(By J.J. Colao)
“The idea that you can start a company with a fancy degree and $100,000 in loans hanging over your head is a joke. Even without debt, seed money is tough to find, especially in a recession. Incubators make this process a whole lot easier. This year Y Combinator will furnish every company entering the program with $150,000 in seed capital; TechStars, a Boulder, Colo. based program that runs sessions in several cities, provides $18,000 plus an optional $100,000 convertible note; and 500 Startups, in Mountain View, Calif., doles out $50,000. The incubators get roughly 6%-8% of equity in return, but the terms are fair and, hey, you need the money.“
Let’s get this straight: If you want to work at Goldman Sachs, McKinsey or General Electric, an MBA is a handy scrap of paper.
But if you’d prefer to bypass the corporate ladder and actually build something of your own, spending upwards of $140,000 and two years without pay is just about the worst way to go about it. Because looming outside those classroom walls is a creature far less merciful than any b-school professor: the market. Customers, you may be surprised to find, don’t give a damn about your degree—and the market will fire you faster than any ungrateful boss.
Want to take the plunge but need a bit of guidance and support? Applying to a so-called startup incubator may be a far better option than business school.
Business incubators have been around since the 1950s. Typically attached to universities, these entities offered a proving ground, with back-office resources, for fledgling entrepreneurs.
Now a new breed of incubator, catering mainly to technology types, is springing up all over the country. These startup hubs offer expert mentorship, resources like office space and legal counsel, and even seed money—typically in exchange for a small amount of equity in tiny (or theoretical) companies. More importantly, early-stage investors are paying close attention.
Paul Graham, founder of Y Combinator, is the father of all startup incubators. (Y Combinator birthed Dropbox, a file hosting company valued at $4 billion, among other newly minted tech stars.) Since Graham launched his incubator in 2005, about 100 more have come on the scene worldwide.
Like top business schools, startup incubators are particular about whom they let in. Actually, they’re stingier: With acceptance rates typically in the low single digits, your odds of getting a bid to Harvard Business School are about three times greater than nabbing a spot in a premium incubator.
For the lucky few, here are eight reasons why incubators beat out business school:
You Can’t Teach Entrepreneurship
The truth is that you’ll never be fully prepared to create a business—and no amount of classroom time will change that. Kathryn Minshew, founder of Daily Muse, a career advice and job placement site for young female professionals, is off to Y Combinator in January. Minshew decided to forego an MBA in favor of starting a company because “I felt like I could learn more by actually running a company and by talking to others who are running companies,” she says. “There were so many other ways to learn the skills I needed and they didn’t come with an MBA’s high price tag.”
Paul Graham offers a different, but equally persuasive, insight: “I’d tear my eyes out in some of the classes they have in business school.”
Eating Ramen Earns Respect
Bootstrapping sucks. But with the vast majority of your b-school classmates looking forward to lucrative careers as executives, investment bankers, or consultants (with the lifestyles to match), the prospect of living on peanut butter and bananas becomes even less palatable. Adam Neary, moved into his mother-in-law’s house in Clinton, NJ to save money to launch Profitably, a company that sells web-based planning and financial analysis software to small businesses. That’s the kind of suffer-for-your-startup story that incubator types love. Neary, husband of a Harvard Business School grad, puts it this way: “It’s a fact of life that in business school you’re surrounded by rich people, generally coming from banking and going into banking. When you’re surrounded by people living the good life and your six friends are flying off to Monaco with their badass signing bonuses, it becomes way harder to get into ‘ramen mode’.”
Spending $100,000 Isn’t Cool (You Know What Is Cool? Getting $100,000)
The idea that you can start a company with a fancy degree and $100,000 in loans hanging over your head is a joke. Even without debt, seed money is tough to find, especially in a recession. Incubators make this process a whole lot easier. This year Y Combinator will furnish every company entering the program with $150,000 in seed capital; TechStars, a Boulder, Colo. based program that runs sessions in several cities, provides $18,000 plus an optional $100,000 convertible note; and 500 Startups, in Mountain View, Calif., doles out $50,000. The incubators get roughly 6%-8% of equity in return, but the terms are fair and, hey, you need the money.
Investors Like Incubators
Most incubator programs culminate in one fateful day – Demo Day – when the entrepreneurs pitch their companies to a roomful of investors. It’s an effective way to get in front of people who matter – and who have the pockets to fund the next big step. Investors trust these programs to do a large part of their due diligence for them, so even the brand association of a premium incubator can really help. Brian Wang, CEO of Fitocracy, a website that turns users’ workout statistics into a social game, joined 500 Startups in the October of 2011. Even before arriving in California, Wang, a New Yorker, used Fitocracy’s acceptance to push indecisive investors to cough up some cash. “I could go back to investors we talked to and say ‘Are you in or are you out?’” says Wang. Most were in, and Fitocracy closed on a round of financing in November.
Your Business Is The Best Case Study
Case-study work is edifying. But it’s no match against focusing intensively on one ongoing case study—your own business—80 hours a week for three months. And because most incubators assign a squad of startup veterans to your venture, it’s like the whole faculty is on your team. David Tisch, Managing Director of the New York outpost of TechStars, says that mentorship at the program is completely customized for each business. “It’s really whatever the companies are looking for,” he says.
Time Is Money
You’re spending a lot more than $100,000 to go to business school: Tuition plus the opportunity cost of not working for two years can approach$300,000. Incubator programs eat just three months—still an eternity in the ever-changing technology industry.
The Networking Is Better
There’s no question that business school connections are unbelievably valuable. Yet even in this respect, incubators are a better bet. DailyMuse’s Minshew says: “I haven’t even started (at Y Combinator) and I’ve already spent hours on the phone with alumni, talking about hiring, closing financing, or moving to California. The fact that all of these people who have never met me are willing to give their time so generously is amazing.” Tisch adds that a tight, committed network of advisers is perhaps the most important asset incubators have to offer: “The biggest thing you walk away with is five to ten outside people who are deeply engaged in the company,” he says.
Incubators Are Fun
No one says you don’t throw back a few cocktails in b-school. (Actually, it’s pretty much de rigueur.) But even in the name of networking, the good times generally come at the expense of the reason you’re there in the first place: to learn.
The joy of joining an incubator is intimately connected to the task at hand: building and selling a real product that came out of your head. It’s fun to read your first press coverage, to close a big round of financing. And it’s a hell of a lot of fun to snare that first big customer.
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