Why the incubator system is broken.

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When we launched Shadow Labs almost two years ago, I didn’t want to call it an incubator. Instead, we called it a lab. We still call it Shadow Labs, but when people ask us what it is, we usually refer to it as an incubator. The reason for my original preference was this: all the incubators that I had seen were not very good. The system as a whole seemed to be engineered incorrectly. Incubators were targeted at founders who lacked experience, not just in building a startup but also in their career. Here are the problems I typically observed:

Recruitment: The recruitment of startups is driven by the program offerings. Most of the programs are very basic, so if you’re an inexperienced founder the program may be ideal. However, an experienced founder may not see the benefit. Someone with significant career experience has already mastered certain basics and now needs advice on more complicated aspects of startup success. 

Equity: An experienced individual will struggle with the idea of giving up a fixed equity amount for a fixed valuation. The one-size-fits-all approach attracts founders who are more than willing to give up equity without having to contemplate the actual valuation of their business. An experienced founder will probably benefit from a different arrangement.

Location-based: I had a friend move from Atlanta to Austin for several weeks to participate in an incubator program. He’s in his mid-forties and married with three kids. It was a massive strain on his family life. He was also outside of his support system. In this day and age, the idea that a person needs to physically move to participate in a program is a bit ridiculous. Experienced people can’t (and shouldn’t) do this.

Current development state: Most programs are built for a cohort. Much like college, everyone is recruited into the program as a freshman. Then, everyone goes through a series of steps until they graduate. The reason this doesn’t work well is that founders might be at different developmental stages upon entry to the program. The same is true about their companies.

The team: Unfortunately, the current startup culture has resulted in a proliferation of incubators and accelerators. The team coaching the startups usually has limited experience in successfully building a startup. If you have the experience, you’re probably building another startup. Or, maybe you’ve reached a point where you’d rather invest in startups.

Timing: A cohort-based system has a start date and an end date. Again, much like college, if you meet the application date then you have to wait until next semester to begin. This system also assumes that you can graduate at the same time as everyone admitted in the freshman class. But some people need six years for undergrad while others can knock it out in three years. Once again, the one-size-fits-all approach doesn’t work.

Demo days: Demo days are pointless. Just like an avid car collector doesn’t go to public auctions, professional investors don’t go to demo days. Professional investors rely on their network and knowledge to find the right founders to engage with. The ONLY benefit to a demo day is if you have potential customers in the audience.

So why did I build yet another incubator? Like I’ve explained, there was no community to help an experienced person build a startup. I wanted to create something better. I wanted a community that understood that getting professional investment is driven by building a real business model. I wanted to actually get to know my founders and support them with a skilled team that cared about their success.

It has been two years and we are just now investing in startups that joined us two years ago. Oh, and we are negotiating a priced round based on their business that is fair to both parties. We have been in their lives for two years, and we will be there when they have a massive exit. We aren’t just helping build startups; in many ways, we are creating our next generation of LPs.

If you want to watch a great video that shows how I have worked with founders, check out “How I Built It: A $1.5B Valuation in 3 Years. The Good, the Bad and the Ugly”. Email me at  kpr@shadow.vc to get a passcode.