Incubators are a Ghetto (opens in new tab)

- We all met weekly for presentations, half the advisors knew what was going on the other half did not. Right before demo day the other half of the advisors were shocked that we had pivoted and planned on selling our OLD idea. Those same people then pitched our OLD idea to the few investors as a possible pivot, which was a huge WTF.

- They brought more politicians then investors to the demo day presentation.

- The investors they did bring focused on healthcare companies and companies further along(profitable, paying customers, large user bases etc)

- The entire operation was paid for by a single guy, who subsequently was the only investor in most of the companies in their "Accelerator" round.

- Most of the companies accepted had non-technical founders/co-founders. Most of the companies could not even launch a product, yet alone MPV, in 3 months because of this, and some had trouble launching a product after 1 year.

Overall we turned down money from their "Accelerator" which ended up being a great decision. If you are going to use an incubator make sure to heed the advice this article gives.

But until you do, I think you're going be in a worse position for getting VC funding. You might not be able to get it at all, or if you're in a hot area, you might get it but at terms that aren't' really great. Certainly, when you can show traction, or massive growth, or profits, or massive growth in profits, at each level the terms you'll get for outside investment get better.

We're about to enter an incubator program (Startup Chile) and I have no idea what their funding rate is. I'm guessing that less than %50 of the startups get funded, certainly by VCs, within 6 months, mainly because Startup Chile supports very early stage companies.

Here's our goals in startup chile:

1. Have 6 months to not worry about our burn rate because its covered while we try to get product market fit.

2. Have 6 months in close association with others doing startups to exchange ideas around technology, business, marketing, etc, that will help us get to product market fit.

3. Test our product in latin america as we try to get product market fit.

4. Expand our relationships with developers in latin america.

For our product and market, a successful product market fit should make us immediately ramen profitable, and probably "we don't have to take money on bad terms ever" profitable. If at that point we want to pursue money, or pursue the go-big-really-fast california venture capital style startup, we'll be in an excellent position to do so because we'll have traction.

If we fail to find product market fit, or we get close but things don't take off, maybe we'll be well set up to apply to Tech Stars or YC, or start offering Dave McClure rides to the airport.

One things for sure, after those 6 months funding or no, we'll be a lot more incubated than we are now.

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Wanted to clarify:

The goal of Startup Chile is to incubate a startup culture in Chile. Thus they're bringing around 300 companies to Chile each year (3 overlapping groups of 100 that stay for 6 months). In exchange you get $40k, and they take zero equity, but you also "have" to network with chileans to help jumpstart their startup culture. For us this networking is a feature.

We're not solving a small problem, we're solving a large one, and we're addressing the global market. Chile gives us an opportunity to test in a small market, if we choose to (haven't decided) but in no way will we be restricted to the Chilean market for our product.

I removed the term "lifestyle business" because it isn't really what I meant to say, and I just hate hate hate it anyway.

Scaling a startup these days doesn't take the money it used to. This makes VC terms even less attractive. Thus the goal of a startup going thru an incubator should be less focused on getting VC money. If you've got an internet based business model, and you've got a way to cost-effectively address your market, you can scale up by keeping headcount growth below the rate of revenue growth.

Do you agree with the assertion (that most incubators are ghettoes) or is the problem simply one of supply and demand? In other words, are there too many incubators?

When you look at the economics of incubators, successful incubators rely on successful startups. If there are too many incubators, companies that don't normally deserve funding (or incubation) will end up getting shepherded through the process....

It seems that startup incubators are doomed to follow the same distribution as business and law schools or non-STEM PhD programs: unless you get into a top one (and by "top", I mean top 3 or 4) you should just go home. The connections that will turn your time and effort into something are not uniformly distributed, but clustered around a small (single-digit) number of hubs. The non-hub alternatives exist to take your money (or, for incubators, equity) and are unlikely to return on the investment.

This distribution isn't inevitable, but it's common. For counterexamples: from an economic perspective, there are two classes of post-graduate educational programs where it actually makes sense to go to a middling (i.e. respectable but not top-5) program. 1. Medical school, because the AMA puts a cap on the number of students the schools can take, limiting the number of doctors and keeping the pay high, so that those skills are in demand regardless of geography and connections. 2. PhD programs in STEM disciplines, where students gain marketable skills and therefore, even though the academic job market has been a cesspool for over 30 years, their graduates can get decent private-sector jobs.

Option 1 is not a credible model for incubators, so that leaves the second: some sort of objective and salable value-add. Unfortunately, this is hard to achieve in 3 months in the context of a no-name incubator. The only way to learn business is to do it (opportunity) and that requires serious capital and powerful connections, not a short runway and "mentoring" from someone of dubious credentials.

People learn best when they are in moderate power. Actually, that's the only time when most people learn. Being at the pinnacle or having infinite resources just spoils them, and no one tells the truth to monarchs or billionaires; but being at the base of the pyramid discourages and enervates them. What the connections and cachet conferred by YC acceptance perform is an elevation into this region of moderate power and high opportunity.

I don't think there's room for more than 5 general-focus Y combinators in the US. It would be nice if there were, but the truth is that opportunity and connections are not that abundant... or at least not in that way.

Only travel writers are lazier.

Just because a program doesn't have successful entrepreneurs running it doesn't mean they're companies are doomed to fail. It all comes down to picking the right companies and the right markets to chase. If I were building an enterprise-oriented SaaS product, it may make sense to join an incubator/accelerator where the mentors have deep enterprise sales experience from an enterprise company.

Has anyone else experienced this?

Then call the references the program directors didn't give you. Do due diligence! Find out where the money comes from which founders, VCs, and Angels support the program and the reason for their support.

As someone who's gone through a "Ghetto Incubator" I'd suggest you do as much Due Diligence as possible before accepting money from a program because you're accepting their terms too!

Good advisors, be it in an incubator or a mentor, help you make sure you can make money with your business before adding money to make it grow.

There are lots of problems out there to solve and for those looking for their first hit it's quite reasonable to find one that can provide enough value early on that customers will pay for it.

OTOH if you really only want to entirely invent a new paradigm with the help of funding, great. Personally I'd rather do the same forever, not having to worry about my day to day thanks to some simple but profitable problems I've solved.

I guess that makes me pro-profit and not so much anti-funding. Businesses need to make money, now, later. The more we avoid and distract ourselves from that the further out we are from reality and sustainability. Both ways have their benefits. :)

The value, today, is in the cachet. Being funded by YC, for example, will probably get you more press, funding, and maybe even a larger exit.