Should you use an Incubator for your Startup?

There are many incubators in Silicon Valley and increasingly all over the world as entrepreneurs who have "won" start opening up their own incubators often with their cash outs.  The biggest question for an entrepreneur is what do I get out of it besides a physical place for my office and what should I be looking for when evaluating incubators?

There is little doubt incubators are playing an increasingly important role in raising investment for entrepreneurs.  Some incubators act as an office with minor introductory or connections as part of the mix.  Then there are incubators who are looking for a substantial stake in your company (Silicon Valley average ranges from 2 to 10 percent) to become an alumnus of their incubator.  So, if they are asking for that kind of stake what would an entrepreneur anticipate receiving in return and is it worth it?

Many of these incubators will offer intensive coaching, warm introductions to potential investors that they think fit your companies profiles (and most importantly get you in the door - rather than ending up in the stack of plans that get weeded out by the new analyst at the VC) and networking with other founders / connections that are of value.  Incubators level and intensity of services varies considerably but it can provide first time entrepreneurs and especially international teams that aren't familiar with US VC's critical initial linkage in Silicon Valley.

An entrepreneur looking at an incubator (especially first timers) should look at an incubator just like they should look at potential investors / Venture Capital money.  What can they do for me and what do I have to offer them.  Here are some questions to ponder:

·         What companies have they invested in? Do those companies look like mine? Will they have knowledge / connections in the space that I need to succeed?

You need to evaluate each incubator just like you do a VC.  Some incubators such as AngelPad, Y Combinator or 500 Startups are well known - some others that maybe worth looking at are listed on Berkeley's Lester Center for Entrepreneurship resource page: and still others like Australia's Startmate offer an incubator like service while investing (25K for 7.5% / post valuation of $333K) in your company without a physical space as part of the bargain.

The key point is you need to know what is important to your potential investors by spending time looking at their sites and in some cases reviewing what they look for - as they will spell it out to you. Make a proposal that will resonate with the decision makers and hit the key points they have likely already articulated for you.  Last be prepared for a dance just like you have to do with VC's.  See some helpful hints on this blog post: Top Ten Investor / Entrepreneur lies.

·         Understand the challenge that incubators face

An incubator acts like a VC in many aspects.  They have to believe that they can get other like minded investors to put money into your business, early on, or it doesn't make sense to invest in you.  You have to convince them that your idea and people are winners.  By investing in your team they will be part of that winning company.  Your team must look the part and preferably have the chops that make them believe in you.  If you get in, they will help you with your pitch at the next level.

·        As always, Introductions matter / use LinkedIn to check out Profiles & Connections

Look at the incubator team and do everything you can to find someone who can make a friendly introduction, just like you would with a VC.  Review companies the incubator teams members have either been a part of or invested in. Use LinkedIn to gather this information if it isn't readily apparent and then use your connections to get an in and avoid the application death bin.

·         You won the first battle, you have an interview scheduled, now what?

I'm a big believer in the keep it simple approach.  Keep your presentation to 10 slides (check out Garage Ventures Guy Kawasaki's model if you haven't seen it previously) and do your homework.  Hopefully you know who will be in the meeting.  If you do, make sure you tie anything your company will do to something the investor can relate to (preferably a "positive" thing).  Also make sure that your team is prepared to answer questions based on their role/responsibilities.  CEO should answer market / business questions, CTO - Tech questions etc.,.  Last practice, practice, practice.  You only get one shot in these situations - bring in people that will "professionally" beat you up with questions in a practice setting so that when the live bullets fly - you're ready! 

·         Does an alma mater, matter?

Absolutely!  Think about what school you went to.  Generally the more prestigious the University you went to the more market cache you'll have.  If you went to Stanford and are looking for work in Silicon Valley you know what I mean.  However, for international startups they usually don't have the US university pedigree and going through a well known incubator can be critical, supplying you with credentials that last a lifetime.

Mentors and relationships from your incubator will provide you with many springboards in later pursuits as well as giving you that initial leg up with your current startup.  Plus you'll work side by side with other companies with similar dreams and knowledge to pass on along the way.  Entrepreneurs are likely to have many different jobs over the course of their working lives and incubators provide an opportunity to work with like minded people that maybe your next team mates.

Incubators aren't for everyone and there are many success stories for companies that didn't use incubators to start.  However, if a first time entrepreneur or international startup is looking for a fast path to knowledge, connections, street credibility and increased success.  Incubators are worth serious consideration.

Top Ten Investor / Entrepreneur lies & What I Think

We work with a lot of companies that are either in the midst of raising capital, have done it already or are thinking about it in the future.  Many of the companies that want to raise capital won't be able to and will need to bootstrap it.  Some will get it via the 3f's Friends, Families and Fools and some will get it from Angels or Venture Capitalists.  Where ever the money comes from to either seed or expand a business the bottom line is that you have to make a pitch to get the money to start from someone.

Raising capital isn't easy and we have blogged about ways to do it, keeping your VC slide deck short & sweet and executive memorandums.  However, on the more humorous side I thought I would add some commentary to a post from one of the more entertaining and semi famous VC's I follow (Guy Kawasaki).  He recently posted the top ten lies of entrepreneurs and investors and I took the liberty of adding some tongue in cheek comments in bold (& where appropriate).

Guys post:

I leave you with two sets of top ten lies: one of entrepreneurs and one of investors so that you know what not to say and what not to believe.

Top Ten Lies of Entrepreneurs

1. “Our projections are conservative.” (But if I don't show a hockey stick of growth you won't listen and tell me I can't make enough fast enough)
2. “Jupiter says our market will be $50 billion in ten years.” (And if I show you it is only $500 million you will tell me it is to small for a VC of your stature - as you're only interest in home runs - not singles)
3. “Several Fortune 500 companies are set to do business with us.” (yep and If I don't have name clients ready to go, you'll tell me to get go get them before you can consider funding us)
4. “No one else can do what we’re doing.” (and if I tell you there is lots of competition and we're not very different except for our positive attitude..............)
5. “Hurry up because other investors are about to do our deal.” (we all know you're going to drag your feet and take your time to do your due diligence and you know / we know we need your money  yesterday - so what would you like me to say, take your time you're the only game in town?)
6. “Our product will go viral.” (hockey stick again - Entrepreneur speak "we're posed for slow steady growth and although you won't get your money back within the life of your current VC fund you can't lose!")
7. “The large companies in our market are too big, dumb, and slow to compete with us.” (If we didn't think we could beat them why would we be here and why would you invest in us..?)
8. “Our management team is proven.” (would you prefer "we're a bunch of propeller heads but we will learn on the way - with your money - forget about it...........we're good to go")
9. “We filed patents so our intellectual property is protected.” (And if we didn't file you would tell us we don't have any IP so if we fail you have nothing to fall back on so go get some IP or you can't invest)
10. “All we have to do is get 1% of the market.” (yep, didn't we hear that with China?)

The average number of these ten lies that I hear in most pitches is ten. At the very least, tell investors new lies.  (I like that at least Guy is being honest - twist the pitch in a new way so I don't get bored with the same ten slides I tell everyone to show me:-)!)

Top Ten Lies of Investors

1. “I liked your company, but my partners didn’t.”  (happens, VC's don't want to be the only to pick a company within their own VC team - if something ever goes wrong guess where the finger points!)
2. “We are patient investors who want to help you build a great company.”  (Ha, Ha - my fund is a 10 year closed one and I have 3 years to invest 3 more to re-invest and 4 to divest - you figure out the timing)
3. “If you get a lead, we’ll invest too.” (Ummm, I didn't say I would invest with just any other lead investor, did I?)
4. “There are no companies in our portfolio that conflict with what you’re doing.” (yep, there is also this game called liar's poker and man are we good at it!!!!!)
5. “Show us some traction, and we’ll invest.” (can't laugh at this one because it is fair ... most of the time - but if I don't have money to gain traction - how can I do it......?)
6. “We love to co-invest with other firms.” (as long as we take the lead, they follow what we want, our lawyer is bigger than them, we get our equity out first, we choose the next CEO+Board+management and.............)
7. “We’re investing in your team.” (but wait, didn't we already say we don't think your team is proven....?)
8. “We have lots of bandwith to dedicate to your company.” (As long as it doesn't interfere with our golf and sailing schedule - we're so busy you know. Oh and don't forget if one of our companies starts looking like the next Google, Facebook etc., we're really really busy )
9. “This is a plain, vanilla termsheet.” (except for all the perks for us that will hurt you down the line - you have no idea how much we pay our lawyers to slide stuff in - and we know you can't afford a good lawyer)
10. “We will get other companies in our portfolio to work with you.” (right.......................)

Do you know what the difference is between the lies of entrepreneurs and the lies of investors? The investors have money.

It’s not all bad news. Think of everything that an entrepreneur needs (tech ones, anyway), and you’ll see that most things are free or cheap.

• Marketing: use blogs and social media to promote your products.
• Tools: most tools are Open Source and free. Microsoft offers free versions of applications like Word, Excel and PowerPoint in the cloud!
• Infrastructure: More cloud goodness—you don’t have to buy servers anymore.
• People: callous for me to say, but in a recession, people are free or cheap.
• Office space: what office space? You can work out of your garage (like David Hewlett and Bill Packard) or just form a virtual team.

(I think the above is great advice!  Keep your posts coming Guy - they are always entertaining and more often than not have some great pearls of wisdom!)

Australian IT and US Venture Capital Investment

Picked up an Venture Capital investment article in the Australian Age earlier this month regarding investment in Australia by US VC's and how the dollars are increasing. The only Silicon Valley VC I'm aware of that has offices here and Australia is Southern Cross run by John Scull, Larry Marshall & Tristen Langley.  There are Australian VC's but there aren't very many and the competition is much stiffer in the US - if you take out the tyranny of distance.

One of the tenants of the article is that Start-ups don't need to move to the US to succeed. My feeling on that one is mixed.  I think that initially an Australian startup can gain traction and sales in Australia (in fact I often advise they get sales in Australia before looking for US capital) but in order to really grow big they will need to have office(s) in the US in order to access the market just like they always have.  One of the drivers not mentioned in the article is that US Venture capitalists like to have their investments close at hand.  They want this so they can keep an eye on them and their business network has the greatest potential to help the fledgling company as much as possible.

The other interesting note was the authors idea that many US start ups were overvalued and therefore Australian start ups were more attractive. I don't know if that is actually the case but in my experience the big hitters Sequoia Capital, DFJ, Kleiner Perkins Caufield & Beyers, Khosla Ventures, LightSpeed Ventures etc., have always been willing to look at Australian companies as long as they have a disruptive idea and they are properly prepared and introduced.  My hit list of items necessary for an Australian VC to raise US capital includes:

• Disruptive technology or service with lots of room to grow (Most VC's want home runs - more than singles)
• Good core management team
• Passionate Leadership - investors believe management can do it
• Great Elevator pitch - You're able to quickly get to the "I get it" stage when describing what your product or service does - to the buyer as well as investor
• Have sales already in place with customers that are happy to sing your praises
• Pitch Deck - 10 slides - Short, Sweet, no fluff - the Pitch deck should be the starting point to great conversation not explain everything
• Know that no VC will sign any non-disclosure agreements to hear your pitch

 The Age
 

International Market Entry Strategy Planning

International marketing strategy planning is one of the most over looked parts of a successful export strategy.  It is absolutely critical to the success of any international expansion but is only as strong as the effort put into it as well as the talent of the individuals creating it.

The first and most critical step is commitment.  By that I mean is your company committed to an export strategy rather than trying to get a quick hit to unload extra product or help during a downturn?  Many companies will not make money in the first year or two of a new market entry and they need to be prepared for it, ready to ride out the bumps as part of a longer term strategy.  With commitment comes the next most important stage which is planning.

Developing an international marketing plan starts with the basics.  What is your company selling?  Who is buying it in your current market and how does it compare to your current in country competitors?  This is often skipped but I believe it is a critical first step.  If you don't know what you do better, cheaper or faster than your competitors in your current environment why, would you think you could do it in another, that you know even less about?  I also think if you're currently working in a small market and if you're not one of the leaders there with your product / service you're probably not ready for a larger market like the United States - which is often the goal of many aspiring exporters.

Now that we understand what we do well in our current environment, its time to look at the chosen market a company thinks they can export into.  My next blog will revolve around the next step, what a market entry analysis should include and how to go about developing one.