It can cost a lot less to start a new company today than it would have cost ten years ago.
Advances in technology—cloud computing, online distribution channels, open software, 3D printers, and the “pay as you use” SaaS model—are continuing to drive down the dollars required to get a startup off the ground.
This has contributed to some interesting developments, including a growth spurt in university-affiliated and regional incubators, as well as the increased availability of concept-stage capital.
Incubators and proof-of-concept capital go hand-in-hand. First, in addition to venture development services, incubators are increasingly providing access to a minimal level (perhaps $10,000 to $50,000) in proof-of-concept funding. Second, the micro-stage VCs are looking for the best of the best deal flow. They may be willing to invest in pre-revenue businesses, but they remain flinty-eyed. They want to know that entrepreneurs who get their checks have strong evidence that customers want to buy what the entrepreneur plans to create.
1. There are really two reasons to join an incubator:
- A. To validate or invalidate your concept with the customers and markets you plan to serve.
- B. To reduce risk by proving (or disproving) that your startup can build a sustainable business plan based on providing products and services that customers will pay real money to buy.
2. Choose an incubator that matches your needs. Be realistic about your own strengths and areas where you lack experience or where your skills aren’t what they need to be. Some incubators emphasize business plans. Others are expert at teaching entrepreneurs how to validate their idea with real customers in the target markets they hope to service. Others accelerate connections with service providers at reduced or pro bono rates or facilitate discussions with university technology transfer offices to spin out IP.
Can you afford to pay fees that may be required? What about location and facilities? Are you looking to become a tenant or is drop-in shared space all you need?
3. Investigate the incubator’s track record. Graduated companies that have received Series A or other follow-on funding aren’t the only way to measure an incubator’s success. Ask about jobs created, customer and investor connections, and strategic partnerships that the incubator helped create. Talk to local business leaders and professors of entrepreneurship. Less intuitive, find some entrepreneurs whose companies failed the proof-of-concept stage.
4. Do you need and want pre-revenue stage capital? According to CB Insights, over the first six months of 2014, almost half of the 129 venture funds closed were micro-VCs, defined as funds with less than $50 million under management. Sixty-five percent of funds closed were $100,000 or less. For the very best proof-of-concept deals there’s interest from the VC world.
Some incubators offer proof-of-concept funds from public or private sources. They may ask for an equity stake or structure deals based on convertible notes.
We’ve seen a number of startups raise prototype money through crowdfunding. The rules for investing in this asset class have relaxed since the federal ban on solicitation eased, but crowdfunding is still new territory. Before you cross the river, seek expert legal and financial advice. A good place to start is with the venture advisors on your chosen incubator’s staff.
Do not accept any outside capital (including money from friends and family) without first talking to an attorney well versed in company formation and the implications of the CAP table on future rounds, especially from the viewpoint of VCs.
5. Have a post-incubator-graduation plan. Any incubator worth its name will eventually tell you it’s time to leave. What happens after that? Do they wave good-bye or can you come back for advice once you’re out on your own? Is there transitional office space or will the incubator help you relocate into the community? Does the incubator offer a continuum of funding to graduates or introduce alumnae to potential investors for Series A or follow-on rounds? If you accept funding from a micro-VC, seek a group with connections to follow-on sources of later stage capital.
There are some outstanding incubator options in Ohio and our surrounding states. TechColumbus’ SpringBox Labs was recently named to the UBI Index Global Top 10 List of the highest ranked university-affiliated incubators. UBI Index is the thought leader in performance analysis of business incubators.
Incubation teams review dozens to hundreds of business concepts every year. They may not see it all, but they come pretty darn close. They may not know it all, but they know a lot.
It’s worth a phone call.
Contact TechColumbus for more information.
