We started our business, Barefoot Wines, in a 1922 farmhouse we rented in the west Sonoma County hills. We had extra space in the laundry room for an “office” because we couldn’t afford a washer and a dryer at the time. We couldn’t afford a desk either. So we went out back to the barn, grabbed an old door, dusted it off and put it on two sawhorses. That was our first office and that our first desk! We didn’t have any money so we had to be resourceful and innovative. We answered our own phone, made our own copies, and our conference room was our dinner table.
That’s how we got started and we worked out of our laundry room for the first two years. It saved us a ton of money – which we didn’t have. Now, things have changed and folks starting a new business have more options. Today there are several business incubators in every city. You can get a real office with a real desk, a receptionist, a conference room and more for an all-inclusive monthly rent. Of course, it assumes that you have some money to pay the rent. But everything else is supplied for you. No need for trips to the barn anymore. Just get the funding.
There doesn’t seem to be any real consensus on the meaning of the name “business incubator.” Generally, it is a place where startups can get, well, started. It provides the startup with some basic needs like a place to work, a place to meet, high-speed internet, a receptionist, a lunch room, and some events designed for networking, introductions, or the chance to rub elbows with some heavyweights (or at least the employees of some heavyweights) at a Friday afternoon mixer.
Pay the Rent!
A business incubator is, at its core, a real estate play. The incubator is the landlord. The startup companies are the tenants. The rent is due monthly. This is very close to a shared co-working space for entrepreneurs like “WeWork.” Business Incubators go by various names. These include, but are not limited to, business accelerators, startup hubs, tech gardens, launch pads, and proprietary names like “Rocket Space.”
Business accelerators like to distinguish themselves from incubator companies by more strictly vetting their tenants, having fewer of them at a time, offering seed funding, providing connections, and offering a fixed-term group program that includes training and mentorship. The term usually culminates in a demo day or a public pitch. In other words, these accelerators take a financial interest in the tenants’ businesses.
Buy the Shovel!
In California, we have a saying, “The only people who got rich on the Gold Rush were selling shovels!” Well, if you are going to go mining for gold, you are going to need a shovel, you are also going to need a mule and probably some Levi’s. But what you really need is a gold map! So, gold miners, beware. Incubators generally want to get a piece of your funding dollars. They will provide you with everything but the actual sales you need to strike it rich.
To that end, many business incubators will tout their services by listing the wildly successful startups that began in their Incubator. Or they will try to impress you with the total funds raised as if funds raised somehow equals success. It doesn’t. They will offer their networks and networking events with important representatives of celebrity companies, possibly interested in acquiring your startup one day. Hey, sometimes it works! But the majority of startups have to scramble just to make next month’s rent.
Interestingly, it’s not in the business incubators’ interest to experience turnover. Vacancies mean lost rent, not to mention, the credibility they can lose in the marketplace with too much turnover. This is why they typically want to vet their tenants to see if they have enough funds to pay the rent for a period of time, and presumably, if they have solid concepts, and more importantly, buyers who will help them create a positive cash flow and remain stable tenants. In other words, “Are you a good risk?”
Last year we did a survey of over 100 business incubators and accelerators around the world. We wanted to know, from their experience, what they felt were the main reasons for startup success and failure. In the process of interviewing 14 different business incubator owners, we discovered the many different ways that they approached the business of providing platforms for their entrepreneurial tenants.
But the most interesting model we found was where the accelerator actually chose their tenants very carefully and behaved more like an investor than a landlord. Several invested directly, others provided different types of funding from government loans and grants to institutional funding provided for solutions in specific areas. Many put tight limits on the number of startups they would engage with and enforced limits on the time they would support them. Every year a “cohort” of startups would come through the business accelerator and then “launch” out on their own.
One we particularly liked was a business accelerator called “Launch Alaska.”They did all this and more. They would actually help with what we believe, from our own experience, is the key to success: sales and distribution! It doesn’t matter how good your solution is if you can’t sell it. Introduction to buyers is more important than all the other services incubators may offer. That ’s how you become sustainable!
In Launch Alaska’s case, they focus on their state’s most pressing single challenge, sustainable energy solutions. They also provide some seed funding for entrepreneurial innovation in this space and take an active part in their startup. They are much more than a real estate play.
Just Sell It!
We know it sounds old-fashioned, but, as a startup, your primary goal should be to pay your bills and become financially sustainable. Not with borrowed or invested money, but with actual sales! This means you need to identify early on how you will gain access to the market. Who’s going to buy your solution first and why? Where does it fit? How does it satisfy what’s missing? Look for an incubator that can help you solve this primary goal. If you can’t get this kind of help, all the other services they provide are moot.
If you are just starting out, look for an accelerator that has access to the specific industry you are addressing. Sure, you need funding, but more importantly, you need market validation. With proof of concept, funding will be easier. In fact, with a stack of purchase orders, a commercial bank may be interested in extending you a line of credit at a very reasonable interest rate. We built the Barefoot Wine brand with commercial lines of credit instead of investor funding.
According to the 14 international accelerators we interviewed, one of the main reasons for startup failure was that the startups simply ran out of money. Some said they were undercapitalized, others said they didn’t borrow enough, still, others said they ran out of runway. But no matter how you put it, it was a lack of sales, plain and simple!
In other words, the failing startups focused on development and thought sales would take care of themselves. Maybe they were so in love with their concepts, they overlooked the fundamental aspect of business, i.e., profitability, or at least breaking even.
Advice is Nice!
This is why we recommend start-ups look for a business incubator or accelerator that provides basic business guidance. In these days of technology-focused solutions, it’s easy to get carried away with the technology. Once you get a few sales under your belt, you can better see how your product is being used and how you can make it more practical. You may need to make some vital adjustments to the instructions, functions, or design.
Work with incubators that offer advisors experienced in your particular space to help you address the unglamorous and practical issues that can make a big difference in your success. Repeat sales don’t happen without customer service. Find out what the true cost of sales is using beta feedback in a very limited market. Customer service is expensive and sets the reputation for your company, products, and brand going forward. Don’t go out of business because you’ve underestimated the customer service costs associated with expansion.
Beware of VCs coming into the incubator with the “scale fast and fail fast” approach. It’s easy for them to say. They only need 1 unicorn out of 20 losers. While it’s true that you need to understand what works and what doesn’t, find that out in a small space so you don’t just fail altogether while scaling fast! Advisors who have been through it can direst you toward a slow but sure success. Check out the advisors and mentors the incubators and accelerators offer. Again, its to their benefit to see you succeed but you may need specific advice.
Watch Out for the Cliff!
A good business plan is a great way to think about your business, raise money, and impress others. But from our real world experience, when it comes right down to the seat-of-your-pants decisions you will have to make in the startup phase, your business plan can’t hold a candle to a good cash flow projection. That hockey stick income projection will look more like the Saw Tooth mountains during your first few years. Your ability to make quick adjustments that may be contrary to the business plan will become essential to your survival. Don’t get over confident just because folks like your business plan. What seems plausible does not guarantee success. Be ready to do a lot of things not in the plan and not discoverable until you really get out there and find out what you need to do.
For years we operated not on a business plan, but on what we called a “Cliff Report.” That was how many days, weeks, or months we had left before we fell off the financial cliff. It never really did get more than three months away for the first 5 years. Once we overcame the negative cash flow, the true cost of sales kept us on the edge of that cliff. Scaling was much more expensive that we had allotted for in our business plan.
Many incubators tend to focus on the business plan but you will need experienced help when it comes to scaling! Make sure your advisor has a firm foundation in sales.
Another helpful piece of advice you will need is cost accounting. This is not just keeping the books, but understanding how much it costs to expand, with what products, and in which markets. This can vary widely from market to market and should be the driving force behind your expansion strategy. Cost accounting literally saved our company from the inevitable financial disaster due to unknown expansion costs, but only after we made several expensive missteps in the marketplace.
Safety in Numbers?
Aside from having it all under one roof, business incubators are also attractive to startups because they provide the company of other startups. This is good news and bad news. The good news is that you see others facing some of the same issues you face with lack of capital and sales. You are not alone. The bad news is that you may be influenced by the lowest common denominator of the group mentality, “Everybody is going through this, so it’s somehow OK. “
But it may not be OK. It may actually mask the real reasons for your difficulties. Are you, for instance, like them, focusing on the wrong things? Are you, like them, underestimating the cost of sales and access to the market and, thus, not achieving a positive cash flow? Sometimes it’s better to be in the company of successful businesses who can show you how success is possible than to team up with other first-timers.
Entrepreneur support is an industry in itself. Startups are the targets. Catering to startups is big business. Business incubators can pass on savings from their efficiencies of scale and offer startups “all” supportive services under one roof. The celebrity successes and the sheer numbers of startups beginning this way are a compelling argument to join in. But don’t kid yourself – you will still have to make most of the sales yourself.
Innovation and technology solutions typically face longer runways than planned. Seek out the incubators that provide practical business advice that can help you shorten that runway and achieve a positive cash flow as soon as possible. Get introductions to buyers, start small and get your act together before you take your show on the road. Don’t scale to fail. It is faster and easier to recover from “failing” in a small territory than a large one.
If you are fortunate enough, try to qualify for an accelerator program where the accelerator takes a financial interest in your success, provides important contacts, and supports you with advice from successful entrepreneurs experienced in your industry. Now, let’s get started!