Incubators…Friends with Benefits

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!

10 thoughts on “Incubators…Friends with Benefits

  1. Matt,

    First off, great post.

    Watching a university incubator in the Midwest go through the planning, and launch stages, I can see exactly what you are talking about. That the incubators website now even emphasizes real estate and not startup companies.

    You clear summary, made me go back and think everything that had gone on there.

    Thanks,

    P. Roales

  2. Matt,

    First off, great post.

    Watching a university incubator in the Midwest go through the planning, and launch stages, I can see exactly what you are talking about. That the incubators website now even emphasizes real estate and not startup companies.

    You clear summary, made me go back and think everything that had gone on there.

    Thanks,

    P. Roales

  3. Hi Matt,
    I would argue that an “incubator” like TechStar Early Ventures (www.tsearlyventures.com) has been successful. They minimize the real estate play by sheltering only one or two companies at a time, and they contribute a great deal in terms of interim management and consulting services. Rather than rent money, the model relies on equity. Rather than relying on the proximity of other entrepreneurs to impart wisdom to one another, the managing partners do the heavy lifting themselves. They aren’t connected directly to an investment pool, but they obviously have a strong network of angels and VCs to get in front of. They’ve launched several successful companies in diverse fields that may not otherwise have made it, and they’ve helped generate a great deal of enthusiasm for entrepreneurship in an otherwise staid midwestern city.

    Have they made a ton of money while doing this? Well, no (still waiting for those IPOs–and it’s important to note that successful incubation requires an even longer timeline than VC returns). But their contribution to the economy far exceeds what is indicated by the remuneration “scorecard.” Incubators are not investment banks but they can be a valuable piece of the bigger picture.

  4. Hi Matt,
    I would argue that an “incubator” like TechStar Early Ventures (www.tsearlyventures.com) has been successful. They minimize the real estate play by sheltering only one or two companies at a time, and they contribute a great deal in terms of interim management and consulting services. Rather than rent money, the model relies on equity. Rather than relying on the proximity of other entrepreneurs to impart wisdom to one another, the managing partners do the heavy lifting themselves. They aren’t connected directly to an investment pool, but they obviously have a strong network of angels and VCs to get in front of. They’ve launched several successful companies in diverse fields that may not otherwise have made it, and they’ve helped generate a great deal of enthusiasm for entrepreneurship in an otherwise staid midwestern city.

    Have they made a ton of money while doing this? Well, no (still waiting for those IPOs–and it’s important to note that successful incubation requires an even longer timeline than VC returns). But their contribution to the economy far exceeds what is indicated by the remuneration “scorecard.” Incubators are not investment banks but they can be a valuable piece of the bigger picture.

  5. Matt:
    Thanks for the post. I don’t follow incubators all that closely, but I do believe that a successful one is The Innovation Factory, http://www.innofactory.com. They incubate exclusively life sciences companies, and instead of attracting entrepreneurial ideas to co-locate in their space, they actually come up with the ideas and/or license the IP and launch the businesses themselves. More similar to an idealab than a university incubator. The founders have all been highly successful life sciences entrepreneurs previously.

    Their partners in this endeavor are the Carlyle Group, Versant Ventures and SV Life Sciences…all VC firms with excellent life sciences practices. I know of them through my friend Mike Partsch (and fellow Kauffman Fellow) co-founder of AMV Partners (and formerly of Versant), which is a medical devices venture firm that has the principals of the Innovation Factory as principals in the firm. Its still a bit early…they’ve only been around since 1999 but my understanding is that it has been very successful so far.

    So it seems like it can be done successfully, but like any business it all comes down to the management team running it. The concept alone is not enough, no matter how great its access to technology is or other common factors cited by incubators.

  6. Matt:
    Thanks for the post. I don’t follow incubators all that closely, but I do believe that a successful one is The Innovation Factory, http://www.innofactory.com. They incubate exclusively life sciences companies, and instead of attracting entrepreneurial ideas to co-locate in their space, they actually come up with the ideas and/or license the IP and launch the businesses themselves. More similar to an idealab than a university incubator. The founders have all been highly successful life sciences entrepreneurs previously.

    Their partners in this endeavor are the Carlyle Group, Versant Ventures and SV Life Sciences…all VC firms with excellent life sciences practices. I know of them through my friend Mike Partsch (and fellow Kauffman Fellow) co-founder of AMV Partners (and formerly of Versant), which is a medical devices venture firm that has the principals of the Innovation Factory as principals in the firm. Its still a bit early…they’ve only been around since 1999 but my understanding is that it has been very successful so far.

    So it seems like it can be done successfully, but like any business it all comes down to the management team running it. The concept alone is not enough, no matter how great its access to technology is or other common factors cited by incubators.

  7. Interesting post, Matt.

    Your suggestion of gathering entrepreneurs in social settings vs real estate ones seems more industrious, though by its nature, quite different and spotty perhaps (perfect post to put under the tech cocktail gathering.)

    I wonder whether incubators featuring complimentary ventures has been explored vs single industry/expertise like tech.

    Space holding a marketing firm with a web firm with a tech firm with a life sciences firm AND a method that links them actively for shared knowledge or cross-pollination could be quite fruitful.

    Of course, a VC firm could bring same virtually if the firm had a broader range of ventures and/or contacts.

    Intriguing to think about an incubator from that more broad entrepreneurial standpoint, barring vastly differing space requirements — to be certain, all marketing firms require loft space (insert choice of emoticon here.)

    — Rob

  8. Interesting post, Matt.

    Your suggestion of gathering entrepreneurs in social settings vs real estate ones seems more industrious, though by its nature, quite different and spotty perhaps (perfect post to put under the tech cocktail gathering.)

    I wonder whether incubators featuring complimentary ventures has been explored vs single industry/expertise like tech.

    Space holding a marketing firm with a web firm with a tech firm with a life sciences firm AND a method that links them actively for shared knowledge or cross-pollination could be quite fruitful.

    Of course, a VC firm could bring same virtually if the firm had a broader range of ventures and/or contacts.

    Intriguing to think about an incubator from that more broad entrepreneurial standpoint, barring vastly differing space requirements — to be certain, all marketing firms require loft space (insert choice of emoticon here.)

    — Rob

  9. I am currently in the due diligence phase of starting an incubator. Looking at “those that have gone before” there are a number of common obvious problems: (1) No serial entrepreneur experience in the team (2) A low bar to entering the incubator, and (3) an ill-conceived business model.
    The team I have in mind is small, with both entrepreneurial AND big business backgrounds, including significant CFO/CEO/COO level experience. The geographic location is a tech-center with a strong tradition of local research. We would provide space and basic infrastructure, but the primary focus is adding our combined expertise to the new company’s arsenal.

    My inner entrepreneur says that there should be a workable business model in here somewhere. Idea Guys + Good Mentoring + A little $$ *should* = Better chance at success.

    Anyone have any thoughts on a workable model?

    —–
    PING:
    TITLE: Do Incubators Work?
    URL: http://www.startupohio.com/startup_ohio/2006/07/do_incubators_w.html
    IP: 204.9.178.8
    BLOG NAME: Start-Up Ohio
    DATE: 07/07/2006 03:38:05 PM
    Business incubators have always been strangely interesting to me. I have had very little exposure to incubators because I’ve never been involved with or personally known anyone that has worked with/for an incubator. Being left to my own devices, I’ve
    —–
    PING:
    TITLE: Matt McCall sobre incubadoras
    URL: http://tellesfera.com/?p=58
    IP: 209.85.6.38
    BLOG NAME: tellEsfera – A Esfera do Telles
    DATE: 07/06/2006 04:50:32 AM
    Fiz uma provocação a um tempo atrás ao Matt McCall sobre incubadoras. Ele respondeu. Minha opinião? Uma incubadora para funcionar deve sobretudo ter um ótimo networking para alavancar as incubadas (mercado e investidores) e acesso a informação d…
    —–
    PING:
    TITLE: Incubator?
    URL: http://middlewest.typepad.com/middlewest/2006/07/incubator.html
    IP: 204.9.178.8
    BLOG NAME: Middlewest
    DATE: 07/05/2006 05:17:27 PM
    Matt McCall blogs about incubators – I would propose that a good model for incubating is one like Paul Graham’s yCombinator – he seems to have added a lot to his portfolio companies. I also bet that Boston and the

  10. I am currently in the due diligence phase of starting an incubator. Looking at “those that have gone before” there are a number of common obvious problems: (1) No serial entrepreneur experience in the team (2) A low bar to entering the incubator, and (3) an ill-conceived business model.
    The team I have in mind is small, with both entrepreneurial AND big business backgrounds, including significant CFO/CEO/COO level experience. The geographic location is a tech-center with a strong tradition of local research. We would provide space and basic infrastructure, but the primary focus is adding our combined expertise to the new company’s arsenal.

    My inner entrepreneur says that there should be a workable business model in here somewhere. Idea Guys + Good Mentoring + A little $$ *should* = Better chance at success.

    Anyone have any thoughts on a workable model?

    —–
    PING:
    TITLE: Do Incubators Work?
    URL: http://www.startupohio.com/startup_ohio/2006/07/do_incubators_w.html
    IP: 204.9.178.8
    BLOG NAME: Start-Up Ohio
    DATE: 07/07/2006 03:38:05 PM
    Business incubators have always been strangely interesting to me. I have had very little exposure to incubators because I’ve never been involved with or personally known anyone that has worked with/for an incubator. Being left to my own devices, I’ve
    —–
    PING:
    TITLE: Matt McCall sobre incubadoras
    URL: http://tellesfera.com/?p=58
    IP: 209.85.6.38
    BLOG NAME: tellEsfera – A Esfera do Telles
    DATE: 07/06/2006 04:50:32 AM
    Fiz uma provocação a um tempo atrás ao Matt McCall sobre incubadoras. Ele respondeu. Minha opinião? Uma incubadora para funcionar deve sobretudo ter um ótimo networking para alavancar as incubadas (mercado e investidores) e acesso a informação d…
    —–
    PING:
    TITLE: Incubator?
    URL: http://middlewest.typepad.com/middlewest/2006/07/incubator.html
    IP: 204.9.178.8
    BLOG NAME: Middlewest
    DATE: 07/05/2006 05:17:27 PM
    Matt McCall blogs about incubators – I would propose that a good model for incubating is one like Paul Graham’s yCombinator – he seems to have added a lot to his portfolio companies. I also bet that Boston and the

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