When Jessica Kim emerged from a Chicago-based accelerator last summer, her four-year-old business had some fresh thinking behind it.
"Lean startup" has become all the rage at incubators and accelerators as it has elsewhere in the tech world. At the accelerator, Kim learned the lean-startup way of doing things: Quiz your customers before selling a single product. In her first 48 hours at the accelerator, she changed her business, BabbaCo, which sells customized boxes of kid crafts and books, to a subscription-based ecommerce model from one selling through major retailers.
"It was an incredible experience that completely turned around our business," Kim says. "We were able to validate our hypothesis, tweak our model, and push our thinking in less than one week. It saved us a ton of trial and error." It's also meant 30 percent month-to-month growth since launching in September 2011, 10 additional full-time employees and $1.2 million in venture capital.
Business incubators, and their close cousins, business accelerators, have been around for decades. But they've undergone dramatic changes in recent years. Here's a look at what's new.
-- Lean-startup strategies. Leading incubators and accelerators are embracing the lean-startup approach to launch businesses and have all but thrown away the traditional business plan. The approach puts an emphasis on customer product testing to shorten development cycles and gain feedback. Outlined in a 2011 book The Lean Startup by Silicon Valley entrepreneur and venture capitalist Eric Ries, lean startup works like the Field of Dreams mantra in reverse: "If they come, you will build it."
At FoundersPad, an accelerator based in Bend, Ore., co-founder Dino Vendetti says he's embraced lean startup because in his view it's the best method for getting a business going while minimizing waste. By the time his charges finish their 12-week course, they're ready to ask angel investors for large sums of money to back business ideas they've tested to increase their chances for success.
FoundersPad teaches lean startup with a host of materials, from the writings of Stanford University Prof. Steve Blank to online workshops from Luxr Inc., a San Francisco based firm that coaches budding entrepreneurs.
In a typical lean-startup scenario, entrepreneurs launch a "splash" web page with little or no investment to introduce the public to a business that may or may not yet exist beyond just the idea stage. If people flock to that web page, it's truly time to get down to business. And if not, the founders can "pivot" and change their idea to test a new hypothesis, or act on potential feedback, in the run-up to launch.
Kim, who enrolled at an accelerator called Excelerate Labs, tested her product through focus groups, interviews, online user testing for her site and in-home prototype tests with surveys and calls for feedback. "Parents loved the idea and expressed the need for it," says Kim, who started BabbaCo with four baby products she invented and had manufactured by others. "They had great feedback on what type of activities they were interested in, and how and when they used the products."
-- More mentoring. Leading incubators are offering more structured mentoring programs with tutoring sessions following a specific syllabus and milestones.
Getting accepted into the FoundersPad program means doing your homework and treating your business idea like an intense classroom project. There is no fee to enter, which applicants do via founderspad.com, or join the program, but FoundersPad takes a small piece of equity in each company that goes through the session.
Schmoozing some rich boss at the water-cooler this is not.
In a 12-week session, participants meet once a week with mentors for five hours, and those mentors become intensely involved in helping make the business a success. The sessions involve a mix of group work and curriculum, and the milestones include developing a product-market fit, building the company infrastructure, and preparing for presentations to potential investors.
It's much the same at Excelerate, which recently joined forces with TechStars, a seed-stage accelerator with an emphasis on mentoring with programs in Boulder, Colo., San Antonio, Texas, New York, Boston, Seattle and London.
The accelerators steer participants towards a critical fork in the road: Either fail, and do it quickly, at little expense, or build momentum and find investors fast. "It's super fun and engaging," says Vendetti.
Darren Powderly, founder of CrowdStreet, a real estate investment website based in Bend, recently finished 12 weeks with FoundersPad, and he's ready to present to angel investors. "Without FoundersPad, we would've been less organized and not prepared for what lies ahead," he says.
CrowdStreet, which is about 10 months old, is seeking to connect accredited investors with Main Street-type commercial real-estate opportunities. FoundersPad has helped Powderly save "thousands of dollars while solidifying the business plan. In the process, we've conducted hundreds of customer interviews. . . and we believe, thanks to all our customer feedback, that we have a product-market fit that will lead to a viable business," he says.
-- More money. Many business accelerators are finding ever-larger amounts of funding to back companies. In many cases, there is no direct investment in the companies per se, but that's rapidly changing. Now that it has merged with TechStars, Excelerate is offering more money for those accepted into its programs. With Excelerate's name change, the newly dubbed TechStars Chicago can now offer more than $118,000 in funding per company. That's up 57 percent from the $75,000 Excelerate Labs offered previously. In exchange for those funds, TechStars gets about a 6 percent stake in the companies it helps launch.
Troy Henikoff, co-founder and CEO of Excelerate Labs, says that he's excited about what entrepreneurs can do with more money, which he hopes will "supercharge the growth of early-stage companies." FoundersPad doesn't currently offer funding to its fledgling companies, but Vendetti says it is in "transition to a model to provide dedicated capital."
More incubators are working more like business accelerators. What's the difference? Business accelerators have a limited time span, usually 12 weeks, and demand more intensive, hands-on work from founders. Unlike incubators, accelerators are often run by investors with stakes in the companies. They're exploding in popularity because they solve some key problems from the incubator model, from a lack of guidance on strategic growth issues to the need for specific deadlines to turn up the heat on creative problem solving. Meanwhile, incubators are increasingly adopting the accelerator practices of regularly scheduled, hands-on mentoring from on-site experts, networking among co-founders of businesses within the incubator, and a structured path to launch within a finite run-up period.
"The accelerator model itself is becoming a best practice because it addresses some of the challenges inherent in the old incubator and angel-investment model," says Susan Cohen, a graduate student studying strategy and entrepreneurship at the University of North Carolina Kenan-Flagler Business School who's researching accelerators. "Since ventures graduate according to a predetermined schedule, they are less likely to become overly dependent on the incubator."
Firms in a business accelerator, much like cadets at boot camp, help each other and receive more services than they would receive from either an incubator or angel, Cohen adds. "The infamous demo-day events, which bring together hundreds of investors to hear venture pitches, are a prime example," she says.