There is no better or more proven method for getting your startup funded than being part of a successful incubator. While about 60% of all technology startups will fail within the first three years, 87% of incubator companies are still going strong five years after graduating from their programs. While writing my new book, Disrupt You!, I visited incubators around the world to discover what makes a great program work. I also met with dozens of founders in order to identify what makes some programs more successful than others and how entrepreneurs can identify which business incubator is right for their needs.
In 1980, there were only 12 startup incubators in the entire country, today the number exceeds 1,250 and continues to grow. Some incubators, like Y Combinator and TechStars, were started by successful entrepreneurs wishing to help the next generation learn from their experiences. Other programs, such as Viterbi Startup Garage and Austin Technology Incubator, were created by universities to help young entrepreneurs bridge the knowledge gap from student to funded company. Other programs around the globe are funded by local and state governments to spur job creation and knowledge-based economics. With such a range of programs, founders need to know the advantages and disadvantages of each type of incubator.
Second, an incubator is designed for capital preservation. Shared overhead, legal and other resources will allow founders to stretch their seed capital further than going it alone. Pooling resources with other startups in the program can make one plus one equal three. If you can prove out your business model on the cheap, the easier it will be to raise your Series A capital. As a serial investor who has raised hundreds of millions of dollars for startups, I know that the business plans coming out of incubators tend to be vetted and more thoroughly validated. The incubator’s input into your business plan will make you look far more polished and experienced – even if you have never run a business before.There are four must-haves for an incubator to add real lasting value to your startup. First, the program should provide you with relationships relevant to your field. No first-time entrepreneur has the business network of contacts needed to succeed. An incubator should be well integrated into the local business community and have a steady source of contacts and introductions. Is your business idea consumer-facing or B2B? What is the experience of the mentors who will be guiding you through your program and how relevant is it to your market? Being able to get to the right people quickly is key to growing your startup.
Which brings us to the most significant and tangible benefit of an incubator: legitimacy. Rightly or wrongly, being associated with a prestigious incubator brings recognition from both press and venture capitalists. The same way that a Princeton graduate gets perceived differently on his resume, graduating from a renowned incubator gets you on the radar of venture-capital firms. Could your company be the next Reddit or Dropbox (two Y Combinator alumni)? With over 6.5 million new companies launched in the United States each year, the hardest part of starting a new company is getting noticed. Most incubators do a great job of promoting their graduates and inviting investors to meet their founders. Remember, you can’t change the world if the world doesn’t know you exist.
Lastly, an incubator provides founders access to capital and capital markets. The Founder Institute, of which I am a mentor, has incubated over a thousand companies in more than a dozen countries and claims that 42% get funded after leaving the program. During the past decade, Y Combinator has launched over 500 companies with an average valuation of over $45 million each and created over $30 billion in overall market value. Raising capital is a full-time job for startups and incubators increase a founder’s success rate by helping them craft their pitches, sharing other’s business plans and providing the knowledge of which venture capitalist is looking to fund what type of enterprise. I’ve watched first-time entrepreneurs raise millions of dollars at substantial valuations because the mentors at the incubators were able to create a frenzy around a new fledging concept for a company.
With so many incubators to choose from today, the most important decision isn’t should you join one, but how do you know which program is best for your startup idea? Just as you toured college campuses during your junior year of high school, I highly recommend that founders visit as many incubators as they can. Who are the mentors and how applicable is their experience to your market segment? How successful was the last class at getting funding? How satisfied are the entrepreneurs currently in the program? And just as you looked at out-of-state universities, don’t be geographically constrained in your incubator selection. Most programs last for only a few months, so move to the incubator that you believe will give your startup its greatest chance for success.
Incubators are job creators that can transform lives and communities. Internationally, I have visited quality programs in Europe, Russia, India and the Middle East. Many successful U.S. incubators are now setting up satellite programs abroad and cross-pollinating the entrepreneurial spirit. Much like the European professional guilds’ apprenticeship programs during the Middle Ages – which helped spark the Age of Enlightenment — today’s incubators are driving a global renaissance of transformational innovation.
Jay Samit is a serial entrepreneur and author of the forthcoming book “Disrupt You!” This column originally was published in the Wall Street Journal April 2, 2015