It’s Time To Burn Down The Tech Incubators and Start Again

Wattpad is an amazing success story with a shocking secret. Company founders Allen Lau and Ivan Yuen never made use of any incubator services or funding.

Lau told a Toronto Startup Grind audience that he and Yuen began work on the Wattpad e-reading app in 2002 funded with their own money. By 2006 there was little traction. They formed an internet ad company to pay the bills and put Wattpad on the back burner. In 2008 they sold the ad company and used the profits to restart Wattpad. It wasn’t until 2010 that Wattpad raised its first round of external investment. An Angel wrote a check for $600k.

Wattpad was in gestation for 8 years before its first funding round.

Founders prep for their Y Combinator intake interviews. Many imitators have coped Silicon Valley's Y Combinator. That model, says Steve Blank, needs to be adapted to work in other geos.

Founders prep for their intake interviews at Silicon Valley’s Y Combinator. Many have imitated this incubator, expecting a slew of successful companies. That model, Steve Blank now says, only works in Silicon Valley.

Oops. In the Y Combinator model that inspires many incubators the first funding round is coincident with the exit from the incubator, about 3 months after entering. One quarter of intensive development under the watchful eyes of experienced advisors is thought to be enough to get decent ideas funded. Is Paul Graham wrong?

No. Y Combinator works in the Valley ecosystem. But the Valley is unlike pretty much everywhere else. Steve Blank blogged about this.

A big shout out to Rick Spence. Rick wrote to Blank and suggested that Canadian communities needed to crowdsource their own playbooks. Develop strategies to adapt the Lean Startup model to the peculiarities of the Canadian context. Blank thought it was a great idea.

And so, after Lau finished his fireside chat, Spence took the floor. He facilitated the world’s first crowd sourcing session for a local Lean Startup playbook.

A second big shout out to Mark Bailey at Jobhubble, who shared his financing story. When Bailey started approaching Angels and VCs he had already developed an MVP for his HR recruiting app with love money. When he talked to Valley investors they told him “we don’t care if 95 out of 100 of our deals crater as long as we find the 5% that don’t.” But GTA investors told Bailey that they were proud that 95% of their investments hadn’t gone bankrupt.

It points to fundamental differences in approach, and expectations about outcomes.

For the incubator model to deliver the results in the GTA, the Toronto community must make some changes:

  • Play to win. Stop playing not to lose.
  • The world is awash in cash. Invest from abundance, not scarcity.

Silicon Valley angels and VCs know that huge home runs are very improbable but believe they are worth the risk. To increase the odds that they will hit monster home runs they make larger investments in early-stage companies than others are comfortable with.

Incubators also need to adjust their approach. Lau believes that with Toronto-area incubators “it’s harder to get in if your product doesn’t work.” This is the opposite of the YCombinator approach. In my experience, YC believes that a working MVP is what you exit the program with.

Weak Performance of Golden Horseshoe Startups. It’s Not What You Think

When Jordan Levy demanded that Toronto Startup Grinders explain why the track record of success for Toronto startups is so dismal he touched a nerve. There was a lot of passion but typical answers: too much regulation, too high taxes, ignorant investors, etc. Levy sees a different problem. He claims there is a soft skills gap. Is he right?

Expectations are good; expecting to get there in one go might be expecting too much.

Low expectations plus low promotion… the spray-and-pray strategy.

It’s hard not to like Levy even when he’s giving you a slap upside the head. Sure, he’s cocky and abrasive but he’s smart, experienced and is the first to poke fun at himself. He told this story. People were thinking up a name to brand Buffalo’s push to become a tech hub. Like Silicon Valley, only different. Levy, who is from Buffalo, proposed Silicon Snowbank.

My experience with startups goes back to the early 90s. I’ve been twice a principal and twice a spear carrier. In between there was a middle management role with a turnaround of a Toronto tech company, which included me advising startups that wanted to work with us. In that up-close-and-personal journey I’ve seen chronic structural challenges.

Canada is the biggest capital market for resource extraction but that scales poorly to the tech industry. The basics of mining don’t change much whether it’s a gold, rare earths, oil and gas, whatever. But that’s not true of tech. Look at computer graphics. In this small slice of ICT there are enormous opportunities in hardware and in software. Unlike mining, new tech changes the basics of each of these industries all the time – and the opportunities are where the changes are.

Valley investors aren’t smarter. High deal flow drives deeper insight.

Then there’s sales and distribution. It’s a particular challenge when your product or service is sold into enterprise-scale customers. The up-front investment makes it a big risk. It’s an especially big issue for Canadian startups. Our market is too small to achieve critical mass at home. From Day One we have to compete on the global stage. In hockey terms, our first match is game 7 of the Stanley Cup final and our side is a teenage AAA team.

But Levy claims there is a hidden, deeper problem. He compares Israel to the Golden Horseshoe and sees many similarities. Starting from a tiny base in the early 1990s Israel VCs last year invested 5 times as much in startups as Golden Horseshoe investors did. And Israel has grown a long list of companies to global scale.

Levy argues that Toronto’s problem is in soft skills.

Expectations. Levy says that growing up Jewish he knew he had to go to university and get a high-paying job. In business terms, US investors expect tech startups to grow to enterprise scale. And, that they need to invest alot to get there.

What is the Canadian expectation of early-stage companies? “Poor returns on investment, leading to a lack of investor confidence.” What Levy is saying is that people who think this way have it backwards. You get poor returns because you expect poor returns.

Promotion. Levy asked “Why doesn’t Stephen Harper regularly tour the Valley with Toronto tech companies and promote the GTA? Wynn won’t cut it. Nobody knows who she is.” I explained that Toronto voted Liberal and NDP in the last election, so the Prime Minister ignores Toronto. Levy looked shocked, started to talk, then stopped. For just that once, I stumped him. But what could he say, given the state of US politics?