Should Startups Incubate, Accelerate, Cohabitate or Stay In Mom’s Basement?

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A version of this article previously appeared in The Wall Street Journal.

The good news for entrepreneurs is that there have never been more office space options for early stage companies. The bad news is that it is often difficult to determine which of these alternatives is ideal, since the definition of “ideal” changes as your venture matures.

 

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Parsing The Confusion

Significant confusion exists when distinguishing between Accelerators and Incubators. I explored this issue in a recent conversation with fellow WSJ Accelerator, Brad Feld. According to Brad, “There is a fundamental difference between an incubator and an accelerator… an incubator has an economic model that is based around having people be tenants. Having people being captive within some investor’s…sphere.

With accelerators, it’s a very focused process, it’s 90-days long. We are actually giving the companies money, rather than taking money from them. If you use the mentor-driven model that we pioneered at TechStars, you get entrepreneurs who are deeply connected with the broader entrepreneurial landscape.

If their first companies don’t work, it’s totally fine, because they built… muscle around creating a startup that would take many years and lots more money to create.” If you want to hear more of Brad’s thoughts regarding Accelerators, you can watch our entire conversation HERE.

For early stage entrepreneurs seeking funding, building their product and formulating their product / market fit, an Accelerator is a great alternative.

Many Sizes, Many Fits

If you determine that an Accelerator is an appropriate home for your venture, you should consider the following factors:

Market Emphasis – As the Accelerator marketplace has matured, a number of programs have become specialized. For instance, some focus on go-to-market strategies, such as SaaS or Cloud-based technologies, while others concentrate on a particular industry.

The exposure to best-of-breed techniques specific to your company and access to industry experts are two key advantages of market-specific accelerators.

Region – An advantage of a regional Accelerator is the exposure to local investors, employees and other startups. Thus, when a startup must decide between a local Accelerator and a geographically remote one with a specific industry focus, I recommend the local program.

Cultural Fit – Just as startups have unique cultures, so do Accelerators. Some ventures pride themselves in a work hard – play harder approach. This might mean routinely working until 2:00 AM, and not showing up until 10:00 AM the following day. If this does not fit your work style, you would undoubtedly have a horrible experience.

The best way to ensure that you and your venture are a good cultural fit with a particular Accelerator is to speak with Founders of companies who graduated from the program and met with subsequent success.

The Numbers – Most Accelerators offer participating startups a modest capital investment in exchange for a 5% to 10% equity interest. The value derived from a legitimate Accelerator will more than offset the associated dilution. However, avoid any Accelerator that charges startups a fee to participate.

End Game – Some Accelerators spend significant time helping startups hone their pitch for a blow-out Demo Day. In other programs, the goal is to help the companies develop their products and validate their value propositions.

Sam Teller, Managing Director of Launchpad LA, recently shared with me the goal of his program, “Rather than focusing our entrepreneurs’ efforts on preparing a killer ‘demo day’ presentation, we believe startups ultimately create more value by using their time within an accelerator to gain third-party validation from customers, partners and investors.” (Note: full disclosure, I am an investor in Launchpad via Rincon Venture Partners).

Results – Given the recent proliferation of Accelerators, their quality varies tremendously. The best measure of an Accelerator’s effectiveness is the post-graduation success of its alumni.

Graduation – Many startups struggle once their Accelerator program is completed. Fortunately, a number of post-Accelerator organizations have arisen to address this need. One such program is Tennessee-based The TENN. According to Jason Denenberg, The TENN’s Director of Entrepreneurship, “Upon graduation, companies typically struggle to find structured programs offered to progress from an accelerator to the next level. The TENN’s primary goal is to help startups achieve product validation and revenue generation.”

Hopefully you will matriculate from your Accelerator with enough investment capital to stay out of mom’s basement. If so, your alternatives are standard commercial office space or a co-working environment. The pros and cons of a co-working environment include:

Advantages – A similar energy and creative environment found in healthy Accelerators. Thus, startups that can benefit from the cross-pollination of ideas and contacts thrive in a co-working environment.

Disadvantages – The chaotic atmosphere that is charming at an Accelerator may become tedious as your venture vies for shared co-working resources. Thus, avoid co-working if your company has matured to the point where frequent and random encounters with folks outside of your organization are more detrimental than additive.

Whatever office space you select, staying in mom’s basement is not an option. Successful startups are built on a network of relationships and conversations. Even though mom’s basement is comfortable and inexpensive, the sooner you change out of your PJs and start collaborating with like-minded entrepreneurs, the better. You won’t regret it (and mom will be glad to have her basement back).

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about surfing dogs or that killer burrito I just ate.

T-shirt image courtesy of Zazzle

John Greathouse

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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