logical place to start. After all, you probably know next to nothing about startups and have many questions:
How do I form a company?
How do I meet a co-founder?
How do I build and sell a product?
How do I raise funding?
If the incubator is well-run, incubators can be a great thing for founders. However, they rarely are. We went through several incubator programs and made progress but never really seemed to grow due to their advice. The advice from the people leading the incubators always seemed a bit off, but being a first-time founder — who was I to say?
I then heard the below statement from YC Partner Aaron Harris while in Y Combinator’s Startup School and realized I wasn’t crazy after all. Although his comments are directed at accelerators, I think the comments also apply to incubators.
I think the number of accelerators is proliferating faster than the number of startups. This terrifies me because most of the people who are advising companies in accelerators have no idea what they’re doing. They’ve never worked at a startup, they’ve never started a startup, they’ve never funded a startup outside of the accelerator. You’ve got to ask yourself why on Earth should I take advice from this person who’s never done any of the things that they’re telling me I should do, never seen any of these things work?
In hindsight, it’s patently obvious. But at the time, it wasn’t obvious. It is easy to be enamored by programs with famous university brand names, by various rankings, and by people who genuinely want to help and seem to have intelligent answers to your questions. However, these incubators often do more harm than good.
Here are some questions to ask yourself to avoid bad incubators.
Questions to Ask
Who leads it?
The incubator should be led by startup founders and/or investors who have had successful exits. Program leadership is the most important question because, without the right leadership, many other problems will arise.
Programs led by founders whose businesses aren’t high-growth startups (i.e. service businesses, for example) are particularly dangerous because they think they know what you need when in reality, it’s often the exact opposite.
Where is it located?
In a remote-first world, this is controversial, but I think you should seek out incubators based in Silicon Valley. Paul Graham, the founder of Y Combinator, listed 18 Mistakes That Kill Startups. Bad Location, specifically not being in Silicon Valley, was what he listed as the second greatest mistake, right after “Single Founder”.
Startups prosper in some places and not others. Silicon Valley dominates, then Boston, then Seattle, Austin, Denver, and New York. After that there’s not much. Even in New York the number of startups per capita is probably a 20th of what it is in Silicon Valley.
— Paul Graham
By participating in an incubator in Silicon Valley, you’re much more likely to interact with successful founders and investors because the density of successful startups is much greater than anywhere else. Prolific angel investor Elad Gil compiled the below data on unicorns in October of 2020 and found that the market cap of Silicon Valley-based unicorns is still far greater than anywhere else, despite being much less populous.
If you’re still not persuaded, imagine what it would be like to go to a program for aspiring musicians in Denver or New York City instead of Nashville. I’m sure both Denver and New York City have programs for aspiring musicians, but the caliber would be nowhere near what it is in Nashville because that’s where the top talent is. This isn’t to say you should completely discount them, but really understand why they chose not to be in Silicon Valley (ie for a particular industry), and it shouldn’t just be convenience.
What is their track record?
Have they helped other founders turn ideas into large, scalable, and repeatable companies? Becoming a successful company is your goal. If they have helped other founders achieve this goal, that is a good sign. If there are crickets or excuses, it is probably not a good sign.
How will time be spent?
Before financial modeling, pitching investors, or legal mechanics are even relevant — you need to build something people want. To build something people want, you need to 1) build and 2) talk to customers. You don’t do either of those things in a classroom.
However, several of the incubators that I participated in, spent the vast majority of our time in classes or lectures talking about topics that were only relevant once we had strong product-market fit. They focused on topics like financial modeling, pitching investors, or legal mechanics.
But since the vast majority of startups never reach product-market fit, it’s a complete waste of time to be focusing on just about anything else until you get to that point. Look for incubators where most of the time will be spent building and talking to users.
How do they deal with charlatans?
In any endeavor governed by power laws where many enter but few win, an entire cottage industry of charlatans will emerge. A charlatan is a person who:
“pretends or claims to have more knowledge or skill than he or she possesses, a quack”
Incubators tend to become hives of charlatans because they are full of eager founders trying to grow their companies and willing to take risks to get there. Charlatans love to masquerade as guest speakers and often take the form of dev shops, Economic Development people, academics, UX designers, coaches, and various other business services who want to use startups for their own financial, professional or reputational gain.
This isn’t to say these people are by default bad people. Just remember there is no such thing as a free lunch and try to understand their incentives.
What is the cost/benefit?
With all of this said, even if the incubator is not great, the cost/benefit may be worth it. Don’t forget that your time is your most valuable resource, though.
So, Should you apply to Erlich’s incubator?
Erlich’s incubator from HBO’s Silicon Valley is probably one of the best-known incubators out there, so let’s see how it stacks up.
Erlich’s incubator is:
Led by a former founder (albeit a car money exit, not boat money)
Based in Silicon Valley
He has a short track record, but he backed Pied Piper, which immediately attracted the interest of top investors
All they do is work on their startup, no bullshit classes
Erlich’s house is definitely a den of charlatans
10% equity isn’t cheap, but they were able to get off the ground, raise funds, and scale
Despite many of Erlich’s shortcomings and his incubator being a hive of charlatans (they do make great entertainment), he’s doing better than most incubators.
Key Takeaways
Not all incubators are created equal, so make sure to ask yourself these questions before applying.
Who leads it?
Where is it located?
What is their track record?
How will time be spent?
How do they deal with charlatans?
What is the cost/benefit?