Lessons From Incubators

In the last couple articles I discussed product portfolio planning lessons we can learn from the Venture Capital industry. In this article I wanted to discuss a similar but different type of mechanism for managing product portfolio investments, known as business incubators.

For those that don’t know, the way a business incubator typically works is that in exchange for a percentage of the startup, the incubator will provide facilities and enough money to cover the salaries of a few people for a few months, but more importantly they will provide access to people with relevant experience in product discovery – product, design, marketing, engineering, finance, legal, etc.

If the idea pans out, the incubator can provide valuable access to potential investors, potential customers, and advice on how to set up and grow a company.

Most people think of the big tech business incubators like Idealab, Y Combinator, Reactivity and CMGI, but there’s actually a spectrum of ways to help incubate product ideas, ranging from VC’s that maintain EIR (Entrepreneur In Residence) programs, all the way up to large corporate innovation labs like Yahoo’s Brickhouse.

I spent the first several years of my career as a software engineer at HP Labs, which was set up to incubate new product ideas, and then transfer the best of those ideas to one or more of the company’s product divisions.  HP Labs was a form of incubator, and they did some great things there and some of the products we all use every day originated in those labs.

Yahoo’s Brickhouse was set up for a similar purpose and in fact many large product companies have some form of industrial research lab, or innovation center or advanced product development group.

What I’d like to discuss in this article are some of the lessons learned by these various approaches at incubating product and business ideas.

While VC’s typically just manage the portfolio investments, an incubator both decides where to invest (product portfolio planning), and also is designed to support the product discovery process, so there are lessons here that apply to each:

1. Incubators are all about making product discovery as efficient and effective as possible.  So small startup teams (generally 1-4 people or so) are provided access to supporting expertise like user experience designers, prototypers, ready access to potential users and customers for prototype testing and potential sales, and smart people around that you can talk to about your learnings.
2. Your initial ideas will almost certainly need to change, so incubators encourage you to try your ideas out quickly, fail fast, and then adjust.  “Pivots” are welcome and embraced.  As long as your learning takes you in directions that are useful, it is all good.  It’s about the search for something that reasonates with customers.  At Y Combinator, the people they bring on are given t-shirts that say “Make Something People Want.”
3. The initial core founder team should be small, deeply committed and hungry.  Most importantly, if the product discovery goes well, this team needs to form the core of the company going forward.  Many corporate incubators made the mistake of thinking that they should have one group for “innovating” and leave  “productization” to the business units, but without the continuity of the core team this generally fails.
4. Be careful not to throw too much money at the problem.  There are many theories about why having too much money and/or time can hurt rather than help, but in any case most successful incubators want the team to feel a sense of urgency and excitement that comes with being frugal.  They also know it’s good for a company to start those habits early.
5. In an earlier article I talked about the value of having a “Board of Advisors”.  One of the big benefits of an incubator is that the leaders of the incubator can effectively serve as these advisors, and the people get access to expertise that they likely couldn’t have had otherwise.

Incubators seem to go in and out of fashion every few years, but I personally think they can be terrific.  If you have a product idea you want to pursue, and a business incubator is willing to take you on, it’s worth considering seriously.

If you work in a larger company, while I would not recommend setting up a separate business entity (like Yahoo did with Brickhouse, or HP did with HP Labs) I would consider making the incubator’s services available to your teams working on product discovery in the business units.  More on how to do that in a future article.

Special thanks to my long-time friend Basil Hashem for his contributions to this article.  Basil took his startup through the Reactivity Incubator.