On Jan 14th, at 8:30 EST, AAIA Youth held an online seminar to extend knowledge to young founders on the journey of creating an invention and extending to build a start-up company, and choosing the right start-up incubators, and receiving fundings from Venture Capitalists (VCs). Guest speakers Morgan Guo, Youji Cheng, and Diane Ding shared their insights and tips of the start-up journey, from the process of developing an IP for a long-time researched product to operating a start-up, eventually participating in incubators and get fundings from VCs.

Speaker: Morgan Guo

As a Senior Innovation Manager at Innovate Calgary and having worked in the technology transfer and commercialization field for over 10 years, Morgan shared with us her experience and insights on the process from research innovation to commercialization:

There are plenty of incubators across North America for start-ups. In the US, by 2020, there are more than 1400 of incubators. In Canada, there are nearly 150 incubators. Many incubators are university-affiliated, such as Velocity (University of Waterloo), Innovate Calgary (University of Calgary) and Genesis (Memorial University of Newfoundland).

It has become the unfortunate truth that 90% of all start-ups fail. More specifically, there is a high failure rate in the first 5 years of creating a start-up. From a survey carried out by 80+ failed start-ups, they summarized 4 main reasons why many start-up companies do not end up succeeding. One is market. Many start-up companies do not survey their market beforehand, and thus their product lack the product-market fit needed to generate profit for them. The technology created by the company might be very cool, but there is no need of it in the market or it does not fit in the current market. The second reason is team. Without the proper roles for each team member, it is easy to have conflict in the vision and daily operation of the company and eventually, the company will collapse. The third reason is finance. There are many cases where companies ran out of money and fundings before finishing their product. Lastly, the fourth reason that results in early-stage start-ups failures is problems with the product itself, the startup failed to deliver the product that it promised/envisioned within a defined timeline.

As we further understand the factors that result in the failure of start-up companies, what is the purpose of incubators and how can it help to prevent such cases? The first resource that campus-based incubators provide is real estate, such as facility, lab, and office space. Such resources are extremely important for companies, especially for companies in the areas of life sciences and manufacturing for them to use the labs to conduct research and create better prototypes. Another resource that incubators provide is funding. The funding can be non-dilutive, or equity based. Non-dilutive funding is offering money to companies without asking for equity in return, which includes innovation fellowships, pre-seed funding, Proof of Principle, pitch awards organized by university etc. Equity-based funding include seed funds, which is providing some money in exchange for acquiring a small portion of a company’s shares. Either way, companies gain financial support, either directly provided by the incubators or by reaching out to the incubator’s affiliated investors. Additionally, incubators also provide training and team building for their start-up companies. As some people are more technically oriented and are not familiar with working with people, this training process aids people to learn how to choose their co-founders, how to interact with other executives and clients in a business, how to market and pitch their company, and how to effectively communicate to solve interpersonal problems. Lastly and one of the most valuable resources that incubators can provide is network. There are strong networks of investors, industry partners, fellow entrepreneurs, service providers, and talents from the incubators. By participating in incubators, the companies gain direct access to various investors, customers, and talents. Thus, they can target their intended customers and receive feedback, hire needed talents, and receive funding much more easily. All resources provided by incubators solves the major problems of company failure.

In terms of funding, each stage of technology corresponds to different types of funding. The concept of Technology Readiness Levels also helps companies to identify what stage their technology is being developed at, with 1 being the least ready and 9 being applied in real-life conditions. Many program funds or support programs provide funds based on the TRLs of a company’s products. More specifically, it is suggested that at TRL 1-3, one can apply for Translational Research Grants; at TRL 3-8, one can join Proof of Concept programs; at TRL 4-9, it is the right time to join start-up accelerators; lastly, once TRL is up to scale, it is time to raise venture funds. For example, more corporate funding requires a company’s product TRL to be after TRL 6 (after product or process validation, having a working prototype and beyond).

Speaker: Youji Cheng

A project manager at a startup incubator Lab2Market and someone who has been in the founding team of two start-ups, Youji has plenty to share about the start-up incubation process:

To start off, some key innovation elements of a start-up are:

  1. To solve people’s problems. Many people start from core tech but miss the point of the problem. Only by talking to the users and continue to get feedback, one can fully tackle and provide a product that becomes the solution of the problem
  2. To build assets in the company. That includes the core IP of the company, such as hardware, software, procedures; financial tools, and properties (houses). Speaking from his own experience as core team member of the failed start-up ChemGreen Innovation, he noted the biggest problem of the company was that there was a lack of market-product fit, as there was limited understanding of the user problem, thus the solution was not accepted by the customers.

Innovation ecosystem is the network of incubators, government and university resources, and the involvement of start-ups. The purpose of these various levels of institutions is to inspire, incubate, and invest start-ups. More specifically, the purpose of inspiring type of incubators such as Lab2Market is to help TRL 2- 4 level companies to conduct market research and comprehend market user problem. The incubate stage incubators such as DMZ aids to develop product, business model, and a founding team based on market research and user feedback, eventually connecting start-ups to potential paying customers and key resources such as prototyping. In the last invest stage, incubators like CDL helps founders to connect with Angels and VCs to provide them with fundings. This is often done at a stage where the company product is being prototyped, manufactured, and user tested. This is when investors will be confident to put in their investment as they will most likely get monetary return. Different incubators specialize in different start-ups areas of needs. For example, Lab2market mainly focus on helping to conduct market research, where as Genesis aid companies to make their first sale in exchange for some royalty; CDL connects founders with investors for equity of companies. One can choose a suitable incubator depending on the development stage of the company and the unique services it provides.

Lastly, there are some important tips for inspiring entrepreneurs for conducting market research: Do not ask customers if they would use the product. Don’t sell! Selling the product during this phase will not receive accurate and truthful customer feedback. Instead, ask users what problems they are having with existing solutions. This way, the problem is being tackled based on the needs of the users instead of first endorsing the solution the company has created without considering the true intentions of the users.

Speaker: Diane Ding

As the former founder Institute Head of Admissions & China Partner and a VC herself, Diane has experiences in all areas of the start-up spectrum. She has since transitioned from the role of helping founders to becoming a founder herself. In this talk, she spoke about the criteria incubators evaluate start-ups on and the major factors VCs look at when choosing companies to invest in. Additionally, she gave gives on choosing the suitable incubator, VC, and Co-Founder:

When incubators are  choosing start-ups to put under their wing, they mainly look at the founders’ ability to identify problems quickly and personal and professional backgrounds. Rapid problem detection is evaluated through the Fluid Intelligence test, which is a test of one’s ability to perceive relationships independent of previous specific practice or instruction concerning those relationships. As a start-up founder, one faces many obstacles a day. One must be able to look at problems in different perspectives, identify issues quickly and think about multiple problems in parallel. Founders’ personality is evaluated by the Big 5 personality traits: openness, conscientiousness, extraversion, agreeableness, and neuroticism. The average entrepreneur has the characteristics of low in Neuroticism, moderate in agreeableness, moderate in openness, high in Conscientiousness, and high in extraversion. A successful founder does not necessarily have to possess these traits, but they are for reference as found in most successful founders. For start-up selections, they do not look at Product Market Fit, Business model, Unit economic or team since these are areas incubators can help an early-stage company to build and improve.

Another topic discussed was how VCs choose the programs they want to invest in. For initial screening of companies, they look for the following criteria:

  • $1 billion+ market share
  • Has a business model that can be quickly replicated in other markets
  • The start-up management team has previous professional experience and a high level of expertise in the industry
  • Professionalism, has a complete team configuration
  • Sufficient product-market fit, proof of concept or product, and clearly identifiable from existing market products
  • There are diminishing customer acquisition costs with network effects, or the product life cycle is naturally increasing
  • No hidden concerns in the technology and Internet-related security
  • There are trustworthy investors in the previous round or from co-investment
  • Compliant with the law

For in-depth assessment, the company is further evaluated in these areas:

  • Measurable operational data growth
  • Financial documents, historical financials and financial projections
  • Key financial data, including loans, number of users, Burn Rate, potential customer list, gross profit, customer acquisition cost, churn rate, etc.
  • Shareholding Composition, Taxation and Corporate Structure
  • Quality of past and current investors
  • Market size, level of competition, competitive advantage, economic moat, ability to scale up
  • Technical due diligence, scalability, stability, security
  • Background checks for top managers

When choosing incubators, for early-stage start-up companies, they are in the situation of no money, no people, and no business model. Selecting incubators that best cater towards the company’s need is the most important. For example, for a pre-seed stage company, their best bet is to participate in pre-seed accelerators where founders and teams get their business to traction and funding.

From her own experience, when choosing VCs, it is best not to choose a VC that has not been an entrepreneur before. If the company needs help, they might not know how to help or feel not empathetic about the issue. The best scenario is to find a VC that understand the technical aspects of the product or help the company to grow in a specific area such as sales and marketing. Another important factor to consider when choosing a VC is to look at their ratings, do research into the previous company they have invested in and see if they have enough interest in the area the company is working in. Additionally, talk to other companies invested by this VC to investigate the relationship between the VC and founder, have a general feel of what the investor is about. Get to know and familiarize with the VC first. Be cautious taking money if not familiar with the VC, as later it might get difficult to deal with issues that could have been prevented from detailed background check. Lastly, it is key to find a responsible and trustworthy corporate lawyer as this can make the whole process of legal work involving investors much easier, in addition to protecting the company’s own rights.

When choosing co-founders of the start-up, Diane offered several advice based on personal experience. Someone can express interest in the work of the company, but it is not until working together that one gets a better sense of whether they are willing to work for the same cause and is the right fit. For someone that is extremely passionately about the cause, they are willing to contribute and work without compensation. For someone that comes up with terms and conditions right away in the first discussion, they might be suitable as an executive to oversee the operation of the company in the future when you have more money in the bank, but not someone who is willing to give their all as a co-founder. Lastly, co-founders need to open their hearts, talk about difficult situations, and be completely honest about their feelings. When dissatisfaction is not being expressed and negativity bottle up, it often results in a messy conflict that can tear the company apart. When finding co-founders, there should also be a variety in roles where each person executes their own area of expertise well.

In terms of early-stage start-ups company evaluation, it largely depends on the decision of the lead investor. Since there is lots of flexibility with companies early on, it is only an estimation decided by negotiation with other stake holders and may not accurately represent the company’s actual value. They also evaluate based on the company’s price-earnings ratio (not applicable in cases of pre-revenue company). It is also a common practice to compare companies to similar companies in the market.

Diane ended on a thought-provoking question of “Is there a need for incubators?” and shared her insights. She stated that entrepreneurs are wolves, and incubators are to there to breed sheep. Incubators offer a systematic way of learning basic business concepts, which is helpful to first time entrepreneurs who lack such professional knowledge. However, the market is constantly changing and evolving. Not only entrepreneurs should know business concepts form the textbook, they also must have the ability to change, learn, and adapt quickly to a rapidly changing market, learning new ways of operating by doing. A start-up company’s real failure starts at when the founders give up on themselves. Many companies were able to drag themselves out of financial hardship when they continued to believe in their cause. There is also the need for entrepreneurs to continuously improve their setback quotient. Discovering problems is always the first step to growth for the company. Having the courage to face the problems and the determination to solve the problems will help the company to succeed.

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