How to evaluate potential of Startup Idea- An Exploratory Study on Business Incubators Criteria for Selecting Startups.

Introduction

Startup incubators assist early-stage companies by offering funding and resources, contributing to approximately 23% higher survival rates for startups that complete incubation programs compared to other new businesses. These incubators' success heavily depends on the quality of the startups they choose. Therefore, top accelerators and incubators must be very selective, admitting only a few high-potential startups to maintain an elite and reputable community, aiming for substantial financial returns later. For instance, Y Combinator and TechStars accept less than 3% of applicants. However, identifying the best startups from a large pool of candidates is a significant challenge for incubators. Consequently, the selection process is crucial for the success of both the incubators and the startups, but it poses difficulties for both parties. Despite this, there is limited understanding of how these accelerators select startups and the key criteria that influence their decisions.

This work aims to explore the various parameters Incubators use while assessing potential startups before incubating them in their ecosystem. Moreover, in the end, report also deals with identifying the best practice and method, which can be used to evaluate any startup's potential.

The overall question of this study will be:

• What can be the general parameters, which can be used to evaluate the startups before incubation?

Business Incubators

A business incubator is an establishment affiliated with a university, a research institution, or operates independently, offering support and services to newly formed firms at their nascent stages. The primary goal is to provide these startups with optimal conditions for survival and growth. There are various types of incubators. Technology incubators, which are often linked to universities or research institutions, focus on high-tech startups. Similarly, science parks and Technopolis cater to technology-driven startups. On the other hand, business incubators generally support all types of firms without a specific focus on new technology ventures. The concept of the incubator, as it is known today in the fields of innovation and entrepreneurship, originated in 1959 in the USA when Joseph Mancuso established the Batavia Industrial Centre in Batavia, New York (Hansen et al., 2000).

General definition, as proposed by Markley and McNamara (1995), describes incubators as local institutions that offer shared physical spaces and business support services to new and young firms (Markley & McNamara, 1995).

R-W-W Framework

The document titled "Managing Risk and Reward in an Innovation Portfolio" by George S. Day addresses the challenge companies face in balancing minor and major innovations within their development portfolios. It emphasizes the need for companies to take smart, substantial risks with innovations, referred to as "Big I" projects, which can lead to significant growth and profitability. The paper introduces two primary tools to manage innovation risks: the risk matrix and the R-W-W (Real-Win-Worth) screen. These tools help companies assess and balance the risks across their innovation portfolios and evaluate individual projects' potential by examining market feasibility, competitive advantage, and strategic fit.

The R-W-W framework, also known as the "Real-Win-Worth" screen, is a systematic process designed to evaluate the viability and potential success of innovation projects. The framework addresses three critical questions:

1. Is it real?

2. Can we win?

3. Is it worth doing?

Is It Real?

This first question explores the reality and feasibility of the market and the product. It involves assessing whether there is a genuine market need for the product and if the technology to develop it is available and feasible. This step ensures that the project is grounded in reality, addressing actual customer needs and leveraging achievable technological capabilities.

Market Reality: This involves understanding customer needs, market size, growth potential, and whether the market is ready for innovation.

Product Reality: This assesses the feasibility of developing the product, including technical requirements, development timeline, and potential barriers to creation.

Can We Win?

The second question focuses on the company's ability to compete successfully in the market with the new innovation. It evaluates the competitive landscape and the company's internal capabilities.

Competitive Advantage: This examines whether the company has a distinct advantage over competitors, such as superior technology, stronger brand, or better market access.

Capability Assessment: This involves assessing the company's internal strengths, including its resources, expertise, and ability to execute the project effectively.

Is It Worth Doing?

The final question examines the strategic and financial viability of the project. It looks at the potential return on investment and whether the project aligns with the company's overall strategic goals.

Profit Potential: This involves detailed financial analysis, including projections of costs, revenues, cash flows, and profitability. Sensitivity analysis is used to understand how changes in assumptions impact financial outcomes.

Strategic Fit: This assesses how well the project aligns with the company's long-term strategic objectives, including its impact on brand equity, market positioning, and relationships with stakeholders.

To answer above three points R-W-W frameworks uses six points, mentioned below:

Real

Market Attractiveness

Product Feasibility

Win

Product Advantage

Team Competence

Worth

Expected Return

Growth Potential

Let's deep drive into the above-mentioned points and understand its importance and use in evaluation of the potential of startup.

Market Attractiveness: Evaluating market attractiveness requires understanding demand validation, customer affordability, market demographics, benefit understanding, and subjective constraints. These factors provide a comprehensive assessment of a product's potential to attract customers and help determine whether consumers are likely to purchase the product.

Q01 Demand Validation: Is there voice-of-customer type evidence or demand validation?

Q02 Customer Affordability: Is there evidence that customers can afford buying the product?

Q03 Market Demographics: Is there market size and demographic analysis?

Q04 Benefit Understanding: Is there evidence that customers understand the product’s benefits?

Q05 Subjective Constraint: Is there subjective barrier that constrains the customer?

Product Feasibility: After a company has confirmed the market's viability, it should thoroughly analyze the product concept and conduct an in-depth examination of the target market.

Q06 Concept Maturity: Is there evidence that the concept can be realized as a product?

Q07 Sales & Distribution: Is there evidence of existing sales and distribution channels?

Q08 Product Maturity: Is there evidence of the functional feasibility of the product?

Q09 Manufacturability: Is there evidence of efficient and low-cost manufacturability?

Q10 Clarified Tradeoffs: Is there clarification of trade-offs in performance, cost, etc.?

From these points, incubators can determine whether the product can be realized and understand its feasibility. Evaluating everything from the concept to its realization and feasibility is crucial before investing.

After confirming that both the market and the product are viable, the project team must evaluate the company's ability to capture and maintain a sufficient market share. Identifying a real opportunity alone does not ensure success; the more promising the opportunity, the more competitors will target it. Established markets will see incumbents defending their positions by copying or surpassing innovations.

Audits reveal that two of the top three reasons for new-product failures would have been identified by the "Can we win?" analysis: the new product either failed to meet market-share goals, or prices fell much faster than anticipated. (The third reason is that the market was smaller or grew more slowly than expected.)

At this stage of the R-W-W screening, it's crucial to differentiate between the product's potential to succeed in the market and the company's ability—through its resources and management talent—to support that success.

Product Advantage: Incubator must know what value the product is adding to the consumer and what are its competitions. It will give idea about the survival chance of the product into the market.

Q11 Competition Validation: Is there validation of product’ competitiveness in the market?

Q12 Value Proposition: Is there evidence of tangible or intangible benefits for customers?

Q13 Sustainable Advantage: Is there evidence of advantages not easily available to the competitors?

Q14 Patent Strategy: Is there a patent strategy for existing/circumvent patents?

Q15 Patent Protection: Is there capability to maintain and protect patents?

Q16 Competitor Response: Is there an evaluation of potential competitor responses?

Q17 Competition Strategy: Is there strategy prepared for competition?

Q18 Marketing Effort: Is there evidence of marketing efforts to enhance customer perception?

Team Competence: The team must assess whether the organization has direct or related experience with the market, whether its development-process skills match the project's scale and complexity, and whether the project aligns with the company culture and has a suitable champion.

Q19 Team Size: Is there adequate manpower in the startup?

Q20 Marketing/Sales Expertise: Is there marketing/sales experience in the startup team?

Q21 Technology Expertise: Is there product development skill set in the startup team?

Q22 Management Expertise: Is there management experience in the startup team?

Q23 Financial Expertise: Is there a financial skill set in the startup team?

Q24 Prior Startup Experience: Is there prior entrepreneurship experience in the startup team?

Q25 Feedback Mechanism: Is there team mechanism to listen and respond to customers?

Just because a project has passed the initial tests doesn't mean it is worth pursuing. The final stage of the screening involves a more rigorous analysis of its financial and strategic value.

Expected Return:

Q26 Profitability: Is there evidence of adequate profitability?

Q27 Risk Assessment: Is there evidence of risk assessment?

Q28 Risk Mitigation: Is there evidence of risk mitigation measures?

Growth Potential:

Q29 Growth Strategy: Is there evidence of strategies and potential for future growth?

Q30 Capital Availability: Is there evidence of adequate capital for growth?

When we interacted with the incubator managers, we got to know that every month they receive 500+ application and evaluating each and every application based on above criteria is not feasible.

To tackle the above problem, we need a set of critical questionnaires who have lager share in decision making compared to other questions.

To determine the critical criteria for final round evaluation we selected the number of questions from the papers "How Do Accelerators Select Startups? Shifting Decision Criteria Across Stages" published by Bangqi Yin and Jianxi Luo which chose the selected number of questions for final evaluation. These questions are Q1, Q2, Q3, Q6, Q8, Q12, Q13, Q21, Q29. These are the parameters which is used for making final decisions on startups 66%-78% time. These questions are from all categories of the R-W-W framework, but real categories is dominant which means that analysis of the real demand in the market is more dominating than any other success factor.

* Prediction accuracy 66-78%

# For final evaluation, the critical criteria in the initial screening stage, might be still critical for the final selection, but the differences in such criteria are no longer sufficient to distinguish the startups that passed the screening stage. Therefore, the four critical criteria are likely to be only a subset of all the critical criteria for the final selection stage

Conclusion

A technology incubator has been evolving as a tool to support the growth of technology-based startups. However, the assessment criteria used to evaluate a startup's potential remain unproven. Different incubators and accelerators employ various models, often relying on the heuristics of managers, which is not an ideal method for assessing the potential of innovative ideas or businesses. As a result, developing and implementing a suitable assessment model in specific incubators is a major concern for researchers and policymakers. In this study, we review previously used models and methods and develop an alternative assessment model based on the theories underpinning the rationale for technology incubators.

In practice, our findings can assist incubator managers in becoming more aware of their subconscious preferences, rationales, and biases, thereby enhancing the decision-making process. Recognizing their implicit and evolving decision criteria across different stages could improve the web-based application data collection system and aid in the development of more informed decision-making tools, such as prediction models. Additionally, these findings can help entrepreneurs empathize with incubator managers, enabling them to better align their businesses with the general parameters and critical criteria.

Since this study is based on available research papers and the current selection processes of incubators and accelerators (which are not publicly disclosed), it has limitations that are important to acknowledge. The selection processes and general parameters were derived from papers and companies that evaluate the potential of incubators specializing in mobile applications, web applications, and sustainable startups. Consequently, the findings may contain biases and may not apply to every startup in every sector. This limitation leaves room for managers to conduct further evaluations through face-to-face interactions or video interviews if they believe a startup that does not meet the initial evaluation criteria still shows potential. Such biases indicate the need for further research on evaluation criteria.

References

1)????? E. Ries, The Lean Startup. New York, NY, USA: Crown, 2011

2)????? G. S. Day, “Is it real? Can we win? Is it worth doing,” Harv. Bus. Rev., vol. 85, pp. 110–120, 2007

3)????? Y Combinator Application Breakdown and?Guide | LinkedIn

4)????? How Do Accelerators Select Startups? Shifting Decision Criteria Across Stages | IEEE Journals & Magazine | IEEE Xplore

5)????? Risk__Analysis20190710-99771-tearr4-libre.pdf (d1wqtxts1xzle7.cloudfront.net)

6)????? Sustainability | Free Full-Text | The Selection Process and Criteria of Impact Accelerators. An Exploratory Study (mdpi.com)