What Entrepreneurs Should Look for in Tech Startup Incubators

Photograph courtesy Drchrono

Y Combinator holds two classes of startups per year, each with six dozen or so companies.

In the last few years, dozens of incubator programs catering to tech startups have popped up. Their typical business model is to take equity in the young companies they nurture in the hopes of breeding some superstars that yield big returns.

With the proliferation of these programs, entrepreneurs could theoretically shop around for the most attractive deal terms. One incubator I wrote about this week in Bloomberg Businessweek has ridiculously favorable terms.

The caveat, of course, is that some of these incubators are extremely competitive, taking thousands of applications per year. And while it’s easy to compare investment amounts with equity splits, it’s harder to measure the value of participating in one of the more prestigious programs, which can give entrepreneurs access to high-profile investors, advisers and business executives.

If you’re a tech entrepreneur looking for an incubator, here’s a quick breakdown of the terms for some of the most popular programs. No need to compensate us in startup equity for this service.

Summer@Highland: Highland Capital Partners, based in Cambridge, Massachusetts, started its incubator five years ago as part of a push into Silicon Valley. The venture-capital firm makes college graduates an offer they can’t refuse: free office space for the summer at its headquarters or in Menlo Park, California, plus at least $15,000 per team without any equity in return. Because of these favorable terms, Highland has missed investing in some fast-growing companies it incubated. But it has won fans among tech startups. Highland turned down 242 applications for this past summer’s class, taking just 14 teams.

Y Combinator: The number of startups accepted to this well-known incubator has ballooned to classes of six dozen or so two times a year. Still, the admission process for the Mountain View, California-based program is very competitive. High-profile investors including actor Ashton Kutcher frequent the Demo Day events. Participating teams get $14,000 to $20,000, depending on the number of founders, in exchange for an average of 7 percent of the company’s equity. Airbnb and Dropbox are two of the most successful Y Combinator companies.

TechStars: With programs located in several cities and a reality show on Bloomberg TV, which is owned by Bloomberg LP, this incubator has become something of an institution. At least 75 venture capital firms provide funds to run the program. One previous participant, Socialthing, was acquired by AOL. Companies that start there receive $18,000 in exchange for about 6 percent in equity.

DreamIt Ventures: This incubator will run next year in Austin, Israel and New York. SCVNGR, which operates the fast-growing mobile-payments service LevelUp, went through this program. Companies will receive $10,000 to $25,000, depending on the size of the team, for 6 percent in equity.

Launchpad LA: Looking to spend four months in sunny Southern California? This program, based in Santa Monica, gives $50,000 for 6 percent in equity. In addition to office space, a standard incubator perk, Launchpad provides participants with discounts for cloud services from Amazon.com, Microsoft and others.

Excelerate Labs: Based in Chicago, this program takes 10 companies a year. Each startup gets $25,000 for 6 percent in equity. Demo Day takes place at the House of Blues, but hopefully it doesn’t leave entrepreneurs walking away singing a sad song.

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