Are incubators and Angel money more harmful than beneficial to software startups?

Many people including myself agree that the cash investment from incubators, angel investors and any other type of investment have its benefits. When you join an incubator and/or get angel investors on board, you could also get great resources in the manner of experienced advice, partnerships, networking, free services, etc… maybe.

However, the fact that you do get cash is probably more harmful than not, in my own humble opinion. Yes, at some point you might need cash to grow IF you start getting successful and you need to invest in resources such as people and hardware to keep up with demand for your product or service. Advice from experienced people and potential customers is what you need when you are in the idea phase or just starting to develop your product, you don’t really need money at this point; you see, money in very early stages can make people lazy and feel as if they have accomplished something… when they haven’t, at least nothing that matters such as getting paying customers or releasing a product.

Why is money necessary for early stage software startups? and please read the question clearly, I am specifying software startups only, I know that my question does not apply to other type of startups which might require money to buy inventory, materials, buildings, licenses, etc… If you are a geek, a hacker, a techie, a coder or whatever the preferred term is for someone with skills to build software, then all you really need is an idea, passion, coding skills and maybe a friend to help you with the coding and design of your product; most importantly, you need customers, or at least people who are interested in your idea and are willing to pay for your product, potential customers. I am sure most hackers already have the hardware needed to build any software product.

If you are in the early stages of your startup, and you do get money from an incubator and / or an angel investor, what do you use the money for? I have heard that many people need this money to quit their day jobs and dedicate 100% of their time to their new venture, is this true? I think is bull-shit. If you look around, most early stage startups (not all of them) that have gotten investment money spend it on people, living expenses, working spaces and even to travel around to attend conferences… When you are building software, and I am only referring to the type of software that most tech startups are building now, you don’t really need more than yourself, a computer and maybe a friend to help you with the coding. And if you cannot afford to do that, then go out and get a job, it is not required to be jobless to build a successful company ya’know!

The idea that you need to quit your day job (or not get one if you are still a student) is incorrect. I think that having limited time as well as limited resources makes you better, it forces you to think about  how to make the most of what you have, it forces you to get out there and talk to people about your product, it forces you to sell; without money, you don’t have the luxury of spending money on “sales” or “marketing”. You have to do it all by yourself and use the free and actually very useful resources you have at your hands, such as social media and word of mouth. Also, the excuse that you need to quit your job in order to build a successful startup is erroneous. There are many people who started their companies while they had a full-time job and were able to create very successful companies. If you don’t think you can create a successful software product without dedicating it 100% of your time then you are probably not fit to be an entrepreneur.

It is well-known that when you are hungry, you work harder and you don’t waste your time. When you know you can’t afford to fail, you just don’t, you make it work one way or another because you know you have nothing to fall back on. Your main goal becomes making money, and not how to spend it. Your main goal is to get customers, and not find a cool looking work space or to order some cool t-shirts with your logo on it to give away to other geeks. You just spend money and time in what you really need and nothing else, you use every free minute of the day to make your product better and to talk to someone about it via a blog post, a tweet, a phone call, email, in person, etc… Yes, in order to do this you’ll sacrifice going out with friends, you’ll miss some happy hours, you’ll quit spending hours playing video games and watching TV, at least until you start making money, you have to.

It is OK to still spend quality time with your family… you can always do your coding at night when the family sleeps ;)

In the other hand, if you are a software startup that happens to have money from investors or from an incubator, your mindset is not the same, can’t be. You know that you have something to fall back on, at least for a while, you also might convince yourself that your idea is going to work since somebody already believed in it by investing money in it, and that could be true, perhaps you have a great idea. However, I just don’t think that most people (there are exceptions of course!) will give it the time, or work as hard when money is available before your product has shipped, don’t believe it. I am sure most of you have heard the term “Hunger is a great motivator”, I agree and know by experience that it is true.

Of course there are exceptions to what I described above, you could be one of them ;)

Perhaps is time to create some sort of support group that offers advice, mentorship, networking, and no money. An incubator/accelerator where offering mentorship is the main goal, ingredient, and benefit; no money involved and not silly restrictions such as having to quit your job or move to a specific city, etc…

Disclaimer: I have never applied for an incubator/accelerator program, and I am not against these organizations, in fact I would apply to any of them if they offered better mentorship instead of money, and had an open mind about people with full-time jobs and living in cities with a low startup scene.

What do you think? What’s your take on this?

9 thoughts on “Are incubators and Angel money more harmful than beneficial to software startups?

  1. I agree with your sentiment. If you find individuals who are willing to collaborate on building and commercializing software – direct them to me. It is a little more challenging than you described due to identity authentication and IP protection. However the economics is highly feasible particularly when there is no needed for a capital infusion until a professionally developed prototype is ready for demonstration. My twitter is @Cognography and I am seeking to establish collaborative relationships with individuals in Silicon Valley or elsewhere, as long as I get authenticate their identities.

  2. Great post Ricardo. Although I agree with most of what you are saying. It is true that for early stage software startups, mentorship and helping to build an experienced advisory or “virtual management” team to compliment the talents of the product development geek-squad is by far, typically the most lacking and needed outside resource in order to get the idea off the ground successfully.

    However, beyond sacrificing as much time as possible outside of one’ s day job, it may be necessary to outsource some of the work that the core team does not possess the experience or skill for early on. Especially when considering time-to-market. If, for example, one has a great idea, is deep into prototyping, gets some early adopter feedback “I’d buy it if it has this or that”, and the product developer doesn’t possess the specific skill or experience to add those customer feedback options, they have a trade off decision to make:

    - I could spend the time learning that new skill, and deliver the enhanced product in 4 to 6 months — OR —
    - I could hire a short term contract worker that possesses the skill and get it done this month

    On the marketing and sales side, most techies are not great at promoting and closing deals. Paying for some expertise in this area also allows the techie to focus those limited hours on what they do best, code.

    It is true that all techies have the hardware that would be required to build their product, but it does take some money to purchase the necessary tools to complete and deliver it. Examples ( for a credible marketing push ), would be a company domain, monthly fees for a dedicated phone line and website hosting, product protection such as obfuscation tools, source code management and bug/issue tracking tools for efficiency, etc. Some of which might also be free open source options … but often you get what you pay for and ultimately spend a ton of your valuable and limited time on setup and trying to find support vs commercial alternatives.

    Point is, you often need to spend a little bit of money in the early stage … case in point, starving students with lots of time, no family responsibilities that started Facebook required money from one of the original founders for these exact kinds of things. I mean the type of small investment Eduardo Saverin seeded … and then threatened to stop the spread of the product adoption “if the server went offline” by freezing fund access. Credibility, especially early on, is crutial and often costs money to achieve.

    Some cash investment, at least, is absolutely essential … even if it is just a software product start-up. I believe it does take more then a great idea, hard work and trying to reach out to potential customers.

    Sincerely,
    Ken

    • Thank you for your comment Kent. Perhaps a small cash investment might be needed in order to get the product out and to attract those first customers, I can agree with that. However, what I am suggesting is that if an entrepreneur joins an incubator, the incubator should (and some of them do) provide the entrepreneur with those basic tools and services such as hosting, domain name, marketing, etc… to help the entrepreneur get the product out and promote it. The cash investment is not a bad thing, but it can change some of the entrepreneurs priorities, especially the very young ones that are not really sure about their goals yet.

      In another note, entrepreneurs looking to join an incubator should look at all the options that are out there, don’t just go with the “popular” ones, it would be very valuable to take the time and do some research to the extent of interviewing some of the entrepreneurs that are part of incubators that the entrepreneur might be interested on, and at the same time, to interview the incubator to make sure they are a good match and have the resources and knowledge that the entrepreneur needs to take its startup off the ground. Don’t just apply to all incubators in hope that one of them will take you ;)

    • Ken and Ricardo
      This is a great post and there’s a lot to think about. Having been part of a start-up dot com during the frantic era, I agree that at the very first you don’t have to have the money and do OK. The problems come once the company gets going and you move to the next phase. Mentorship from business people is critical – what Ken says should be read carefully – if you don’t have the expertise, you need to hire quality experienced people who are on your side – and not just there to suck up all the cash they can. Also sometimes the original people get so “happy and start spending like a drunken sailor” – buying “marketing tools” that are pointless, going to trade shows in nice places – but not effectively working the show – not paying attention to the business and the careful steps that need to be taken…developing the attitude “hey, we got money for that…and they will give us more..”All very dangerous thinking and will sink a company that should have great future. When results need to be produced, the original creator may find his newly hired “dedicated” staff not capable, not really interested, and using resources to jump to the next place. Being able and willing to listen to proven mentors and experts is just as important as the money. Great post!

  3. The interesting thing about incubators is that even though they do provide services, that too costs money. It can also be a challenge getting through the screening process to be accepted by an incubator. Texas runs one and even though it provides personnel and physical resources they are not free, so angle funding may still be required.

    A more critical focus may need to be placed on securing the “concept” you are looking to exploit, from potential competitors that have deep pockets. If you invent the next earth moving data base application, the incubator and angels need to help protect your idea from the IBM’s and SAP’s of the world. Otherwise you could have the best idea in the world and see it stolen.

    In short the funding is almost always needed, but legal protection should be an early expenditure even though I’m not fond of lawyers.

    Chris

  4. Philosopher Mouse of the Hedge: “Mentorship from business people is critical”, that is what i believe startups need the most, everything else will come, including money if you have a good product, good people and great mentorship. Experience is key for startups to get to the next level, and finding good, honest experienced people willing to help is not an easy task, especially if you have a small startup and are under the radar.

    Thanks all for your comments and insights about this topic!

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    blog in the near future but I’m having a difficult time selecting between BlogEngine/Wordpress/B2evolution and Drupal. The reason I ask is because your design seems different then most blogs and I’m looking for something completely unique.
    P.S My apologies for getting off-topic but I had to ask!

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