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Federal NDP leader Thomas Mulcair (L) and Ryerson University president Sheldon Levy listen to Zainab Habib, founder of Sojo, at Ryerson University’s Digital Media Zone, May 15 2013. (Fernando Morales/The Globe and Mail)
Federal NDP leader Thomas Mulcair (L) and Ryerson University president Sheldon Levy listen to Zainab Habib, founder of Sojo, at Ryerson University’s Digital Media Zone, May 15 2013. (Fernando Morales/The Globe and Mail)

Do business incubators give startups a leg up? Add to ...

In the fall, Stephen Lake will pack up his team of 25 employees and move them to a new office down the street from VeloCity Garage, a business incubator in Waterloo, Ont. Once they’re in their new digs, Mr. Lake and the other two co-founders of Thalmic Labs will, for the first time, have to start paying rent and dealing with publicity, IT and other administrative concerns.

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The year-old company, which invented a gesture-control armband that works on computers, mobile devices and video-game consoles, is in rapid growth mode. Its three founders were the only employees as recently as September, 2012, then Thalmic Labs pre-sold 30,000 of its $149 units in just one month in February – it plans to ship by the end of the year. And this week came the announcement that it has raised $14.5-million in funding.

“We’re excited to have a bit more ability to focus, it can be a bit distracting in a shared space like VeloCity,” Mr. Lake says of the move from the incubator, which provides University of Waterloo students and alumni free space and business mentoring to kick-start their companies.

This next step is a pivotal point in Thalmic Labs’ development: it’s time to sink or swim away from the collaborative spirit and endless support and information. Like many Canadian companies, Thalmic Labs has thrived thanks to its relationship with an incubator. Incubators and similar-but-different accelerators – which generally provide some investment and run companies through a short program – in various forms have been increasingly cropping up at universities, in tech-driven communities and just about anywhere someone wants to foster startups.

The University of Toronto’s new Creative Destruction Lab puts businesses in front of an esteemed panel of coaches over an eight-month stint and eliminates poor-performing businesses. While VeloCity provides mentorship and free office space, Innovate Calgary, which is loosely affiliated with the University of Calgary, has affordable office space for rent, but focuses on an a-la-carte menu of services mainly for tech companies. It operates under a somewhat unique structure: one third of the funding comes from the school, another third from government, and the remaining third from tenants of the building.

Every incubator has its own business model, but the ones that provide free services are usually backed by a party trying to stimulate growth in a region. Universities generally don’t take an equity stake.

The National Business Incubation Association in the United States says incubated companies have an 87-per-cent success rate compared with 44 per cent for the average startup. But there’s still a crucial period after companies graduate. How can startups weather the transition into the real world?

Valerie Fox, executive director of Ryerson University’s Digital Media Zone (DMZ), has been keeping tabs on the 34 graduates of the three-year-old incubator. Thirteen are thriving, three were acquired, eight are on hold (the owners are students), five have dissolved and five have lost touch.

“The companies that didn’t do well or have failed coming out of here, it all came down to sales,” she says. “If you don’t have customers you don’t have a business.”

She suggests young companies pay close to attention to sales seminars and speakers – DMZ is upping its sales-related content with talks on cold calling and landing first customers. She adds she thinks startups also need to partner with potential customers to get feedback at all stages of product development.

Innovate Calgary will “touch” an average of 500 companies every year, with varying degrees of involvement. It connects entrepreneurs with investors not only as a means of generating capital, but as a source of meaningful advice. President Peter Garrett says most small-business investors have been burned in the past and they can question a business plan like no coach or mentor. “If they are asked these questions earlier, on a test basis, it’s of huge value to a company,” he says.

For Jesse Rodgers, manger of the Creative Destruction Lab, startups that pay attention to business basics and keep their eye on the numbers do well. “The transition out involves costs. Companies that know how to manage those costs and keep them as low as they can, they survive.”

But the most important thing incubators might offer is an intelligent business network that doesn’t have to go away when you leave. Creating an advisory board while you’re still in an incubator, using the mentors and coaches you meet there, is an essential move, Mr. Rodgers says. Staying in contact with those seasoned experts as well as the guys at the desk next to you can help provide advice and support for years to come.

“Stay connected to some sort of mentorship community. Don’t try to do it on your own,” Mr. Garrett says.

Despite all that support, incubators can’t always change a new company’s outcome.

Burstn joined the DMZ before the doors officially opened in April, 2010. Everyone loved the company’s photo-sharing app and it gained widespread media attention even before it launched. However, San Francisco-based Instagram, which looked great and was backed by considerably more funding, hit the market around the same time. By its first anniversary, founders Dave Senior and Josh Davey put Burstn on the back burner and found jobs.

Based on his experience, Mr. Senior suggests startups avoid getting caught up in the early accolades they might get inside an incubator. “Don’t be distracted by cheerleaders. If people are congratulating you and you feel like you haven’t done anything yet, you likely haven’t done anything yet.”

While his company didn’t endure, Mr. Senior and his business partner certainly did. Mr. Davey works as director of product at marketing technology company Chango, and Mr. Senior is now a partner at digital creative agency Playground Inc.

Mr. Rodgers says most incubator grads land on their feet. “Over time, the real entrepreneurs keep grinding it out and make something happen. Others use their skills and find jobs.”

Mr. Senior says the contacts and skills he learned at the DMZ through Burstn are essential to what he does today. “For me and Josh, we made an amazing name for ourselves in the community. There’s been no shortage of opportunities for us.”

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