I owe Camilo Telles a post on incubators. I have been promising him and others this post for over two months. The key question is do incubators work?
About every 10 years, incubators come into vogue. We see a flurry of them, not much comes of it and they fade into the background. While there may be several out there, I have not seen a successful incubator model yet.
Incubators usually have their genesis in one of there ways: one, a university tries to launch one near the campus to encourage commercialization of its technology; two, a government entity (city) or community group (consortia of entrpreneurs, gov, univ, etc) launches an initiative to create a "tech hub"; or three, an serial entrepreneur creates a vehicle to commercialize his/her ideas.
In the end , most of these digress into real estate plays with poor credit risk technology companies as tenants. This makes for a poor real estate play and a poor venture effort. Why is this the case?
Technology companies are successful because of a couple of factors. First, they have targetted a significant problem or issue. Second, they have a product or service that the customer/consumer is ready to buy at that point in time. Third, the management team is able to effectively execute and out manuveur the competition while pleasing the customer. Fourth, various environment factors (macro trends, etc) go their way and luck is on their side.
Real estate does not play a key factor in any of these. The notion of co-locating start-ups together makes sense at a high level, but fails to work on the ground. Networking, mentoring, sharing, etc all work when the entities/companies involved are of similiar caliber, have similiar issues and are playing in the big leagues. However, often, you have a building full of inexperienced or small entrepreneurs attacking niche issues in a broad array of industries. There is not a lot that they can teach each other. If there is a breakout company, it is so focused on building its business, that it doesn’t have the time or interest to pull up the other inhabitants with it. In fact, it will often move out for bigger space. It also experiences asymetrical benefits…it gives a lot of advice but gets limited value in return. Also, the companies in an incubator are often so diverse that they are each facing fairly unique issues.
Companies need to have global visibility in order to see what is going on in their industry…best practices, competitor challenges, etc. A local incubator can not give them this visibility or connectivity. By definition, the incubator is local and somewhat isolated.
Shared services and reduced rent are two potential benefits, but they don’t make or break the success of a company. Many firms start up virtually or in low rent areas. They can provision internet, telephones, etc as needed.
One could argue that Idealabs is an incubator. I would comment that it is more of a holding company for Bill Gross’s commercialization efforts. He has had several big hits like Overture (now Yahoo). However, few incubators have the vision, experience or connections that Bill does. Another model that possibly works is an incubator tied to a successful venture group.The VC acts as the screening agent and can bring resources and visibility to the company. Our breathren at DFJ New England are involved with an incubator near the MIT campus.
As stated earlier, incubators are often just real estate plays cloaked in a greater cause. There is little inherent in an incubator that increases a start-up’s chance for success. Efforts would be much better spent finding ways to hook up entrepreneurs together through informal events like dinners. You should try to indentify the rising stars and pull them together. Help to create critical mass that way.
If anyone has seen a successful incubator model, I am all ears!