David Duey

Are they incubators?

In the early nineties, I was exposed to business startups and small businesses (mostly mom and pop) through Florida State University’s business and economic development programs.  During that time, I heard a lot of talk about business incubators, although I didn’t have any first-hand experience with incubators. 

At the time, most of the incubators that I knew about simply provided cheap or free office space as well as other amenities like copy machines and telephone service.  They didn’t really offer much in the way of advisement or mentoring.  The incubators I knew of simply helped reduce the cost of starting a business, but that was about the extent of their services.  If they provided contacts or mentoring, it was usually on the local level.

It seemed to me that the business incubators got a lot of good press and had a lot of supporters.  Business people liked them, politicians loved them, and the press always gave them good coverage.  But, if you looked at the statistics, businesses that were started in the incubators didn’t seem to fare any better than the ones that weren’t incubated.  (I didn’t do thorough research on the subject, so my observations may be incorrect, but everything I’ve heard since supports my findings.)

That brings me to the present; there seems to be a new investment model emerging that includes infrastructure (office space and hosting), like the incubators of old, along with minimal seed funding and mentoring.  I think Y Combinator and TechStars are the two front runners using the new investment model.  Unfortunately, they’ve been labeled “incubators,” but I’d argue that they’re not the kind of incubators that most people are familiar with.  I think it’s a mistake to lump them into the same category as the old style incubators.  I think I’d categorize them differently; I don’t know what I’d call them, but they do seem to be a different breed.  Mentorbator?  Ah…no.

Why are they different?  They’re not different because of the infrastructure or even the funding they provide.  They’re different because of the mentoring they provide.  The mentoring comes from people who have built or are actively building startup companies.  These people know what its like to start and run a very early stage business.  (As opposed to the retired IBM executive who’s probably very alien to the startup process.)  The mentoring, connections, credibility and exposure that Y Combinator and TechStars provide go far beyond the typical incubator.  That’s why they’ll be more successful than the typical incubator and that’s why they’re in such demand; the clued-in startup founders know a great value when they see it.

Recently there have been other copy-cat organizations using the Y Combinator model.  That’s good and that’s cool.  The only downside is that, eventually, the quality of these new organizations will probably suffer.  Why will they suffer?  It’s because there’s one big constraint on the growth of the model:  quality mentors.  Capital and infrastructure is relatively easy to come by, but good mentors are not.  I hope the Y Combinator model proliferates, but in order to do that, good quality mentors will be required.  I wonder if there are enough good quality mentors to satisfy the demand. 

Regardless, I’m convinced that startups need mentoring and connections more than they need money.

Evolutionary Ideas

I haven’t had much time to blog over the past few months, and this is going to be a very short entry. I came across a very good blog entry by Dharmesh Shaw titled “Startups:  Why What You Build is Less Important Than Who you Build it With.”  Dharmaesh discusses the evolution of ideas and the need for a good startup team.

The Consulting Conundrum

I do a lot consulting and contract work which is the major source of income for my small software company while growing the product side of the business.  Consulting and contract work can provide good income for an individual or a small closely held company, but it doesn’t scale well because it’s hard to find good employees at the right price and the profit margins are often low.  I recently came across a good article on softwarceo.com where Kyle Bowker, president and CEO of Nextance, discussed the consulting conundrum:

“It's a common problem for start-ups, many of whom are always ready to augment software sales with some degree of consulting revenues.

‘It's almost like an addiction,’ says Bowker. ‘You look at these early-stage companies and the revenue grows based on their consulting work, but if you look at the profitability and the margins, they're not there.’

That's because the margins are so low on consulting — just 20 to 30 percent by his estimation — versus the markup on software, which can run as high as 90 to 95 percent for a completed application.

That doesn't mean Nextance outright refuses to do any consulting. But the firm does limits the degree to which it takes on that role.

‘We do have a consulting practice, and we will continue to have that practice,’ Bowker says. ‘However, if you look at the Siebels, the PeopleSofts, and all those guys, their success was really driven around expanding their own ecosystems, and entering into third-party relationships for consulting services.’

In other words, consult if you must — but always look for a way to pass the consulting gigs off to partners, while you stick to creating software.”

There’s also a very good article about the consulting conundrum by Joel Splosky titled “Big Macs vs. The Naked Chef.”

“What does this mean for Fog Creek? Well, our goal has never been to become a huge consulting company. We started out doing consulting as a means to an end -- the long-term goal was to be a software company that is always profitable, and we achieved that by doing some consulting work to supplement our software income. After a couple of years in business our software revenues grew to the point where consulting was just a low-margin distraction, so now we only do consulting engagements that directly support our software. Software, as you know, scales incredibly well. When one new person buys FogBUGZ, we make more money without spending any more money.”

Consulting and contracting can generate income quickly for a hungry startup, but it’s often an uphill and never ending battle from there.  I think the issue for a startup is not to get too sidetracked by “easy money” in the short-term only to give up a more profitable alternative.

Adaptation and Change

Adaptation and change are important to the survival of any business and hugely important for startups trying to find their market.   In an excellent post by Dharmesh Shah, he discusses five ways to commit “startup suicide.”  One of the ways to commit startup suicide is “Death by Determination” which occurs because of an unwillingness to change or adapt.  Shah states:

“I should have called this ‘Death by Stubbornness’, but I like the alliteration and ‘death by determination’ just sounds interesting because we always think of being ‘determined’ as a good thing.  To clarify, what I mean here is when you are determined to make your original idea a success.  You read somewhere that lots of startups die because they give up on their idea too soon and you’re not going to have that happen to you.  Come hell or high water you will see this idea through!  Here’s an insider tip:  Most successful startups end up doing something that is different from their original idea.  Dogged determinedness will likely keep you from building the business that you could have built.  Yes, you can’t just drop every idea that comes along at the first sign of conflict or controversy.  It’s a very thin line (nobody said startups were easy).”

Another good article about change and adaptation  is “Startups Start Over” in Wired magazine that discusses the transformation Riya, Odeo and Pluck in effort to refine their businesses before running out of seed money.  Andy Sack, Judy’s Book founder, has been discussing changes at Judy’s Book in a series of posts on his blog site (I think it’s really cool that a founder and CEO is so open).

Lastly, Tim Wolters has a post about Helen Grenier and iRobot.  He tells the story of the evolution of the roomba vacuum cleaner.  It’s a great anecdote about adaptation and change that led to a very successful product.

Gall's Law

Gall’s law is a good heuristic for a startup business as well as for software development.

“A complex system that works is invariably found to have evolved from a simple system that worked.  A complex system designed from scratch never works and cannot be patched up to make work.  You have to start over with a working simple system.”
John Gall

It’s easy to get caught up in analysis and feature creep.  It seems like keeping things simple would be the normal order of things, but I think we often delude ourselves into thinking the extra complexity or additional features are required to create the “killer” product or business.  Instead, the additional complexity is often the killer.

Extending a Product Line

I just read a post on joelonsoftware about FogBugz being used as a help desk application.  FogBugz is a perfect example of extending a product across product categories.

FogBugz was originally developed for tracking bugs in software applications, but it evolved into a bug tracking and project management application.  Now it looks as if it’s becoming help desk software as well.

I think it’s interesting and compelling (i.e. very cool) that one application can fill so many seemly different product categories.