With this in mind, I would like to share my opinion on the growing phenomenon of Southern California entrepreneurs turning to these organizations for help. Before you sell a piece of your idea or company to one of these companies or investors you should have a clear understanding of the incubator/accelerators' long-term goals. Do they have your best interest in mind and do you really need them to become successful? Ideas are a dime a dozen in the startup world and it's all about the execution of your idea that makes you successful.
A vertical incubator is a group of investors and entrepreneurs who collectively form companies that focus on a specialized industry vertical. Specific examples include: mobile games, telematics, social media, and advertising are some examples. An incubator that proclaims they are focused on digital media, the Internet, or mobile is far too broad and unfocused. Typically the mentors of the incubator have deep domain expertise and contacts within the target industry that can foster accelerated business and technology partnerships. Also, most of the companies within the incubator portfolio focus on solving similar complementary problems in the same industry where resources can be shared. Most vertical incubators are designed to help "first-time entrepreneurs" with the basics of company formation, technology, management, and business development and provide a small amount of funding for a pretty big chunk of the company.
A start-up accelerator/incubator is typically started by a group of smart people who have backgrounds in finance, investment banking, venture capital, or successful entrepreneurs. Accelerators tend to be technology agnostic or generalist. They will look at lots of deal flow in order to find ideas and entrepreneurs to fund. The founders and the portfolio companies do not necessarily overlap and there is typically no purpose or overarching mission to the incubator. This lack of a mission or goal is why I am not a big fan of accelerators. Making money or giving back is not a reason to start a company or an incubator. Having a passion for a particular problem or industry is most important, which lends itself to fulfilling a mission. Focus, focus, the focus is everything!
In my opinion, an accelerator/incubator with limited capital resources (under $500M) cannot be a generalist. It may be a lot more fun to see tons of ideas and deal flow but I guarantee you the incubator that focuses on a niche will be more successful. The 80/20 rule applies to just about everything in life and especially investing in technology businesses. The incubation game is about focusing on what the people within the firm know and do best.
Putting all the energy of the firm into one particular area of focus is paramount. Why, because there are only so many experts in a particular field and the best always rise to the top. It's impossible to be an expert at everything despite what most VC's might claim. Yes, investors can make bets in lots of companies to hedge risk in an incubator, but at the end of the day, 80% of the fund will likely come from 20% of the companies you start. The focus will be demanded as the incubator matures and some companies fail. So, it probably makes sense to have a common mission deliberately at the beginning because someday all the jockeys might be riding on the same horse.
Our monthly Venture Capital Alliance meeting this morning was particularly interesting as a sign of the changing times once again in Southern California. We met with the founders of MuckerLabs, Startup Engine, LaunchPad.LA and had some discussions with investor friends of Amplify.la. It encourages me to see the renewed energy in LA since the 40 or so VC funds started in the late 1990s are all but virtually extinct. However, LA still lacks the critical mass of capital resources that the Bay Area has and so it makes it that much harder to create billion-dollar ideas down here. LA doesn't have the financial resources to create a "Ponzi scheme like VC companies". (ie. Groupon)
Ponzi scheme VC investing is when angels and VCs form cult-like groups that bid up private stock in illiquid private companies. Ponzi VC scheme companies rely on constant fundraising in order to keep the business afloat and never have any intension of making money. Financial engineering is common as most VCs participating have multiple funds (early and late stage) to create a false sense of growth. Soon private equity funds and hedge funds take the bait and then Wall Street investment bankers sell the stock in an IPO dumping all the shares on the retail investor. Groupon is a great example of a VC Ponzi scheme as bigger dumber money kept piling on top of early investors without any intension of making a dime of profit. There were 1,000 other Groupon competitors in a company that had no IP or competitive advantage when it received a $100M VC valuation from a few Bay Area VCs.
The VC game has become a very tight-lipped investor club controlled by a half a dozen funds who only bet on their friend's deals. If you are not in the club that doesn't try and get in because most of the time you will get screwed unless if you have something very special. So, I would encourage the incubators based in LA to build hyper-focused niche businesses that sell for $5M, $10M $50M, $100M, and not $1B. Bay Area billion-dollar ideas don't work in Southern California yet so let's start slow. Digital media companies based in will LA will kick the crap out of the Bay Area in the next down business cycle built on VC Ponzi schemes. Smart people will come here and join the wave on Silicon Beach. Let's get back to the basics of business and ask the hard questions like, "What pain are your companies trying to solve?"
I would also encourage you to read Ryan Born's article: LA Startup Incubators/Accelerators/Mentorship Programs as Compared to NCAA Football Conferences
I encourage your comments below!