Incubating innovative startups successfully has been one of the holy grails of entrepreneurship since the Medici’s started funding artists and trade leaders in Italy in 1500’s. Unfortunately, even with great examples like the Medici family incubating creativity has been more of an art than a science. The recent attempts in Silicon Valley and here in Boston during the dot com years were mostly popular for their failures than their successes. The Y Combinator and TechStars are the rare examples of sustained successes. It might be too early to tell just how successful the TechStar model is but on the surface it appears to have the right ingredients.
In our own business we stumbled into the role of incubator. It’s been more of an accidental opportunity than a deliberate attempt and we’ve made more than one mistake along the way. To be clear, we never intended on being an incubator for startups and it is still not the core purpose of the business. Instead it has become a way for us to share in the upside of our client’s successes and at the same time reduce the dependency on fee-for-service revenues.
Over the last two years we have tried our hand at the incubation thing about five times. The first attempt was a mess because we tried to do it as a part time gig without finding a full time person to run it. That taught us our first lesson: always have a full time founder or CEO that can give the business daily attention. The last few incubations have been far more successful. Even the worst of the attempts still returned a profit to us when we sold the assets.
The question we’ve been asking ourselves is whether there is a scientific process to creating new successful businesses? We think there is and here’s a broad outline of the process and the components.
How much funding is needed? To get an idea out of somebody’s head and in front of prospective customers you don’t need much. Unless you are building a telecom business or a particle accelerator a simple prototype will often suffice as a first proof point. We have typically invested about $20K in our startups. That’s in line with the $18K offered by TechStars and the $20K or less offered by the Y Combinator. There really is no magic number but $20K is an easier pill to swallow if it doesn’t work out. Our first company cost us $16K and returned no revenues. Our most recent company has cost us about $20K and already has received deposits of $10K and has approximately $50K in contracted revenues for 2010. You’ll notice we are very nervous about counting sales as revenues. We prefer to look at deposits as a way of keeping score. We believe that because we have started and run several successful businesses, the money we invest comes with all the benefits of having a full time adviser on your staff. Dumb money, or money without the experience, is far less meaningful.
Bottom line: you don’t need much money but the source of the money matters a lot more than you think.
Who will run this business day to day? As mentioned before the worst mistake you can make is thinking you can run a business on the side. You need a full time manager or CEO. It’s only possible to get the momentum you need to break startup inertia if you have someone with 100% focus on the business. We look for CEO’s with startup experience and at least 2 or more successes behind them. Startup CEO’s are very different to the CEO’s that end up running the business after 2 – 3 years. These startup CEO’s are ready to roll up their sleeves and do anything necessary to get the first customer signed up or the product released and out the door. We do not think this role is for entrepreneurs that have just graduated or are starting their very first business. We may team the idea guy with the startup CEO but we advise against letting the smart computer science grad run the business and attempt to build the business.
Bottom line: Who you choose to work with and their level of commitment is without doubt the biggest determinate of startup success.
Operational involvement and control
How much time and energy do you have to put in to your companies every day? The horrible truth is that you need to give your incubating companies attention almost every day. Our business is somewhat unique in that Fresh Tilled Soil actually builds and supports many of our investment companies websites and applications so we are intimately connected to the daily operations of the business. This unique involvement is far more active than if you are just a financial investor or a board member. We also physically house some of our companies which gives us unparalleled access to the founding teams. From an operational point of view we insist on weekly management meetings with our partners and founding CEO’s. These meetings are designed to review the key metrics of the business (sales, revenues, expenses, COGS, deposits, AR, AP and process). We have a dashboard which shows all these key metrics and compares them against the previous weeks and months. In each meeting we’re looking for patterns and opportunities to improve.
Bottom line: Starting a business is like having a child. It’s a daily commitment where the level of involvement is in direct proportion to the outcome of success.
Mentorship and partnership
How will the founder or founding team get the experiential and emotional support they need? Make no mistake, this is the key to a successful business. Nobody starts a great business by themselves without lots of support. Forget about the mythologies of Jeff Bezos and Bill Gates. Even the greatest billionaire CEO’s started with a partner or an advisory board. Both Bezos and Gates have repeated said that without the right mentors along the way they would never have created the businesses we know today. We provide lots of advice to our founding teams whether they solicit it or not. We also offer them lots of emotional support because we know it will get tough. One of our company CEO’s was in for a design meeting but we sensed they were distracted by other issues. As we probed the conversation quickly turned from design to sales. We ended up hearing about some unforeseen sales challenges that were getting in the way of achieving our revenue targets. By discussing the stresses and concerns of our CEO we were able to get to a solution. These conversations can feel like therapy sometimes but they are necessary for a leader to find the daily focus they need. These sugar-free meetings can be a little abrasive and direct but they are served up on a plate of compassion and a desire to get to the truth quickly.
Bottom line: No one is an island. Get advisers, mentors and partners that support you with honest direct advice.
Where should we put the team and how can we reduce the infrastructure cost of starting up? Earlier incubation models insisted on sharing physical space so they could amortize the costs of rent, printing, etc. I’m not yet sure it’s necessary to be in the same office but it really helps. We have enough space to house at least 2 or 3 small startups and still have ample space for Fresh Tilled Soil. We share in the cost of rent, connectivity, utilities, some legal fees and sundries but that’s not the real benefit to being together. We love being able to solve problems in an ad hoc real-time way. If there is a question our startup teams can get up and walk over to get answers. That speed of decision making is critical to maintaining momentum.
Bottom line: Even in a virtual world, physical space still matters. We are social beings and the closeness to others has a meaningful impact on the startup process.