There has been an uptake of tech incubators/accelerators in the African techosystem™. While I applaud the great work that has been done so far, I am yet to see an incubator on this continent run the way I’d love to do it. Rather than just criticise, I’ll use this post to give my own perspectives and suggestions using an example.
I have to point out that this is merely postulation and in real life, things hardly turn out the way you postulate.
Between the Incubator and the Accelerator.
There seems to bit of confusion between what incubators and accelerators are. My own definition is simple: the incubator takes the idea to product/market fit; the accelerator takes it from product/market fit to where it needs to scale.
I am talking about running an incubator.
Guiding Principles.
The incubator will be pro founder and looking to fund commercial viable businesses.
I am not one of those that ridicule MBAs. But there seems to be a difference between business and tech head founded startups. My guess is the tech heads are better placed to empathize with a fellow tech head. While pure business heads are guided solely by numbers.
In addition, I see a lot of incubators that view their investor position as being benevolent. They see it like they are doing the entrepreneur a favour. I see it as a partnership at worst and at best, the founders are doing me a favour helping me make money.
In reality, we both need ourselves to make money while solving problems.
The set up.
I like the Y Combinator setup. If I were running an incubator, I’d have a core partnership structure. The partners made up of “specialist generalists” e.g operations would all have a stake in the incubator and must have contributed to the fund.
I am not a fan of incubators/accelerators that stockpile “mentors”. It ends up confusing people. There are many ways to cook soup. What ends up happening is each mentor in a bid to justify their existence insist their way is the best. Of what use is a mentor that tells you “what that other guy said is good enough”
The partnership will have one primary person that covers an area of expertise. e.g Product, Finance, Technology, Design Legal and Operations. The partnership will not be bigger than 6 people. Of course industry experts will be welcome to play an ad hoc mentoring role but it will be after the startups have been selected.
More on that in my example to come.
Idea Selection
We’ll focus on ideas that are relevant to the continent but applicable globally, generate revenue from the very first user and can scale to millions of dollars in revenue with a team of 20 or less and at worst can survive without follow-on funding even if it does not succeed in scaling.
Founders will be able to apply with their ideas or ours.
Founder Selection
Since we will be focused on incubating, we will be looking for teams that are “complete”. The core tech must be internal and part of the team. Same as the core operations (more on that in my example). They must have proven at some point in their past that they have the resilience and focus to execute a project for a long period of time.
We will also recruit our founders. The best employees are sought out and not waited on to apply for the job. I believe same applies to founders. I see most incubators putting out application forms and waiting for the applications to roll in.
Like the CEO of a startup, I as the promoter of the incubator will use applications but will also spend a lot of time trying to recruit founders. Many of the best people are already doing something else with their time. That does not in anyway mean that those that apply are not good more like there a lot of great people that will not apply.
We’ll look to cap it at 5 teams per set and 2 sets per year.
The Incubation Period
There will be a residential place available for all founders. This may not be a big deal in other climes but here in Lagos, having a place where you have 24 hours light is luxury.
Providing only an office that has the resources is not enough when most of your founders will be spending 4 hours daily commuting and most likely will be operating at 50% capacity during “office hours”.
For the 3-4 months incubation period, every other distraction will be taken care of. At least it will be an offer left for you to take or not depending on circumstance.
Scope and Funding
Once of my biggest criticisms of African incubators is that they do not begin with the end in mind. They have this idea of holding on to the startup from the beginning to IPO. I view the startup funding funnel more like an assembly line. Before starting, it has to be clear who you want to hand over to and pitch those people before you start. After hand off, you move to the next batch.
Y Combinator’s accelerator program ends with them handing over to Venture Capitalists and Seed investors on demo day. Were I to do an incubator, my plan will be to hand over to the accelerators and that means discussing with the likes of YC, TechStars and co before I start to know the type of metrics and growth that will get them interested.
Sometimes, the startup might scale beyond your next planed step. In that case you work and hand them to the VCs. But at worst they have great accelerators to be handed over to.
For the above to work, there has to be a clearly defined time scope. If startups think they can stay forever they will work like they have a cushion. Like strict and loving parents, they have to know the nest is available for just 4 months. That’s it. It would help them have an urgent mindset. It does not mean after 4 months you kick them out in the rain if they are stuck.
Equity and Financing.
Off my head I am looking to spend $25-35k per startup for 10% “founder shares”. $15-20k cash and $10-15k for facilities/operational expenses depending on team size. I think it is fair because we’ll be acting as co founders taking practically the same risks as founders.
For the funding of such a scheme, we’d will be looking to raise about $2 million that will last over 4 classes (5 startusp per class) and 2 years. A fraction of the money (say $100k) would come from the partners, much more(say $400k) from the promoter i.e me and the rest, from strategic Limited Partners. e.g Venture Capital firms and accelerators interested in deal flow and say telco companies interested in not being left behind.
Raising money from external parties is the hardest part. But then, that’s why we have the finance person in the startup :). Also see epilogue.
A Quick Example.
Idea
Funding a startup that wants to build an on-demand platform for building artisans (painters, plumbers, etc). Customers request jobs and the startup gets a trained artisan to do the job and takes a part of the revenue.
Founder Selection
The team would need to have someone that can build the platform but more importantly, a person that has practical industry experience. Say whose parent or self is/was an artisan, or has experience in the industry e.g has worked in a building maintenance company.
If we do not see such a person applying we’ll seek them out. Maybe someone doing such a business on an analogue scale or sweet talk that person out of their building maintenance job where they do all the work but the owner takes all the upside.
I am not saying a founder without such experience cannot learn on the job. I just believe the risks of failure are much higher without practical experience.
Scope
Our work as an incubator is to ensure that at the end of 4 months, there is traction which we’ll define in revenue terms before the class starts.
In the first few days, we will work with the founders to define the scope. e.g focus on painters and painting jobs in Lagos.
As a product person in conjunction with our tech partner (say Ope Obembe), in two weeks, we can work hands on with the technical guy to get the version one of the platform ready. Our operation partner say Mark Essien (top lad) will work with the operational co founder to work on recruiting 5 painters that will execute the first jobs and maybe a strategy for scaling recruitment and training.
Everyone will work hand in hand to get the first set of jobs.
At the end of the incubation period, we would expect that 30-40 painting jobs must have been done with say 8 new jobs a week coming through and growing weekly. Growth is extremely important.
That will be the core focus. That is what we will hand over to be accelerated. If per chance it is moving much faster, then we’ll seek higher level of funding or if sustainable, no funding at all.
It all depends on circumstance.
Mentors
After selection of such a startup, we’ll seek mentors that have experience in the building maintenance space. Say an executive in Berger Paints or someone that has executed on something similar in a different country like Adaora, the co founder of HomeJoy (no, she’s not Igbo) . Such people can be a source of finance or important strategic partnerships later on
This differs from the popular model of pooling mentors for the numbers before knowing if their skills will be relevant to the starups selected. Although someone that has scaled and exited a web hosting company is cool to have around, that experience is most likely irrelevant in the case of building an artisan on demand company.
Conclusion
The above captures the high level of my general idea. While still very theoretical and easier to write than execute, it is the way I’d try to do it if I were doing it.
Epilogue
My retirement plan was always to fund and run an incubator after my first exit. It is so much easier for two reasons, I would have the money to kick-start the process and secondly, I would have the authority and trust when speaking and convincing founders, potential investors, partners and most importantly myself.
But since that is taking much longer, I’ll brain dump my theory until it’s time.
PS: Do check out Callbase, one of the products of the startup where I’m co founder.
Thanks to Ope, Banke and Mark for feedback.
This was first published on OoTheNigerian’s blog
