Should you join an incubator or accelerator?

y combinagtor.jpg

We had a recent mentor session at MIT VMS where the founder was dead set on joining an accelerator for the summer. We spent most of our 90-minute session dissuading him from that decision.

I see incubators as for very early stage companies where the founders just have an idea and the goal of the incubator is to hatch that idea – turn it into a demo, prototype or even a product. Incubators provide peer-to-peer support, mentoring, outside speakers and other related services, often without charge, as is the case with academic incubators.

Accelerators help founders increase their rate of growth in building their business. Often these accelerators, such as Y Combinator, purchase 6 or 7 percent equity for about $100,000 to $150,000. If you’ve gotten past the idea validation stage, perhaps graduated from an incubator, you may want to join an accelerator like MIT’s Delta V (which has no requirement that founders sell their equity).

Often getting admitted to an incubator or an accelerator is very competitive. As I recall it’s harder to get into Y-Combinator than either Stanford or Harvard. Other things an organization like Y-Combinator or TechStars provide are connections and assistance in becoming investor-ready. The culmination of participation in many of these organizations is a demo day, attended by regional investors. The goal is to help founders get a seed round or Series A investment.

The brand power of Y-Combinator and TechStars is such that they lend a stamp of credibility to startups and are very well connected with the investment community.

So why were we trying to dissuade our mentee from spending the summer at an incubator or accelerator while his team mates worked on the business, which by the way, was outside the U.S. The answer was simple: the team had a well-defined target market, a well thought out business model, experience as customers in their market, and were on the cusp of running a pilot with a major customer this spring. So our argument was simple: why spend the summer with other founders who more than likely were not nearly as far along the business growth curve and perhaps also end up selling their equity at a bargain price. If he worked all summer to close customers what I call ROTI would be significant. ROTI is Return on Time Invested. Time is the major asset of founders, how they spend it is existential to their ventures. Yet it seemed that peer pressure had convinced this founder he needed to spend weeks learning a standardized curriculum when he could spend those weeks co-located with his team mates, pursuing leads and closing customers. And by the way, learning by doing.

Incubators and accelerators can add a lot of value and many have a proven track record of generating winners. But founders need to think long and hard about fit. Not product market fit, but the fit between their venture and its current status, and the model of value added by the incubator or accelerator they plan to apply to. If you see a good fit, but all means go for it, but if you have progressed far beyond the typical venture in an incubator or accelerator spending time with them may actually de-accelerate your venture.

There is one other value accelerators provide: that’s access to their alumni. In the case of Y Combinator that’s a community of over 4,000 founders. The value of those potential connections is hard to measure, of course. My rule of thumb for founders is that the earlier their stage of development the more value an incubator or accelerator can provide.

Unlike venture capitalists, who are very opaque about how they make decisions, whose value add can be very hard to determine, and whose investments vary all over the map, you can find out a lot about accelerators like Y Combinator by visiting their web site, reading their blog, and studying their application. The only cost to apply is virtually always zero – just your time. At the least, no matter where you are on the business development curve, there are valuable resources on these sites. Check out the Y Combinator Startup Library for example.

We may not know if our mentee takes our advice and works on this startup rather than spends the summer in an accelerator, but at the least we hope that we have catalyzed his decision process by taking a strong position that was contrary to his. Mentors often play the role of Devil’s Advocate, which can help founder teams who can sometimes be subject to group think or peer pressure.

No one with experience need apply!

jobs and woz

Earlier this year Business Insider had an article entitled The idea that most successful startup founders are in their twenties is a myth — the average entrepreneur is much older. 

The article states that:

… the average age of entrepreneurs who started a company that went on to hire just one employee was 41.9, and the average age of founders who started a high-growth company is even older, at 45 years old.

The study also examined the age of entrepreneurs in sectors like specialized tech employment, venture capital investing, and patent firms, which yielded similar results: The average age of these people, too, was somewhere in their early-to-mid forties.

“Our primary finding is that successful entrepreneurs are middle-aged, not young,” the study reads. “Founders in their early 20s have the lowest likelihood of successful exit or creating a 1 in 1,000 top growth firm.”

The study contradicts everything I’ve every read about high tech startups, starting with Microsoft, which was founded by two college dropouts in the 1970s up to Google and Facebook and beyond.  VC like their founders young – the younger the better! Young people aren’t married, don’t have mortgages, are happy to sleep in the office, work in a bullpen, and will trade off salary for equity. They can work long hours because often they don’t have any one to come home to, certainly not children.

There’s a reason why virtually every high tech company’s offices look like college campuses – these companies want to recreate the campus atmosphere for students they hire fresh off of a college campus. It makes their transition from student to employee seamless. And with the rising cost of health insurance, young healthy hires in their early twenties are so much cheaper than middle-aged breadwinners with a spouse and kids, whose insurance cost can be four or five times that of a single recent college graduate.

I was reminded of the study recently when I read a New York Times Corner Office piece on inventor James Dyson: The Public Wants to Buy Strange Things, subtitled He made billions selling vacuums. Now he is backing Brexit, building an electric car — and making antiquated comments on ‘racial differences.’

james dyson

I can see Bill Gates and Mark Zuckerberg nodding in agreement reading these quotes:

The point is, here’s this longhaired art student in the mid-’60s, getting asked to design something he knew nothing about. Then he’s told to set up a company, which he knew nothing about. That’s what I do today with my people. I try to recruit everybody as a graduate, because they have no baggage, they have enthusiasm and curiosity. I think experience can be fine in certain situations and with certain companies. But when you’re doing something very different, it’s often best done by people who have done nothing before.

Yes, this is just one data point, but it totally jibes with my experience of seeing hundreds of startups founded by college students, college drop outs, and recent graduates who, surprise, want to hire people who look just like themselves (which is why young white males and young Asian males dominate the management and employee population of tech industry growth ventures.)

James Dyson may be in the mold of British genius eccentrics, but from my experience all these accelerators, incubators, co-working spaces, and startup companies are populated by young people. If you are older than 25 and looking to found or join a startup, be prepared to demonstrate your enthusiasm, curiosity, and evidence of doing wild and crazy things!

Kryptonite for founders – the down round



Entrepreneurs are by nature optimistic and first time founders even more so. But once you have raised Series A, B, or C rounds there’s a dark side to taking VC money: the down round.

The number one goal of VC-backed companies is not customer satisfaction, market share, gross revenues, or social impact: it’s growth in the company’s valuation.

The lead investor in any round of financing sets the valuation of the company. Given the many variables involved and unlike real estate, the very few comps, this is a black art. But so long as founders push for growth their capital needs may well outpace their revenue, meaning that they need a cash infusion. While there are other ways, such as a bridge loan, typically VC-backed companies raise another round, which means selling enough shares at a sufficient price to meet the company’s needs, typically for 18 months or more.

For each new round the value of the company is set in order to derive the price per share for existing investors, who may want to invest to maintain their percentage ownership position, or new investors who are eager to get into what to them is an exciting deal. So what’s the down round and why is it kryptonite for founders? A down round occurs when investors purchase stock in a company at a lower valuation than the previous round. The causes of a down round are not only bad news for the company, they are worse for the founders who are almost certainly going to have their ownership diluted, as rare is the founder who is both willing and able to invest enough in their company to drive maintain their equity position.

Causes of down rounds

A down round is a last resort if a company needs cash and can’t draw on a credit line or land a bridge loan. There are several reasons for a down round.

Failure to meet milestones or metrics

Milestones and metrics vary from growth company to growth company, but a major reason for a down round can be a failure to meet milestones that may have been set at the previous round. Milestones can range from gross revenues, gross margin, and market share, to shipping a new version on time. This is why founders need to be conservative when setting milestones – under promise and over deliver. But beware of what the VCs call lowballing – knowingly setting goals that are so very easily met that they can be called layups.

Emergence of competitors

Given how cool entrepreneurship is these days and how universities are fueling the startup fire by not only offering many courses in entrepreneurship but they are also setting up incubators or accelerators, running business plan competitions, and even making grants (equity-free money) to student-led startups. So I tell my mentees that however unique their idea may seem to them, the odds are that some other startup somewhere – and that now includes Israel and western Europe these days – is working on the same thing, or something very similar. And competition doesn’t only come from other startups – the vogue for innovation in large companies has generated internal startups and new product initiatives. While one can use sources like Techcrunch to track competitors, your competition may well be in stealth mode – operating under the radar of Internet media companies that track the startup world. Before you start your company you need to do a thorough web search for competitors. But that’s necessary, not sufficient. Monitoring competition has to be an ongoing task. The simplest way to do that is to set up Google alerts. In addition, success will attract copy cats. This is why investors are so fixated on sustainable competitive advantage and unique selling proposition.  Be prepared for competition and be ready to explain why you will continue to grow due to your competitive advantages, be they patents, exclusive distribution agreements, large customer base, high switching cost for your customers, price advantage, superstar management team or any combination of advantages.

Previous rounds were overpriced

Investors hate to admit it, but they are like lemmings. They are eager to jump on the latest thing, be it crypto, block chain, deep learning, robotics or artificial meat. Flooding a sector with capital can result in valuations that were driven more by competition amongst VCs than true market value. While a rising tide raises all boats a falling tide can leave many boats stranded on dry land. “Market corrections” in your sector may cause your investors to stick to your previous valuation or even lower it as they come to their senses about whatever wave they thought you were riding.

Down rounds rarely make the news. But today’s article in The Wall Street Journal Genomics Startup Human Longevity’s Valuation Falls 80% sub-titled Fundraising round this week values company co-founded by genomics pioneer Craig Venter at about $310 million; aiming for a turnaround is the story of a down round. Genomics latest round  represents an 80% decline from its previous valuation of $1.6 billion – that’s a real haircut!

But down rounds aren’t simply confined to a lower valuation, they also often come with harsh terms and conditions as well.

This round also includes onerous terms that promise priority payment in case the company shuts down or sells itself, and a so-called ratchet that would reset the share price investors in the new round paid if the company has to raise future capital at a lower price, according to the filing. Such terms are rare in venture-capital financing, and typically imposed on companies struggling to find new investors.

According to analysts at the law firm Fenwick & West, 9% of venture financing in the third quarter were down rounds, up rounds represented 78%. Simple math tells us that 13% of rounds were at the same valuation as the previous round – resulting in dilution for all involved unless they “buy up” to maintain their percentage ownership.

The genetics firm Human Longevity is a case study of the fallout from a down round:

As the company has continued to burn cash, its workforce has dropped to around 150 from roughly 300 people at the end of 2016, according to one of the people. And its chief executive officer, chief medical officer and chief operating officer all departed in 2017, according to their LinkedIn profiles.

Dr. Venter, who helped sequence the first human genome, relinquished the chief executive role at the beginning of 2017, resumed it in December, then stepped down again in May, according to company statements. He remains a shareholder.

So how can founders avoid down rounds? As mentioned above, you can start by not getting greedy on the valuation of the Series A round. But mainly by continuing to hit benchmarks and continuing to grow important metrics (versus vanity metrics like page views). Founders need to realize that they have stepped onto the hamster wheel of VC-backed companies: get big fast and then get acquired or go public. The pressure on the company will be unrelenting. So before you take VC money, which is the most expensive way to fund a startup, investigate your alternatives. The best use of professional investor funding is to scale your company, meaning you have nailed your target customer, your business model, your competitive advantage, and the ability of your infrastructure and cash on hand to keep up with the needs and demands of a rapidly growing customer base.

One of the failed initiatives of Human Longevity is a real red flag to founders who think that data is the new oil and they will get rich drilling for data.

But key facets of its business didn’t develop as planned, say people familiar with the company. It had hoped to sell analytics to pharmaceutical companies as they increasingly incorporated genetic sequencing into drug development, these people say. But drugmakers have been slow with the new technology and wary of sharing data, they said.

If you are counting on revenue from the data or analytics your company generates you need to be very sure that it really has value, and to whom. Too many founders I mentor seem to assume that all data has value – not true.

The old medical saw that An ounce of prevention is worth a pound of cure holds true for down rounds as well. The best way to avoid them is to carefully manage both your cash flow and be able to make accurate revenue projections. Your goal every day should be increasing the value of your venture, whether that’s by becoming more capital efficient, selling new products  to old customers, raising prices or inventing new products.

Down rounds should be something you only read about, you never want to hear that phrase  from the mouths of your CFO or your investors!

Lies, damn lies, and statistics

TAM-SAM-MarketThe saying “Lies, damn lies, and statistics was popularized by Mark Twain, who attributed it to the British prime minister, Benjamin Disraeli. The actual origin of the phrase isn’t clear and doesn’t really matter – it’s as true today as it was in Twain’s day and far more relevant in a world flooded with statistical analyses derived from reams upon reams of data.

But what does this evergreen phrase have to do with founders and mentoring? Increasingly in our data-driven world investors and business partners are insisting on quantitative evidence of both a new venture’s market opportunity and the size of the problem it is trying to solve. Thus many founders need to rely on third party research to buttress their arguments, as they don’t have the resources to do in-depth primary research themselves. Typically the sources of the data they rely upon – government and market research analysts – have far more credibility than the founders do.

I came across a perfect example of the perils of “data risk” for founders in The New York Times article Digital Divide Is Wider Than We Think, Study Says by Steve Lohr. It describes how Microsoft researchers did a study on the actual use of high-speed internet in the U.S. They concluded that 162.8 million people do not use the internet at broadband speeds. However, the Federal Communications Commission (FCC) claims that only 27.7 Americans lack broadband access!

If you are a company like Microsoft that is interested in profiting by solving the so-called digital divide – the large gap between the many millions of U.S. residents who have broadband access and those who don’t – you have to have the correct data to act as foundation for your business. Microsoft, of course, has far more resources than ever available to a startup, but the discrepancies found by their researchers between FCC findings and their’s are dramatic. This gap is most striking in rural areas of the U.S. For example in Ferry County in northwestern Washington, the area highlighted in the  Times article, Microsoft estimates that only 2 percent of people use broadband service, versus the 100 percent the federal government says have access to the service.

It turns out that the FCC relies on simplistic surveys of internet service providers that inherently overstate coverage. For example, if one business in an area has broadband service, then the entire area is typically considered to have broadband service available. You can get the full details of how Microsoft generated their data in the article, which I highly recommend, but suffice to say that they did not rely solely on ISPs for their data – they performed primary research.

There are several lessons for founders who are relying on government or other sources for data that may be the foundation of their business case.

  • Consider the source of the data. In this case one would expect the FCC to have accurate data. But anyone who has been following the politicization of the FCC would realize that they are very biased: it’s in the FCC’s interest to show that they are doing a great job by making broadband universally available through their policies that favor ISPs.
  • Try to learn the source behind the source. The FCC did not do any primary research into broadband access, they totally relied on third parties – ISPs – who like themselves, were biased towards showing universal data access.
  • Find out the foundational definitions.  Nowhere in The Times article is broadband defined! Access speed can vary exponentially from 100 mbps to 1 gigabit service.
  • Learn how the data was gathered. The FCC relied on simplistic surveys of ISPs rather than performing rigorous surveys of consumers’ access to broadband. The best data is gathered from primary – firsthand – research.
  • Find multiple sources for the data. One way to factor out bias or poor data collection techniques is to find more than one source for the data. Just as it’s a risk for manufacturing companies like Apple to rely on a single vendor, if your venture is relying on just a single source for foundational data you are exposing yourself to the risk that your data may be in the “damned lies” category.
  • Verify data sources with your own research. Let’s assume you were looking to start a business to serve a rural area, for  example, an internet-connected animal tracking service for cattle ranchers. Rather than just basing your total addressable market on a single, potentially biased source like the FCC, do your own primary research.  By interviewing just a few ranchers you would probably find that most lacked internet service or relied on very slow satellite systems for their internet connectivity. Others might even have to drive to their local library to access the internet. Hard to get real time location tracking by relying on your local library for broadband access!
  • Understand that there is no such thing as “objective data.” No matter how rigorous the statistical methods used, biases of the researchers will seep into the data. Microsoft has its own bias, as it is trying to convince the FCC to allow them to use the “white space” between TV channels to deliver internet access to rural areas. So it’s in their interest to show very low levels of internet access – just the opposite bias of the FCC (and big ISPs and broadcasters, both of which are dead set against Microsoft’s initiative).

The bottom line is that secondary market research that has value in determining your total addressable market may be necessary, but not sufficient. Supplement that research with your own primary research, as cash-constrained as that research may be. A good question to ask during your customer discovery process is to ask your potential customers how big they would estimate your market to be and what, if any data, they rely on themselves. While not all data is lies or even damned lies, it may well be tainted by bias – it’s up to you understand and account for the biases and assumptions of your market research sources.

Everybody’s talking about gender, but no one’s talking about class

aston martin

As the father of two daughters, I’m glad to see greatly increased awareness of discrimination against women in the startup world and some progress in leveling the playing field. A lot of focus is on the fact that there are far fewer female founders and it is far harder for those founders to raise capital than it should be. Research is demonstrating that more diverse teams make better decisions than the typical mono-cultures found in the startup world of young white males as founders and middle-aged white males as investors.

But what I haven’t seen addressed, and frankly I have to admit to not thinking too much about, is the very small number of founders who come from lower socio-economic levels. It wasn’t until the end of The Boston Globe article An upper-class mindset doesn’t make you classy that that the reasons for this surfaced:

…,the predominant US upper-class view of rules is that they’re made to be broken. Just look at popular books about success, like Marcus Buckingham and Curt Coffman’s “First, Break All the Rules” and Angela Copeland’s “Breaking the Rules & Getting the Job.” If we want to succeed, these books tell us, we’ll need to cast aside established social norms and chart our own path. This is sage advice for people who have little threat, but clearly bad advice for the working class.

Though they tend to shun rules, the relative looseness of the upper class offers several strengths: they tend to be much more creative, entrepreneurial, and open-minded. The working class, meanwhile, struggle with diversity: they are more suspicious of people who are different from themselves, who appear to threaten their sense of social order.

In today’s digital economy, several attributes of cultural looseness reinforce upper-class advantages. Whereas those from tight groups understandably tend to view change as a threat, loose communities see mainly opportunity. They have the cultural reflexes — socialized from a very early age — to adapt to disruptive changes, and the autonomy and independence to chart their own course.

Unfortunately the article’s author, Michele Gelfand, a professor at the University of Maryland, and the author of “Rule Makers, Rule Breakers: How Tight and Loose Cultures Wire the World”  and Jesse Harrington, a research associate at Fors Marsh Group, don’t offer any solutions to this problem.

Their conclusion, We must recognize that it’s culture that we need to reckon with, not just our bank accounts is not actionable information

However, one of my VMS colleagues is a mentor at an accelerator called Smarter in the City. Their mission is to bring diversity to Boston’s tech landscape:

Our mission is to diversify Boston’s startup sector by providing support and resources for local minority-run ventures. Through our accelerator program, we draw investment to communities that have traditionally been left out of the high-tech startup scene.

Check out the stats on minorities in Boston on their home page, they are eye opening!

9.2% of tech industry employees are Latino and African American

0.2% of venture funding goes to black women

20% of firms are owned by minorities

$8 average net worth of African-Americans in Boston

Supporting incubators and accelerators in the lower socio-economic areas of high tech-centric cities like Boston is one way to attack the lack of diversity. But I think this problem needs to be addressed earlier in lives of potential founders. Why aren’t there classes in entrepreneurship in the Boston public schools? Clubs for budding student entrepreneurs? Business plan competitions in high schools? In other words, young people across the economic spectrum need support, training, and encouragement to explore creating their own businesses. Unfortunately our public schools are still stuck in the 19th century model of churning out compliant workers for industries’ assembly lines. But until there’s real change in the antediluvian public education system, investors who have made a lot of money betting on entrepreneurs who look like them should direct some of their massive profits to support organizations like Smarter in the City. I don’t see a single VC firm or angel group listed amongst the sponsors of Smarter in the City. Though kudos go to Microsoft as the sole tech sponsor.





There’s no success like failure and failure’s no success at all


I doubt Bob Dylan had entrepreneurs in mind when he wrote that lyric in the song Love Minus Zero/No Limit. And I’m not sure I understand what he’s saying either, but Dylan’s great at creating enigmatic aphorisms, as well as song titles that are inscrutable at best.

But Bill Gates, who I doubt was the Dylan fanatic his competitor Steve Jobs was, came up with a great quote that every entrepreneur should take to heart: “Success is a terrible teacher.” Jean-Louis Gassée, in his Monday Note #519,even improved on this quote when writing about Steve Jobs:

As Bill Gates once felicitously said, “success is a terrible teacher”. (The French translation, maîtresse, is even better as it combines knowledge and infatuation.) The success of the Apple ][ might have seduced Jobs into believing that he knew while he might have simply been a kind of Chauncey Gardner: At the right place at the right time.

I was a victim of the success syndrome myself, thinking that after starting two companies backed by a host of blue chip VCs and corporate venture arms of companies like Apple Computer, that I could start a third company by myself, based on my own idea. You can find the Throughline story elsewhere on this blog, so I won’t repeat it.

Startups are hard and just because you have done one or two before doesn’t mean you’ll succeed again. Mitch Kapor, did a brilliant job of creating Lotus 1-2-3, the spreadsheet that succeeded VisiCalc and preceded today’s standard, Microsoft Excel (which may in turn be superseded by Google Sheets) and Lotus Development Corporaton. But he could never match the success of 1-2-3, though he tried mightily with Symphony, Agenda, and Jazz at Lotus. In fact Jazz, a Macintosh variation of Symphony, was such a turkey that Jim Manzi, who took over from Mitch as CEO of Lotus, joked that “We got more returns of Jazz than we shipped!”

Mitch went on to try more companies and yet more products, On Technology being one company I recall, before hitting his stride as an angel investor, where he has probably made far more money than he ever made at Lotus or elsewhere.

Silicon Valley likes to focus on failure and how it’s a great teacher and how successful entrepreneurs just fail harder the next time. But not enough attention is paid to the perils of success!

If you are interested in a computer industry veteran’s view of today’s tech world you can subscribe to Gassée’s weekly Monday Note newsletter, as I do, for worthwhile insights as well as interesting historical tidbits from his fifty years of experience in the computer industry.



What’s the difference between coaching, mentoring and teaching?



Unfortunately the term “mentor” for startups is getting like “organic” for food: once meaningful, but through both misuse and overuse becoming close to meaningless. I have a post from a video by entrepreneurial guru Steve Blank that very clearly describes how mentors differ from not only coaches and teachers but advisors as well.

Thus I was pleased to see the Inc. article Do You Need a Coach, Mentor, or Teacher? Finding the right source of counsel makes all the difference as Inc. has a lot of reach with SMBs and entrepreneurs.

Here’s their very brief but helpful clarification between a teacher, a coach, and a mentor.

  • teacher is someone who has studied a topic enough to be able to teach what she has learned to others.
  • mentor is someone who has experience in your industry creating success for herself and can show you the way.
  • coach is someone who can help you with the internal aspects of entrepreneurship, personal growth, setting goals, and facing fears and resistance.

Another difference worth noting is that taking a course or hiring a coach typically costs money, where as mentor is synonymous with “volunteer.” I’ve yet to see any one charge for mentoring. If you do that you are an advisor.

Another point mentioning is where in your entrepreneurial journey you should look for what type of help. Typical is taking a course related to entrepreneurship, as many of my MIT students do before they enter the startup world via MIT Sandbox or one of the Institute’s many other entrepreneurial programs. By entering a support system like Sandbox or The Venture Mentoring Service founders get access to mentors. It usually isn’t until a venture is further along that coaching comes into play. Mentors or often investors may recommend a coach, usually to help a technically-minded CEO improve their business skills. Years ago we used to call this “going to charm school.”

Another way of looking at these sources of support is that the further along your venture is the more your need for domain-specific mentoring, advising or coaching. Very early stage ventures can benefit from mentoring on the many general issues common to all startups: what type of business entity to form, founders’ agreements, building a team, creating pitch decks, prepping for business plan competitions, etc.

An important point for founding CEOs: you need to differentiate between support for your venture and support you may need as a first time CEO. This is similar to the legal counsel issue: while ventures always have legal counsel often founders or executives can benefit by having their own attorney.

Taking advantage of the right teachers, mentors, advisors and coaches can be as important to founders as the talent they recruit. As I’ve said many times, startups are learning machines and founders should seek out sources of learning wherever they can find them, including their own staff and colleagues at other startups or even at mature ventures.