Innovation and entrepreneurship are intimately linked, but as Silicon Valley has grown, the connection between the two has become evermore complex.
The Three Incubating Categories
Startups are moving from coffee houses and garages to co-working facilities, incubators, and accelerators. The three categories vary widely and there is often overlap, but in general, they each provide a unique set of offerings to entrepreneurs and startups.
Co-working facilities, such as WeWork, The Hatchery SOMA, StartupHQ, 5M Project, and mission*social, are shared office spaces that have sprung up around the globe. They attract professionals who want to get out of their houses and engage with others in an office environment. The co-working crowd can include individual entrepreneurs, freelancers, and independent contractors. Events and classes are held on the premises, but services are usually limited. Co-working spaces typically charge a monthly fee.
A startup incubator, such as YCombinator, 500 Startups, and TechStars, is a facility or a mentorship program for early stage startups. Incubators have a competitive application process, and a company is accepted into the program based on its ideas and the team’s potential. Each company stays in the incubator for a specific amount of time and then “graduates” at the end. Resident companies receive assistance refining their business ideas and preparing the product for market launch. In exchange, the incubators receive equity in the companies they help.
A startup accelerator, such as RocketSpace, Kicklabs, BootstrapLabs, Blackbox Mansion, or i/o ventures, picks up where incubators leave off. If an incubator is similar to an undergraduate education, an accelerator is like graduate school. Accelerators focus on post-incubator, seed-funded startups on the cusp of rapid growth.
Like incubators, accelerators are highly selective. They provide participating companies with a workspace, extensive startup services, and networking opportunities with angel investors, venture capitalists, lawyers, and leaders of Fortune 1000 companies. Accelerators typically charge startups a monthly fee, but they may have the option to invest in the companies they advise.
Who are the rock star startup incubators?
One of the best-known incubators is Y Combinator, or YC. It provides seed funding, which is the earliest stage of venture funding and pays the expenses while a startup is getting off the ground. Starting with a small investment—rarely more than $20,000—YC receives a stake in each company (usually 6 to 7 percent). Two, 3-month funding cycles occur each year. Each culminates in an event called “Demo Day,” during which the startups present to an audience that includes many of the world’s top startup investors. Since 2005, YC has funded more than 460 startups, including Reddit, Disqus, Dropbox, Heroku, and Airbnb.
YC partner Jessica Livingston says it is all about the founders: You can change the idea, not the founder.
The startups accepted by TechStars raise, on average, more than $1 million in outside venture capital by the time they leave the incubator. A quick roundup of companies that participated in the TechStars program reveals that less than 15 percent fail, more than 75 percent are still active, and about 10 percent have been bought by other firms. Statistically, those numbers are promising, as venture capitalists generally figure that between 50 and 90 percent of businesses eventually fail.
TechStars and YC have similar structures. TechStars invests $18,000 in seed funding in each startup in exchange for a 6-percent stake in the company and an optional $100,000 convertible debt note. TechStars is backed by more than 75 different venture capital firms and angel investors. They also provide free office space, three months of intensive, top-notch mentorship, incredible perks, and the chance to pitch to angel investors and venture capitalists at the end of the program.
Since 2010, 500 Startups has seed-funded Internet startups focused on usable design (designing functional user experience), customer-focused metrics (acquiring happy engaged users and data), and online distribution (strategizing across key search, social, mobile, and email platforms). As of April 2012, 500 Startups had invested in 257 companies, including Wildfire Interactive, which was co-founded by Swiss entrepreneur Alain Chuard and acquired by Google, as well as TaskRabbit, Twilio, and Mint.com, which was acquired by Intuit.
In exchange for approximately 5 percent of the company, 500 Startups typically provides funding of $25,000 to $100,000, though the equity it receives may be different if other investors have already backed the startup. In exchange, startups get access to a global network of more than 120 mentors, who give talks as part of the weekly accelerator curriculum, provide 1:1 mentoring, and are otherwise available to help and guide the startups. In addition, startups get office space in Mountain View, California, for three to six months.
And who are the rock stars among startup accelerators?
Accelerators, such as Blackbox Mansion in Atherton, just north of Stanford University, present the international startup community with yet another option. Blackbox Mansion helps non-U.S. startups to bring their products and services to the global market. It is a one-of-a-kind living-and-working space for entrepreneurs hosting regular events, such as co-founder dinners, hacker meet ups, and multiple pool—ehm, networking dinner—parties. Startups are allowed to stay for up to three weeks at relatively reasonable standard rates. In addition, Blackbox Mansion holds several two-week residential “Blackbox Connect Programs” each year offering crash courses in the business culture of Silicon Valley.
Rocketspace, with alumni such as the car service Uber and the online shoe warehouse Zappos.com (acquired by Amazon in 2009), is another important accelerator for international startups that want to work next to other highly ambitious entrepreneurs in downtown San Francisco. Innovation agencies from various European countries, which we’ll discussed later, collaborate with Rocketspace to take advantage of their various offers for startups.
San Francisco-based i/o Ventures is another early stage startup program with up to five companies per three-month session. It focuses heavily on mentorship, working closely with founders beginning with product launch and sharing proven methods for product scaling, revenue growth, and fundraising. i/o Ventures tends to focus on Web services, client software, digital media, and gaming; it usually invests $25,000 in exchange for 8 percent of the company.
The list of startup incubating models would not be complete without mentioning another category: the not-for-profit accelerators.
In January 2012, the University of California, Berkeley, launched Skydeck, an engineering- and MBA-focused accelerator for digital businesses, in collaboration with Lawrence Berkeley National Laboratory and several other partners. At Skydeck, participants include undergraduates, postdocs, recent graduates, and professors.
At the other end of San Francisco Bay, a nonprofit program at Stanford University called StartX is in its second year of operation, and so far has helped launch 60 startups. StartX gets funding from private companies and Stanford Student Enterprises. Advisors and sponsors have included AOL, which provides office space, Greylock Partners, General Catalyst Partners, Khosla Ventures, Charles River Ventures, and Asset Management Company, with numerous other law firms, banks, and technology companies providing resources as well.
StartX takes 10 to 15 companies at a time for three-month sessions. It provides technical resources as well as $5,000 in free legal fees, a $5,000 stipend for founder living expenses, and accounting and banking resources. The emphasis is on education to teach entrepreneurs how to best tackle challenges. The success rate of StartX has been spectacular so far: 85 percent of the companies supported by StartX have successfully raised funding, totaling more than $88 million at an average of $1.42 million per company.
In contrast to for-profit incubators, neither Skydeck nor Stanford’s StartX takes equity in participating startups.
Many foreign countries have launched “soft landing” programs in the past few years, including the Spain Tech Center, Innovation House Norway, Innovation Center Denmark, Mind The Bridge (Italy), German Silicon Valley Accelerator, and of course, swissnex.
swissnex San Francisco has offered nearly 100 Swiss startups advice on entering the U.S. market, as well as shared office space, since 2006. In late 2010, with sponsorship from the Commission for Technology and Innovation (CTI) of Switzerland, we launched our own accelerator program, the CTI Start-up US Market Entry CAMP, which provides a customized program of workshops, lectures, and events, in addition to one-on-one coaching, workspace, and access to swissnex’s broad network in the startup, academic, design, and investment communities. Like most soft landing programs, we don’t take equity in the companies that participate. In November 2012, the startup services team has planned a five-city Startup Roadshow in Switzerland geared for companies looking to make the leap to North America.
A parallel wave of incubating innovation is also sweeping over Switzerland. For example, the city of Zurich’s new BlueLion Incubator is centered information and communications technology and clean tech startups. Incuray invests in digital services startups, and Centralway focuses on innovative financial technologies, to name just a few Zurich-based programs.
In Western Switzerland, co-working spaces and incubation or acceleration programs like Parc Scientifique, or PSE, at EPFL in Lausanne, La Muse in Geneva, and Y-Parc in Yverdon have established themselves as the leading startup hubs.
And in Italian-speaking Switzerland, Lugano’s Centro Promozione Start-up, a not-for-profit, university-affiliated incubator, is the go-to destination for Ticenese startups seeking support and infrastructure.
What’s next for the startup and the investor community?
One escalating trend is the formation of hybrid launch platforms, blending traditional venture capital with startup accelerator or incubator models. Just a few months old, the Hive has offices in downtown Palo Alto, San Francisco, and Santa Monica.
The Hive was founded by investor T. M. Ravi and managing director Sumant Mandal, both of Clearstone Venture Partners. It’s structured uniquely to be an operating company, not an investment fund—one that actually creates companies, typically those that use large volumes of data for intelligent decision-making and tap directly into the nascent big data market. The Hive follows the mantra, “high touch/low volume”—that is, high touch because they are operationally hands on with startups, and low volume because they work with at most five companies at a time. Most incubators and accelerators tend to be “low touch/high volume.” Interestingly, there is no formal application process; instead, it operates by word of mouth, in the same way most traditional venture capital firms do.
Here's Dave McClure, founding partner at 500 Startups, who explains how the changes in the marketplace have increased the speed of startup commerce.
Caution: sharp turns ahead
The proliferation of new accelerators, incubators, and funding strategies has made one thing clear: Things are changing fast in the startup world. It only makes sense that the launch platforms for the world’s most innovative companies have had to become innovative themselves. And there’s no reason to believe that this constant shape-shifting will stop anytime soon.
With the advent of cloud computing and open-source software, it costs less than ever to start a company. Yet, the skills required are in short supply, making incubators and accelerators attractive talent pools. Groups like swissnex San Francisco actively observe the changing landscape from the front row and provide relevant updates, insights, and advice to startups. And with venture capital in turmoil, the solid foundation, advice, and access to investors that these operations provide are indispensable.
- “Master of 500 Hats,” a blog about Geeks, Entrepreneurs and Startups in Silicon Valley (as of 2011 one of the ten most-read blogs on VC finance), by Dave McClure, founding partner of 500 Startups