Incubator hopping: Should you go to more than one incubator?
My pal Sam Altman wrote a post about a growing trend I’ll call ‘incubator hopping,’ in which he explains that going to another incubator may actually DECREASE your chances of getting into YCombinator, rather than giving you a better shot.
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Some incubator heads I spoke to read Sam’s post as a scare tactic designed to discourage founders from going to other programs. Let’s put that inside baseball stuff aside for now and focus on the actual question at hand:
SHOULD YOU GO TO MORE THAN ONE INCUBATOR?
I’ll give you the correct answer, which is obvious, but dependent on your options. Specifically, it depends on a) how strong a reputation you have as founder, b) the overall strength of the business and c) how competitive a market there is for your equity (which is tied to points A & B above. At least in a rational market).
Here is exactly what you should do, in order of how strong you are (on a scale of “seemingly invincible” to “desperate”):
- (SEEMINGLY) INVINCIBLE: If you can raise an A-Round without ever going to an incubator, you should do that. You’re obviously awesome and don’t need help from an incubator. You can, and probably have, self-funded your MVP.
- VERY STRONG: If you can raise a seed round right now, you should only go to an incubator if you think it will increase your chances of getting an A-Round (which is very hard to do in 2016).
- STRONG: If you can’t raise a seed round, but you get into a high-quality incubator, do it quickly. Incubators are the way many angels and syndicates look for a signal that you’re worth a seed round — and they’re right! If you make it through a respected incubator, you should have been vetted to the point at which you have a working product, some customers and perhaps even revenue, which greatly improves the angel’s chances of getting a return.
- WEAK: If you can’t get into a ‘Tier One’ incubator, but can get into a second tier incubator in a second-tier market with second-tier mentors (i.e., folks without killer track records), well, that’s better than not starting a company in my book! Give it a shot, and if you fail, the only thing you’ve lost is six months of your life. You’ll have learned a ton and increased your chances of being part of the first three groups above!
- DESPERATE: If you went to an incubator and didn’t raise a seed round, or you did and you’re out of money, you’re going to want to take a deep look in the mirror and ask the following questions:
a) Does your product suck?
b) Does your team, ummm, suck?
c) Is your team awesome and you just picked a bad idea?
d) Is your team awesome and everyone else in the world is wrong about your idea?
e) Is your team awesome and you’re on the cusp of a breakthrough / pivot?
If your team is awesome and they want to keep going (c, d and e) above, I would certainly go to another incubator and dilute yourself another ~7% because, well, what have you got to lose?!
Remember, Sam’s advice is coming from the position of an incubator that is graduating, what, 350 companies a year? No one company matters in YC’s results (unless it becomes Airbnb). Sam’s fear is that you don’t get accepted to YC and you go to another incubator (or two). If that happens, he misses getting 7% of the next Airbnb.
That’s why his advice can be interpreted as either “doing another incubator will not help you attend ours” or, perhaps more cut-throat, “do another incubator and you’re dead to us!”
Do what you need to do to survive, because startups that survive learn a lot, and sometimes wind up breaking out.
If you go to one, two, or three incubators and fail, you didn’t fail “more” than someone who went to zero incubators and failed — and failure means “you learned!” in our business.
Now, what’s the worst case for you as a founder who goes to two or three incubators and then succeeds big?
Founding teams wind up with 50% of a company’s equity, typically, so going to an extra incubator or two will reduce your take by 5–14 points (i.e., 5–7% for each of a 2nd and 3rd incubator).
So, if your startup becomes a unicorn and your $500m in stock gets diluted, here is the back-of-the-envelope difference:
— 1 extra incubator at 5%: founders get $450m instead of $500m
— 2 extra incubators at 5%: founders get $400m instead of $500m
— 2 extra incubators at 7% each: founders get $360m instead of $500m
Startups tend to be binary, so if you go to 1–2 extra incubators, there is no impact on your life. But there’s a huge impact on Sam’s life if you go to one and later skip YCombinator!
So, if you get into YCombinator, take the seat. It’s an awesome leg up. But if you don’t get into YC, take heart knowing that 99% of all unicorns did not go to YCombinator.
PPS — Our Angel Summit is taking place on March 1st. We’re bringing together 25 angel investors to present their portfolios, goals, and approaches to angel investing for founders to get to know. Get your ticket here.