Brokers, Incubators, and Intermediaries- Oh my!

Introduction

Over the past decades, we've seen many different types of organizations formed to "accelerate innovation'. In some cases, firms called "#incubators" seek out promising firms, select a few for residency and then provide services to the firm, often in exchange for stock. We've seen private firms do this, ad hoc organizations such as angel investor networks (#angelinvestor) , and local/state governments get in on the act. But is this a good thing for you to do with your idea and your early stage startup? We'll explore some of these in this post and see if we can develop some criteria about selecting one of these "accelerators" to work with.

The Main Idea

Increase your odds of success by doing the right things first

What is the purpose of an incubator?

#Brokers, #incubators, and #intermediaries claim to help startups get into the marketplace. A A cursory analysis of Y Combinator (famous Silicon Valley group) shows the acceptance rate for new firms is about 1.5% of those that apply. And of those that do get in, the success rate is also quite low, less than 1% of those that originally applied I believe.

What if you apply and don't get in? Does that mean your idea is mediocre and not worth their interest? No. It means you don't fit what they are looking for. From my perspective, Y combinator and other incubators look more like a low cost deal flow process for venture investors. This means that Y combinator firms have been carefully curated to match what venture investors are looking for (this week). Unless your idea is squarely in the current hot area of investment, you are out. But wait- did you start this company with the purpose of raising venture capital or solving a customer problem?

My concern is pretty basic- why do you think admission to a prominent incubator is somehow a validation of your idea? In this blog, we believe that validation comes from the customer. And, your first goal is to get customers using your product before trying to raise money from others.

Cattle Calls and Other Wastes of Time

When I first jumped into the startup world in 1999, I made all kinds of mistakes in getting my company off the ground. One of the biggest mistakes was in the board of directors and the source of funding. Once we took money from an angel investor group, we were immediately on the road making presentations to other investor groups, not visiting potential customers. Why? Very simply- the early stage investors first task is to find the next set of investors so that they can get their positions covered. Very few investors will back an unknown startup and founder alone and simply hope for the best.

Another major waste of time was what I call a "cattle call"- an event where the audience is supposedly all early stage investors and one startup after another (the cattle) pitches their company. Ostensibly, the investors in the audience will seek out promising startups. This is very convenient for the early stage investor funds but it is the best venue for you and your startup? Again, my advice is no. Investors don't purchase your products and some of these events produce zero new investments. Can you get some notoriety if you gain an investment here? Possibly, but it depends on who wants to know more about your company. Keep in mind that "investor" is a very ill defined term. What if one of the investors is from Intel's corporate venture capital group? Then sit up, put on a clean shirt, and pitch to them. But you don't need an event to pitch to a corporate VC- just contact them directly and get their feedback. But you will probably hear the same thing we've been saying in this blog: Do you have a product? Can we test it? Who is the customer?

What does work- Innovation Networks

I got an opportunity to work on this exact problem during my Ph.D. program. I worked with an amazing tenured faculty member, Dr. David Bodde, in a program he created called the AutoVenture Forum (AVF). The purpose of the AVF was to bring a group of carefully curated startups directly to the product development teams representing all of the US automakers. The audience for the presentations were mostly auto company executives and a few corporate venture investors (see above). The presentations were aimed squarely at the auto makers stated needs which were provided in advance to the startups.

Of the dozen or so firms that presented, every single firm got some kind of a development deal with one or more of the auto firms after the 1 day event. Interviews with the auto executives that attended the event was quite revealing. All of them said that they had never attended an event like this and considered it a success.

The innovation network, implied in the AVF, assumes that the organizers understand the needs of the industry they are serving and seek to find startups that may solve some of the industry's stated challenges. This "impedance matching" between the large firms and the startups is a critical role. Dr. Bodde was clearly a master at this difficult task. The innovation network's goal is also to provide a high quality deal flow to professional investors, at some point. My thinking on this was that we were trying to get the startups into the market with an industrial partner first and demonstrate that their product does what the customer wants. If this occurs, then raising money to grow your business is much easier and there are many more sources of investment.

Funding for a organization like the AVF came from the auto industry and grants. But, sustaining the AVF meant that the auto industry would have to fund the organization. For the AVF to be successful, it would need a permanent staff. The AVF would have to be responsive to the needs of the industry while also staying within Federal law on collaboration among competitors.

Should the AVF be institutionalized? It could be very expensive to maintain the AVF long term considering the level of expertise involved in the AVF event (I do not include myself). Is there a way that we could modify the AVF format so that it could be run with low overhead but still help small firms meet and greet with potential customers? Yes there is.

Industry Innovation Brokers

In my limited experience, all of my ideas were about stuff that I was interested in, and not targeted at chasing the latest investment craze. In Portland, there was no incubator for indoor air quality companies and AirAdvice did not squarely fit into any of the hot categories at the time.

However in my current company, Tailwater Systems, we were very lucky. I started the firm to solve the "nitrate problem". Nitrate contamination from agriculture (mostly) is now the largest unsolved pollution problem we are facing. Every major river system that is close to agriculture seems to be contaminated with this criteria pollutant.

We learned about an organization called the Western Growers Center for Innovation and Technology in downtown Salinas. The Center charges startups a nominal fee (a few hundred dollars a month) to have a presence at the center- usually a cubicle. They provide services to the member companies including an article feature in the Western Grower Magazine. Funding for the center is provided by the large firms in agriculture. To this day, our first appearance in the Western Growers magazine generated more sales leads for us than any other marketing.

But what impressed me the most was how it was organized. The Center staff did not claim to be industry and technology experts. What they did have was many personal contacts with every major grower in the area. For a startup, this was invaluable. The Center organizes events at the center and around the State of California. The center pulls together companies to come to the event and solicits startups in the center to present or via Zoom. There is some coaching on occasion but the presentations and demos and followup are up to the startup firms and the ag producers.

Summary

First, so-called innovation intermediaries can be very helpful in getting your idea launched into the market place. Second, select an intermediary that serves your potential customers. Third, stay away from organizations that focus on pure "deal flow" for investors. Finally, keep your sights on the customer and solving their problems and use this criteria to determine if an intermediary can help you.