How to Turn Incubators into Venture Accelerators

..well that is the point yes? That an incubator is in the business of accelerating ventures to a cashflow positive state faster than they could get there on their own. Rather than trying to take apart what does not work herein, let's address what does work! We have several successes to model, a couple of which I'll reference, but do keep us honest by referencing others not covered, and present why they work so well.

Although incubators were all the rage in the late 90s and it seemed like all one had to do was provide office space and e-infrastructure! Well, those obviously weren't the only two ingredients in the recipe were they. You also needed pull, as in a funding market, and you needed push, as in advisory intellect. Incubators evolved into networks (virtually connected) rather than office space only (physically connected). But that allowed the pay to play model so one still got a lot of chafe in harvesting the grain, and without regular wins the angel money got locked up in indecision, generally. (Note that these also are not the sole winning and loosing ingredients but its important to get to the point). So if its not about pay to play -which in itself could be a good business advisory model- then it must be about quality ventures and quality advisory intellect.

An accelerating model that appears to be working very well we find in the software world -- y-combinator models such as TechStars. What works so well in this model? First and foremost is the promise of money along with a heavy dose of advisory intellect. If we take a look at what that does we'll immediately understand that the promise of money will draw many ventures... which allows picking the winners from a huge pool of ..ah .. loosers. (We should remember that not all ventures are winners, and that not all ideas will result in value, and therefore entrepreneurs would serve themselves and their friends and family the pain of pursuing a deadend. Fail fast is honorable in this game!) Also determine a near term liquidation model, not 100% liquidation but some way to refresh the pool of money for the next cohort. Second and also foremost is a high quality network of advisers and angels, with rolodexs filled with the market of target partners. Reach to intellectual and social capital is probably more critical than financial capital. Its arguable that one could derive a better business if they had the right advise rather than money alone. Yet the problem with advise is that the entrepreneur must utilize advise wisely, not attempt to execute every piece of advice that comes along... not easy. I propose that there are three other critical elements to successful accelerators - narrow focus; catalyst mechanism; and time dependency.

A narrow focus can be a host of different things -to solve a specific problem realm; to take advantage of an emerging market; or to serve a specific community. What a narrow focus does is the same for any organization - it requires that all involved are working in the same direction on the same time frame. That is the only way to fully understand a market place and its dynamics; it sets the playing field to know everyone involved (the players) and therefore what they are seeking to accomplish; and provides for cross-pollination on all the business elements. When you add a catalyzing mechanism into the mix we spawn the right conversations. A catalyzing mechanism is something that brings two communities together and generates forward momentum. Although there are several options, each being a fairly deep discussion, the simple one I like is a process with stage-gates. When 'gates' are predetermined and used as a carrot (and stick), then both entrepreneurial team and advisory team are aligned on goals, ideally one of those gates being funds or a serious funding consideration by the external angel network - focused, fast, evolution. And the final catalyst is time. Like the TechStars and UnReasonable model ventures are put through a camp. Not a camp with learning sessions but one where you either achieve and get the most out or you miss your chance to have attracted that network and money. Time focus is great because people are able to focus on interests for a few weeks or months, but that becomes a long dwindling tail over time because other life issues crop up and take over mind share.

To reiterate - a venture accelerator needs the following elements:

1. use money to attract the highest quality ventures and teams - not all are quaity so make sure the ones you allow in can be successful; put a small amount up front, and a larger amount at the end;
   
2. engage successful advisers with deep industry experience and rolodexs - not just one or two, but a whole peer group per target industry.
3. maintain a narrow target industry focus - industry focus allows all the ventures and advisers to attack that target segment and know more than any other single group;
4. use time to catalyze activity - with a time dependency such as summer camp or semester focus you can capture significant mind-share ... but that will only last for a while and they have to feel success in the graduation rate;
5. implement a focusing mechanism such as a scorecard or stage-gate methodology - this will align entrepreneurs and advisers on exactly what they are seeking to achieve by when, and overcome debate or counter productive decision making.

All comments welcome of course. And one thing to keep in mind is how to leverage the entire regional ecosystem of stakeholders to achieve job creation - networks, government offices, private enterprise, and university's. A later post no doubt.

-Chuck Ray-

Sales People or Business Development ??

So you need sales people you say.. feet on the street knocking on doors and finding customers. You want to compensation that effort based on results (commission only), after all your product is ready and proven, you are telling them where to look, and you provide sales support. What's wrong with this picture?

Before diving in on what's wrong with this expectation, based on the stage of business' evolution, let's provide a bit of framing. As a business development consultant I find that when early stage companies think they want sales people what they are really seeking is revenue, which of course comes from product and service sales. Upon a bit of investigation into the target market and company history it becomes immediately obvious that we're talking about a new offering to the market or extending the existing offering into a new market segment -- in both cases we have a 'business development' need, NOT a 'sales people' need.

Let me explain: Traditional "selling" IS about people and their skills. They sell on points of differentiation into a market that knows what the product does for them. Usually that means selling into the middle of an organization on points of productivity and competing for existing budget. Business development is about market place needs--the value proposition--and identifying points of entry or those functions that will respond to the value prop which usually means the top of an organization, and likely on points of strategic objectives.

These are two completely different methods for increasing revenue. Sales people will differentiate on features yet they also seek the close with exuberance. They will knock of door after door and will chase any and all prospect interest, but will never look at how their offering fits with the breadth buyer needs. Biz Dev people will discover what the market place needs based on current dynamics and match your offering accordingly. This may inform the market approach vector to be channel partnerships or association leverage points to penetrate a market. The goal remains -quickest path to revenue- which is some combination of biz dev and sales, but usually not one alone.

What is most telling in understanding your best approach is to look at the stage of company evolution versus the market place dynamics. Product or service is mature enough to sell today-check; target market is identified-check; target market has reference clients-?; target market is an emerging market place.. or is a new target market-?. It is absolutely critical to understand where you are if you want to to achieve your revenue objective anywhere near the internally set expectation. Curiosity for your offer IS NOT commitment! If you product/service offer is new then your targets don't yet fully understand what is does for them and they won't adopt. This means a long process in realizing the value prop, getting the decision makers on board, and finding budget. Which means you MUST FIND EARLY ADOPTERS so you have pilots and references for those still trying to make a decision. If you are pursuing a new market with existing offer then you have reference clients, yet you don't actually understand the appropriate value prop, decision process, and approach vector. You still need to find early adopters which comes down to tracking them by navigating a myriad of conversation in this new ecosystems.

Why sales people are the wrong activity: Because most start-ups begin with product we have an engineering mindset which puts all modes of selling in the same bucket. This perception leads to things like 100% commission, technical differentiation, and territory alignment-which sets us silos-but leaves a gapping hole in proof of application in this new market. It also negates the fact that to penetrate a new market quickly, requires tightly coupled cross pollination of all internal intellect as your team discovers how to win in the new market place. From value proposition to target client objectives to how your offer fits in their work flow to where it falls in the priority list to how buy decisions are made to what does an average sales cycle look like.. should be mapped out by the whole team.

Create the right incentive structure: Ensure that you incent your team to work together to discover how to win. This value--determining how to penetrate a new market--is not worth zero!! In fact, its some of the most important knowledge your company will acquire.. so set up the team to work together and figure it out. If you can't pay base salary until commission can take over, then offer equity or compensation in arrears. Double pay commissions and don't set up silos. And above all else, make sure you have a business development person leading the charge, not a sales manger simply setting up processes.

Smartgrid Matters

The last quarter of '09 witnessed a big federal push behind smart grid technology, to the tune of $4.2B deployed to utilities out of the stimulus package. That gives buoyancy to near the same amount of private investment in smart grid companies from late '08 thru '09. What is interesting is that the federal money is intended for smart meters and intelligent utility infrastructure, where as the private money has primarily funded consumer side intelligent devices.

Seems like a great double sided stimulus doesn't it, to get to real demand side management [DSM]. Well...

The trouble is the so called 'behavior economics' which says that a rational individual will choose the most economic path for themselves if information is freely available. In other words if I can save a buck then I will take the action that saves me a buck. Number1 - this is the same base economic argument that underlies Free Markets, and we surely know by now that irrational exuberance is as much a decision driver as is so called rational banking. We must admit that psychology behind consumer or investment decisions is an emotional one, supported hopefully by facts and knowledge but emotional non the less.

What the behavioral economists believe, and the entirety of the smart grid community, is that - consumers will turn off their air conditioners when its hot; charge their EV at night; hang out their laundry; buy new in-home electric meter devices, and new intelligent appliances; and generally run around turning off lights based on watching the live price of electricity.

Number2 - people are far too busy to outs lots of effort behind saving $15/mo, and there is no way they'll spend $15k so that their appliances self regulate. Not in this economy where scrapping for income goes a lot farther than saving a little.

So if its not about economics as the purists' would have us believe, then its about change behavior based on societal norms. I think its prudent here to cite one of our last big evolutions in this society, that wasn't about economics but about conservation and quality of environment - recycling. We all do it now, almost all of us, as long it is readily available and especially if our neighbors do it. So how did we get here? A teared up native american was the initial image, emotional quilt the drive to actually go out of your way, a lot of awareness building, definitely peer pressure, and eventually a robust infrastructure to allow easy of doing the right thing. But is sure isn't about economics.

So what can we learn from the migration to wide adoption of recycling? Now continuing forward to zero waste. First that it takes education and awareness. Utilities: note this, it takes a human 8 times to be introduced to a new way of things before it is accepted (and often overtly rejected along the way). Second that it takes a robust outreach/engagement program, within communities in order to create the peer pressure and top of mind behavior shift. Third that it is usually the kids in the house that take the lead and keep us reminded of what we are doing and why. Fourth that a little competition goes a long way in our society, especially with a dose of nationalism. And fifth that results should be easily accessed and compared to substantiate the results and reinforce the change.

Its psychology not economics!