The Incubator Bubble

by francine Hardaway on April 14, 2014

There’s a bubble.

It’s not in startups, or in valuations, but in pitch contests, challenges, and incubator/accelerators. In Arizona, we used to have two or three, and now we probably have more than two dozen. They have different conditions, rules, and metrics. Every week I get an email from some incubator or agency asking me to share their challenge, event, or contest with my network.

Although I dutifully do it, because I want to support the community, I feel more than a little guilty. Most of the startups we deal with do not have the time or energy to do two or three of these applications a week, and end up being ineligible even if they do participate. This takes time away from product development, and even if they do get into an incubator often the services don’t match up with their needs and cash is not given.

This week I’m acting as a judge for the Arizona Innovation Challenge. Although I don’t get a view into all the applications, the ones I’ve seen this spring are not as exciting as the ones I’ve seen in seasons before, and I’m seeing more from out of town. This worries me. It may mean that companies we saw in the past that weren’t ready for AIC have not re-applied (and I don’t know the reasons). I’m once again seeing companies that are too early for this competition, or sometimes barely eligible because they don’t have teams.

Some startups simply focus on building a sustainable business and we never see them in these challenges. If they can raise money, great. But they don’t spend valuable time chasing it all over the United States, which is a signal that there is no “Plan B” for what happens to the business if funding isn’t attained. And truthfully, in the case of most early stage companies, it isn’t. I’ve seen applications lately where the founder does not have any money in the company — no skin in the game. As a seasoned investor, I am willing to invest beside a founder I know well, and in whom I believe, but I certainly wouldn’t invest in a team I didn’t know or a company where the founders have no investment.

We seem to have lost sight of the fact that most startups fail. As Steve Blank (The Startup Owner’s Manual) says, a startup is a science experiment. It is designed to test the hypothesis that there’s a market for a certain solution that is large enough and passionate enough to pay for the product or service. If there isn’t, well then we have to change the ingredients, or the proportions, and in the most extreme cases even give up the experiment.

Spending all your waking hours chasing down the elusive “funding” in no way advances the experiment. It tests no hypothesis. A far better way for a founder to spend time would be to find those early customers — the ones who need the solution badly enough to pay money for it and perhaps even pre-fund the company.

I fund projects on Kickstarter all the time. In fact, I’m doing more of that these days than conventional investing. Why do you think so many experienced entrepreneurs who could raise money from angels  are doing Kickstarter projects, especially those in which the donors can get the product before it ships commercially?

Because they are testing the market, that’s why. They’re looking for people who want what they’re building enough to put up a small amount of money in advance for it. And that’s the true purpose of crowdfunding; to provide a market test for startups.

If you are doing a startup, perhaps it’s best to go heads down on your product and see if anyone wants it before you reach out for funding.,



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