The top 10 things I learned by building a startup incubator
A year ago we had a long thin space in South Delhi, a network of mentors and a bunch of willing startups. Today we have a budding incubator and four successful startups who’ve gone on to seed-round funding. Here’s what I’ve learned along the way:
Most startups fail
We named our incubator-accelerator ‘Startup Tunnel,’ as a joke about eventually seeing the light at the end. But I now think ‘Startup Funnel’ would have been just as appropriate. Most startups fail. That’s a truth that one can’t really appreciate until one has gotten wet with this game, and even many successful startups will never realise how lucky they really are.
We interviewed 220 startups between December 2014 and February 2015, out of which we made 14 offers. Twelve startups accepted our offer and began working with us. We graduated five startups with our credentialed seal of approval in April 2015. Four of those are now negotiating seed round funding at valuations between Rs 8 crores and Rs 25 crores.
What of the rest? We haven’t followed up carefully, of course, but I would guess that no more than half are still around, and many more of them will fold over the coming year. The odds of coming through with your original team and idea intact are very, very, small, which is why I encourage teams to keep their ear to the ground and to stay nimble, and open to reacting to new opportunities and options as they may reveal themselves.
What's in the Pitch has to be in the Product
When you're starting out all you really have is your vision, and you have to communicate that vision through your pitch. You get into Startup Tunnel on the strength of your pitch and you graduate into seed-round funding the same way. We spend a lot of time helping startup teams with their pitch, because what you envision and articulate will actually describe the business you go on to build.
But what's in the pitch must eventually translate into your product as well. So we look for teams who have the ability to describe what they want to build in detail, in ways that show they know with precision and clarity what they're going to try to do. Pitch and product have to hang together, else the startup will sputter and fail.
Straight-up e-commerce and on-demand plays are over
I don’t know how many on-demand service pitches I’ve sat through. People are serving you groceries, hot food, half-cooked food, coming over and making drinks for you at home, giving you massages and perms and doing your make-up, fixing your car, watering your plants, and really taking over every aspect of your life. I don’t say this isn’t the way our economy is trending -- I only say that it’s impossible for me to evaluate which of these many competing services will eventually win out. And if there isn’t a clear differentiator, I’m afraid I’m not playing.
The best startup pitches aim to help people in real ways
After you’ve seen party apps, event discovery apps, and dating apps fill up your pitch slate, you really want to bite your teeth into something meaningful. You want to see startup pitches that will really change things for people, even if they’re hard to achieve. Those are also the spaces in which new opportunities are hiding, two standard deviations from what’s hot right now. As an early-stage incubator we are hungry and thirsty for bold new propositions that might feel like a brainfreeze the first time we hear of them. We look to take risks and go places where angels may fear to tread.
Data has to be part of the story
While many startups are focused on their short term play, there is also the question of managing the data they produce. If startups can’t think strongly about analysing and monetising their data they will eventually be edged out by competitors who can. So this has become a really hard line for me: are you thinking about collecting, analysing, and monetizing your data in ways that will give you differentiation and prevent your business from becoming someone else’s lunch?
Growth is to be hacked not bought
The other side of a strong product is the ability to reach audiences, convert users and drive traffic through your platform or to your product. This cannot be a spend item for a startup team -- founders must have the smarts, and be savvy to be able to connect with their market for negligible costs, or else the startup will burn through all the money that’s ever put into them.
Teams win over even the most gifted individuals
Paul Graham of Y Combinator deserves all the credit for articulating this insight first in the startup space. But I suppose every investor has to validate this general truth for themselves. We have backed individuals and we have backed teams, and in general teams perform better. This is because teams can possess a greater diversity of skills and abilities, the manpower to fundraise and work on product at the same time, while also enjoying more objective, reality-based decision making, and a better validated initial business concept.
But this is just a high-level generalization. There are still successful single-founder companies that come along and of course there many, many multiplayers teams that will still go belly-up.
Incubators can help with seed-round funding
Over the past year, I’ve sat on multiple meetings with our startups as they’ve pitched to angels and institutional investors. It’s surprised me how much of a difference my presence has made. In some cases I’ve been in a position to give feedback to the startup about what parts of their pitch were working and where they needed to refine things further. In other cases I’ve heard chatter from the prospective investor that I’ve back-channeled to the startup, which has helped the two sides come closer to an agreement. In all cases, having someone in the room who has spent a lot of time with you, who has your back, is an advantage that can only come from an institutional incubation process.
There's a lot of ‘stupid money’ out there
Yuvraj Singh and Kapil Dev have become angel investors, along with Bollywood actors and the sons and daughters of every other industrial house. Every old family seems to have some young gun trying to increase its corpus through a few quick deals. Needless to say, most of this money will be spent in subsidizing your car rides, funding your discount coupons and in chasing you around the Internet with redirected advertizing until it is all gone, gone, gone. Even though much of this money will never see any return, I’m glad it’s floating around. Easy money is the only thing that can change our old industrial-feudal ways of doing things. In the process, we’re seeing a less risk-averse society where failure isn’t quite the devastating condemnation it once was.
All the same, for first-time investors in startups, it’s important to learn about the space, learn about the sector you’re taking a stab at and develop the ability to evaluate startup teams. People who invest seriously need to spend a lot of time with a lot of startups and a good deal more time with those they actually invest in. Failing that, you’re shooting in the dark with two blanks out of three.
Funnels mitigate risk
At Startup Tunnel we really believe we’re helping build better startups on account of the emphasis we put in product, user and market orientation, data analytics and growth hacking. We also perceive that our startup teams are savvier with investors and with their long-term planning going forward several rounds of investment funding. So every pea coming through this pea shooter is going to be a better pea.
But not every pea is going to come out. And this is where I see that we have an advantage that other investment vehicles just can’t match: we have the opportunity to sit and wait out the process of startups maturing and either crumbling or coming good. We spend time watching founders deal with different kinds of challenges in the course of trying to build their product and business. That’s the sense in which the funnel of Startup Tunnel gives us a ring-side view into who are going to be the winners coming out of each cohort of startups.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.