This document is intended to describe all the different aspects involved with creating a Y-Combinator style startup incubator, sometimes called a startup accelerator. This should be considered a living document, to be shared and improved upon by anyone reading it. Edit the document here. I've attempted to break things down into discrete buckets: Sponsors and Investors, Investment Thesis, Application and Interviews, Founding Team, Investment Terms, Office Requirements, Mentorship, Partners and Advisors, Speakers, Demo Day, Post-incubator experience, Community Building, and When Things Go Wrong.

Read Part 1.

Sponsors and Investors, Business Model, and Investment Thesis

Unsurprisingly, discussion around creating a startup incubator needs to begin with the money. What's the business model of the incubator? Who is sponsoring the incubator? Are their goals financial or otherwise? As an example of the latter, a governmental sponsor's goal may be to create new jobs or grow the city's reputation as a technology hub with a thriving startup community. For the former, what size returns are expected and over what time frame? How large is the fund? This impacts what kinds of startups are accepted and how much risk to take on.

Historically, the idea is to make 10 or so small investments and hope that one of the 10 hits a home run and returns the fund. If so, the profile of the ideal investment takes shape: VC-track company, extremely capable founding team, able to show traction (revenue or # of users) by the end of the program (typically 3 months), and with enough financial stability to last until the VC investment is made. Furthermore, the program needs to be attractive to the startup: the investment terms need to be reasonable and the program's connections and mentorship need to be necessary and valuable. This discounts all kinds of otherwise attractive startups startups: those needing large amounts of capital, those who are already VC ready, those who are not targeting a large enough market ("the lifestyle business"), and those who have a great idea but wouldn't be able to reach critical milestones by the end of the program or run out of funding.

At what stage should the companies be at the end of the program? This needs to align with your business model, taking into account the current investment climate. VC-ready? Angel ready? Shipped product? Revenue generating? What is their runway?

This point is worth repeating: the types of companies you accept need to be consistent with your investors' expectations, the investment terms, and the length of the program.