
New Tech Incubators Put Finances First - jkuria
https://www.wsj.com/articles/new-tech-incubators-put-financials-first-1510508396
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ThomPete
I hope this becomes a trend.

I still think Clayton Christensen's "Be patient for growth, not for profit"
quote is the sanest way to build a business.

I understand the idea of giving startups money to explore business models but
I also think it can lead companies astray and into some very problematic
business models like Ubers where subsidizing is disguised as a business model.

It's not that it doesn't work (it works remarkably well) it's just that it's
creating a lot of companies taking in a lot of talent who aren't creating
anything and I personally do not think the few that do end up being successful
makes up for it.

If you are forced to look at your finances you are foced to look at where you
can create value that people want to pay for.

~~~
coffeemug
I hope it doesn't. "Finances first everywhere" is dumb in technology for the
same reason it's dumb in research -- you get predictable incremental
improvements rather than quantum leaps. We get what we pay for, and it
absolutely makes sense to invest into curiosity-driven technological research.

People want "finances first" investment, but then complain that all we get is
a bunch of sharing economy clones. If you want something other than doordash,
uber, airbnb, instacart, caviar, lyft, etc. you have to be prepared to invest
into ideas that have no financial story in the short term.

~~~
ThomPete
I am unconvinced about that argument but I am willing be convinced. Can you
give some examples of quantum leap companies? I don't see why you would need
SV money to make quantum leaps as a company or why that's important.

Edit: I can see from the responses that there is some confusion. I am of
course not talking about companies who do some sort of research based
incubation. I am talking about the host of companies who do no research or
innovation and simply use VC money to get a team of the ground.

~~~
askafriend
You don't need to look much further than the story of Google. Search was
thought to be a "solved problem" and many at the time thought that there was
zero money in search. Plus it was an incredibly saturated market with existing
providers.

If you took the finances first approach, you would have missed Google.

Another good one is AirBnB. Staying in other people's homes was a pretty
ridiculous idea at the time. Who would want to stay in a stranger's home? How
does a company like that make any money? It's more obvious today but that
capital had to be invested in order to open up the market for AirBnB to come
in underneath the hotels and cement itself.

If you took the finances first approach, you would have missed AirBnB.

Yes, my examples are cherry-picked (I know someone is going to bring this up).
But you asked for examples and here they are :)

~~~
ThomPete
I built an Airbnb ish kind of product back in the 90'ies with a friend of
mine, he even wrote his thesis about it.

I got the idea because some stranger on ICQ from Japan asked me if he and his
girlfriend could live with me in Copenhagen for a couple of weeks in exchange
for me being able to live with them if I ever came to Japan.

The service was called IKIKI (apparently meaning visiting each other and also
at the same time a palindrome)

However, we ran into a lot of problems with generally getting people to trust
each other.

I later ended up doing design for a couple of other airbnb ish companies
amongst others vacationvalley.com owned by a very young swedish entrepreneur
called Martin Schaedel who unfortunately died very early in a plane accident.
[http://www.businessinsider.com/2009/1/the-internet-says-
good...](http://www.businessinsider.com/2009/1/the-internet-says-goodbye-to-a-
friend-martin-schaedel)

So I have had my experience with the Airbnb business model and never missed
that. It was a timing question not a funding question.

It is not a good example as that had more to do with market adaption of social
networks and mobile phones plus payment services than product innovation.

~~~
zaptheimpaler
>that had more to do with market adaption of social networks and mobile phones
plus payment services than product innovation

Not parent, but this seems to be key. Many say tech will be forever as
innovative as it has been in past 10-15 years, but now it seems that all of
that has simply been the effect of widespread adoption of the internet &
smartphones, rebuilding parts of the economy on top it, and things are
reaching saturation. Until there is another major breakthrough like that at
the hardware level, we will see far less growth and unicorns.

~~~
coffeemug
So let's fund teams that are likely to come up with the next major
breakthrough at the hardware level. "Putting finances first" is probably not
the way to do it.

~~~
ThomPete
Putting finance first means making solid businesses that solve peoples
problem. If you don't capitalize on the innovations happening you can't help
fund the next innovation.

It's not that there shouldn't be innovation done but you can't build a market
only on that.

~~~
eldavido
There's a middle ground here guys.

If you're talking about 2-4 million seed rounds, sure, back a great team. But
when you're talking about nine-figure equity raises, you _probably_ need a
tenable financial model.

Another thing: software is high-margin. A lot of dumb VC is getting thrown
into low-margin reinvention of relatively old business models (food delivery,
hotels, livery), evaluated through software-like metrics. Maybe finances
matter in low-margin scale businesses. It's just not as important in
businesses based on pure software/design/IP-driven innovation.

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lkrubner
I'd recommend Peter Drucker's book from 1985, "Innovation And
Entrepreneurship".

Drucker points out that the output of a small startup is radically different
from a large, mature organization. From a large organization, investors might
want growth of 15% and final profits of 20%. But he also points out, this is
both too little and too much for a small startup. From an early stage
organization, it is important to see triple digit growth, and no profits at
all. The sign of a successful startup is that it finds a business model that
allows it to grow rapidly. Drucker also describes the failure mode where the
small startup gets enough growth to survive, but not enough to become a
mature, independent organization. It then limps along in a crippled state.

For my money, Drucker has a better density of insight-per-page than any other
business writer. I strongly recommend him.

~~~
eldavido
Here in Startupland we sometimes disparage 15%/year. But at the scale where
big companies operate, that can be truly massive. facebook is realizing
something like 15% return on _70 billion_ of equity book value.

Getting 15% on a 100k real estate flip is one thing. Realizing 15% on 70
billion dollars is quite another.

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ultimatejman
Agree. Focussing on financials pushes a sales first attitude over a raise
money attitude which I feel more early-stage startups need.

Doing sales before you have a product is uncomfortable and frustrating at
times, but it is the best way to know what to build and for whom you are
building.

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bob_theslob646
I didn't read the article that closely, so please correct me if I'm wrong.

Are finances not entirely dependent on the business plan and or idea?

Applying a one size fits all approach is extremely dangerous.

In my opinion, it is all dependent on which space you are in. Margins speak
volumes.(They tell the story of most businesses) For software, the issue of
money is not as important as it would be for a hardware business because it's
much easier to scale.

The fact that "now" incubators are focusing on ideas that make financial sense
may be one of the silliest things that I have ever heard. What that shows is
that these venture capitalists/investors are starting to realize that "free
money"( super low interest rate environment) will end eventually and it will
be more crucial for these companies to be catious on how they spend their
money.

Frankly, hearing this is scary, because they are somewhat admitting that the
funded people lavishly and asked questions later.

It always makes me wonder how they benchmark vc's who invest in startups.
Considering their returns are not public, it is hard to say.

What is even harder to realize and gauge is how they measure "successful
investing."

So much of this is luck, especially in a crowded space/market.

Usually the best ideas(the paradigm shift) will always have access to infinite
capital, but the ideas that may not be articulated fully, will be severely
constrained until proven. That is not a bad thing, but may add some reality to
what creating a company is actually about. Who knows whether is good or not,
but in a few years we shall find out.

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garry
Startups certainly die because their shoelaces are untied, which is what
getting tripped up on financial accounting is like. But you don’t see champion
marathoners going to shoelace-tying workshops with the hope it will help them
win races.

Finance is important but product, engineering, and marketing are far more
essential to making something people want, and that is why YC and the best
incubators spend most of their time on that.

~~~
jamestimmins
I noticed that most of the products here seemed to sell a physical product, so
unit economics would presumably be a bigger factor than if it was pure
software. Does this type of company have more of a need/ability then to focus
on the underlying financials?

I think of the failed Kickstarter campaigns that had massive customer
interest, but weren't able to deliver a good because it ended up being more
expensive than predicted, or they delivered it at considerable financial loss.

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khaledtaha
IMO this is highly dependent on certainty. If there is a low uncertainty
around the product, technology, and/or market then this is a very useful
exercise. However, as uncertainty grows so does the futility of trying to
articulate a coherent business model.

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thisisit
> The first time Bitsbox co-founder Aidan Chopra had to create a forward-
> looking income statement, he “didn’t know where to get those numbers from.”

Many founders are out to solve a problem which they think requires solving at
a large level. The issue being not knowing - where to get the numbers. What is
your market size? What is the income strategy? etc.

Sure, there are some companies which succeed massively despite this but
majority go down under because they don't understand it completely.

