Tips for people considering starting new incubators

Joey🔸19 May 2023 12:52 UTC
232 points
20 comments9 min readEA link

Charity Entrepreneurship is frequently contacted by individuals and donors who like our model. Several have expressed interest in seeing the model expanded, or seeing what a twist on the model would look like (e.g., different cause area, region, etc.) Although we are excited about maximizing CE’s impact, we are less convinced by the idea of growing the effective charity pool via franchising or other independent nonprofit incubators. This is because new incubators often do not address the actual bottlenecks faced by the nonprofit landscape, as we see them.

There are lots of factors that prevent great new charities from being launched, and from eventually having a large impact. We have scaled CE to about 10 charities a year, and from our perspective, these are the three major bottlenecks to growing the new charity ecosystem further:

  • Mid-stage funding

  • Founders

  • Multiplying effects

Mid-stage funding

We try to look at every step of our charities’ future journeys, to see how we expect them to fare as they progress. In general, there seems to be enough appetite in the philanthropic community to supply seed funding to brand new projects, and we have been successful in helping charities to launch with the funding they need. However, many cause areas appear to have gaps in available funding for charities who are around two to five years old.

Charities’ budgets tend to grow each year; for example, a charity might need $150k for its first year, $250k for its 2nd, $400k for its third, and so on. The average charity might require a seed of $150k for its first year, and mid-stage funding (years 2-5) of ~$2 million over 4 years. Currently, it is much more difficult for highly effective charities to fundraise this much at this stage of their journey than it is for them to get the funding they need at the seed-funding stage. Keep in mind that this mid-stage funding is still too early and small for most major institutional funders (e.g., GiveWell does not recommend organizations that can only absorb $1 million a year as top charities), and governments rarely consider projects this young.

Mental health case study: An example that demonstrates this issue well is found in the cause area of mental health. We have identified a number of promising intervention ideas in this area over the past few years, and a solid pool of aspiring entrepreneurs interested in founding mental health charities. Although we expected our seed network would be able to support the first round of funding, we did not have confidence in what came next for these charities. We have since worked to improve the situation by helping launch the Mental Health Funders Circle, but even with that network we are concerned about mid-stage funding in the future.

D-Prize case study: Our concern is not just theoretical; it is a trend other incubators have experienced too. D-Prize, who gives $20k seed grants to a number of organizations, has consistently found that the organizations’ biggest challenges are in the mid-stage funding years. This rings even more true for projects with limited networks in key funding cities (e.g., London/​San Francisco).

Why is mid-stage the problem?: Instead of seed or late stage? I believe it’s the same donors who consider seed or mid-stage funding, but as the volume of funding is smaller at the seed stage, it is covered much more easily. While some charities may struggle in the late stage as well, less will even get to that stage and the number of options typically expand once a charity is clearly established as a field leader.

Founders

Although a solid number of people are interested in founding charities, it’s only an ideal fit for a relatively small percentage of people. It is a career path that requires a highly entrepreneurial mindset, plus a very strong ethical compass to succeed in. Due to the low number of people who are a good fit, I don’t believe that it is a career path that can absorb a high number of people (my guess would be less than 5% of people are actually suited to founding a nonprofit). It is my opinion that other career paths, like for-profit founding or policy, suit a much larger percentage of people (maybe 20%).

CE founder pool case study: We have found that there is a relatively large difference between the impact of the top 20% of founders and the other 80%. This has even been predicted fairly accurately by our vetting system. This means that if CE were to train 60 people a year instead of 30, the impact would not double (assuming that there are no changes in the pool of talent). Typically, the top 20% of our founders generate a majority of the impact, meaning even if funding or counterfactuals of the applicants’ time were not taken into account, going from 30 to 50 founders might only result in 120% of net impact, despite a doubling of competition for funding, talent and mentorship. This is already making the pretty generous assumption that the next 20 applicants would be identical in strength to the 20 that we accepted, but who were not in the top 10 (which we think is uncommon based on our historical data).

Y Combinator case study: It is pretty common for for-profits to think that founders are the biggest predictors of success, and one of the theories as to why YC’s average company valuation has gone down is due to accepting a larger pool. For YC this is fine; if the total scale goes up but the average per company goes down, they still make more revenue from their investments. In the charity world, however, donations are limited and funders are not consistently donating to the highest impact areas/​projects. This makes the “throw lots of darts at the wall” approach of nonprofit founding far less attractive.

Why are founders so predictive?: It is pretty surprising to find that founders are so predictive, but in our data it’s consistently the strongest factor to suggest how well a charity is going to do. We think this is due to the 100s of choices that can be made for every charity; it only takes a few of them to be wrong for the charity to fail to have an impact. Having great decision-makers at the helm is therefore extremely important.

Multiplying effects

The final bottleneck that we will touch on briefly, is multiplying effects. As has been suggested in the founder section, it’s not primarily luck that separates the top charities from the bottom. If you look at externally reviewed and ranked charities (e.g., GiveWell tops) they have quite a lot in common, in both their approach and methods. To be one of the best charities, you have to get a lot of things right. You can have a great co-founder pairing and a great idea, but if it is launched in the wrong location the charity is not going to be competitive with the best. This means that despite the 90⁄10 nature of entrepreneurship, you lose a lot of impact when you 90⁄10 incubation. A charity that makes 9⁄10 key decisions right will often still fail to have a significant impact.

Fortify Health case study: Early on in Fortify Health’s development, they came across an opportunity that was highly promising from a tractability angle, but less cost-effective when compared to flour fortification. The government was on side, and the less cost-effective path offered far more security in terms of both impact and funding. FH made the choice 95% of nonprofits would not, and stuck with the more cost-effective intervention. They became GiveWell incubated because they were focused on such a cost-effective intervention. To be one of the best, you often have to make hard calls.

Why do factors multiply instead of add?: I think this is mostly due to the exponential nature of entrepreneurship. Both in the nonprofit and for-profit world, a few actors tend to become dominant in the field. With impact being harder to measure, you have to not only become a field leader, but also be truly more cost-effective than the field leader you displace. This is hard to pull off, even for projects that have everything lined up well (e.g., have gone through the Incubation Program and have the full support of CE behind them).

But I want to start an incubator anyways!

Well ok, but don’t say I didn’t warn you! It’s a harder thing to pull off than people tend to think. However, I do generally like competitive markets and despite all of the above, there is some room for more impactful incubators if they are set up intelligently.

1. Provide profound assistance to your organizations

Invest heavily: A lot of the incubators and the people that contact me want to do a “CE light”. However, due to the exponential nature of impact and the direct competition for resources charities go through, I think it’s far better to have a small batch of really good charities rather than a huge batch of mediocre ones. In fact, I would even argue it’s better to have a small batch of charities that are all good than to have a large batch of charities where some of them are good, but some are only having a medium-sized impact.

Invest long term: The second part of really helping your charities is not just throwing them into the deep end after your incubator’s program (remember, your incubator has no impact if all your charities fail soon after you incubate them). You have to think about their next steps- how you can support them in the first three years, not just their first three months. Is there appreciation in the mid-stage funding market for the number of charities you are putting out? Can you teach your charities how to overcome the challenges they will likely face two years down the line?

Invest specifically: It’s really hard to be good at everything. CE started by incubating in two cause areas it knew really well, and only slowly expanded to others after seeing some success in those areas. Almost every incubator that contacts me wants to be too broad; the more focused you are, the more useful you can be to the specific interventions in your program.

2. Consider alternative incubation paths

Other career paths: One of the great things about CE is that it gives a clear ramp onto an impactful career path that would otherwise be hard to access. But charity founding is not the only career path that can be highly impactful. Training for Good is working on policy and journalism equivalents, and there are many more career paths that seem promising but for which there is no clear ramp to move forward onto. This is likely the most promising alternative area we currently see.

For-profit: For-profit programs, although more abundant, do not suffer from many of the same challenges nonprofit programs face. It is a lot more viable to run with a larger group, or a group where only 1⁄10 projects hits big. There is also a much larger pool of people who are keen to start a non-profit and are well-suited to the endeavor. A for-profit incubator that only lets in people who take the founders pledge, for example, could work to efficiently reduce the void in mid-stage funding (excited entrepreneurs are a great fit for this gap). It could also utilize and mobilize the large pool of impact-minded entrepreneurs who are often going to weaker social enterprise incubators.

Start a direct project instead: In some communities, meta or cross-cutting projects are all the rage. However, for 19⁄20 people, I really think that working on something more direct than an incubator would be the right call. For every meta project started, there are dozens of direct projects more needed. There are many who consider meta too quickly relative to just founding the project they want to see go through an incubator.

3. Consider if you are the right person to found an incubator

When someone asks me about starting an incubator, the first question I ask is: “how many successful projects have you founded?” I don’t think CE would be a very useful incubator if our founding team had not started and learned a bunch of lessons from our past projects. This is both from a genuine knowledge perspective and a credibility perceptive. The only reason charities first considered listening to CE was due to our team members having past experience, not only of founding projects but of founding and being involved with projects that were externally vetted and were considered desirable to replicate. Prior to CE’s founding Charity Science Health and Fortify Health were GiveWell incubated, and New Incentives became GiveWell recommended; this sort of background is part of what drew the initial talent CE needed to launch our incubator (and remember, talent is super important).

Probably even more important was the fact that a ton of our team members, including both founders, had founded and worked for a variety of nonprofits. This meant the advice we gave could actually be useful. An incubator run by people who have never previously founded successful projects is rare, even in the for-profit field; if you haven’t actually done something yourself, it is useful to consider how easy it would be to teach it.

The second question I ask is: “you know this is not going to be glamorous, and is going to be pretty hard, right?” Incubators in the nonprofit sector are far closer to operations than they are to research. An incubator is the supporting character of the story, not the hero. Your charities/​projects/​students need to come first; they need you to give them everything and ask for very little in return. If CE focused mostly on building itself up, mid-stage funding would be even more limited as we would absorb it before our charities get a chance. Our charities would pick up spending habits that are unsustainable for them, as CE spends 10x what they will be able to. CE does not even ask the charities to put our brand on their website unless it helps them! If you can, visualize an incubator as a personal assistant role to a bunch of charities- this is possibly the most accurate way to think of it.

The third question is “how good are you at vetting?” People are the most important ingredient; an incubator’s hardest, but most important task, is to vet well. Your incubator’s credibility is based on how your projects do (which is mostly predicted by founders), and your incubatees’ experience will mostly be shaped by how good the other people in the room are. If you have an amazing venue but you fill it with the wrong people, the event will be far less meaningful than a great group meeting in a public park. The same is true with your incubator; to be a good incubator you have to see talent and opportunity where other people miss it. Do you have a track record of hiring people who are overlooked by others, but turn out to be rock stars of the movement a short while later? How about funding a project that the most respected funders were skeptical of, only to have them pick it up two years later as one of their favorites? This is the sort of vetting and decision-making power that fuels a great incubator.

In summary: Running an incubator is hard. Although there are still some great opportunities for new career paths and focus areas to get incubated, it’s worth taking a deeper look at whether it is the most impactful project to do, and if you are the right person to do it. Right now, even the CE team thinks that the way we can expand to have the most impact is if we branch into other careers (such as founding foundations).

Joey🔸19 May 2023 12:52 UTC
232 points
20 comments9 min readEA link