Tomorrow night is Tech Cocktail. It is the first in what will be a series of tech networking events in Chicago. Eric Olson from Feedburner and friends are pulling this together. I will be there as will a number of our local entrepreneurial and tech scene. You can register above. Hope to see as many of you as possible there!
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!
Ideas and Feedback
I’d like to think that this blog is more of a community vehicle and less of a platform for Matt to drone on with random thoughts. As a result, it’s key to hear back from the reader base. It would be great to hear from as many of you as possible via comments or email.
1) Let me hear from you on topics of interest or need.
Are there topics that you want to hear about? Some of the ideas that are upcoming from you are:
— do incubators work…why or why not?
— what makes an effective fundraising pitch?
— direct or channel for sales?
2) Are there features you like, dislike or want to see added?
Of the "features" included, are some more valuable or interesting than others or some you’d prefer not to see:
— bootcamp: topics for entrepreneurs
— VC 101: topics on VC
— Buzz: news and thoughts on trends
— Blog of the Week
— Philanthropy
— Resilience
— other…
3) Any other suggestions on how to make this blog more useful
LOOKING FORWARD TO HEARING FROM YOU…
Venture 101: Visit the Wizard
One thing entrepreneurs are always trying to figure out how VC’s think and go about their business. What is it that VC’s are looking for? Those trying to get into the business are trying to figure out the best practices of successful VC’s. Paul Kedrosky just led a panel of leading VC’s and asked them some of these basic questions and posted his findings on PE Week’s daily newsletter. He also publishes his own blog "Infectious Greed". His final conclusion is that the Wizard is schizophrenic…click above to get the full story.
Top 10 VC Blog
Many thanks to Andrew Fife for including me on his list of top 10 VC bloggers on the net. Below are the other bloggers on the list. All of them (including Andrew’s) are worth a read and have great insights into the venture and entrepreneurial worlds.
Brad Feld – Mobius Ventures
Jeff Nolan – formerly of SAP Ventures
Will Price – Hummer Winblad
Peter Rip – Leapfrog Ventures
David Cowan – Bessemer Venture Partners
Tom Sheilds – Woodside Fund
Jeff Clavier – Angel Investor / SoftTech VC
Tim Oren – Pacifica Fund
Guy Kawasaki – Garage Technology Ventures
Bootcamp: Slow Boat to China
There is a lot of press and buzz going around about the rise of the capital efficient start-up. These companies do not need venture capital and hence are free to grow their businesses unencumbered by some Stanford MBA, Mensa venture partner. Ironically, I am moderating a TiE panel this Thursday called "Capital Efficiency for Growing Businesses" (<- click here to register…self-promote!).
Other than control, another reason most entrepreneurs should consider bootstrapping or other non-VC approaches is the trend regarding exits. Historically, 20-30% of VC backed companies went public. Now it is less than 10%. This means that the wins are smaller and it is more difficult to get the VC capital the returns they seek (plus VC’s are raising larger funds and yet again, pumping $10-20m chunks of capital into companies).
Last year, there were only 56 IPO’s of venture backed companies in the US market, down from 93 in 2004 and only 10 IPO’s in the 4th quarter. As of March, there were only 25 companies in registration.
Additionally, more and more bankers and firms are talking about listing on the AIM (Alternative Investment Market) which is the Nasdaq of Europe. Due to the cost and regulatory complexity created for small firms by SOX, the US is losing its position at the heart of the capital market. This is driving IPO values down, and with it, M&A valuations as well. Without the IPO stalking horse, acquirers have less pressure to pay up.
Larger funds are starting to come back into vogue. Many funds cut their size from $800m-$1B to around $400m. Now they are back with $650-700m vehicles. Since the average IPO has hovered around a $180m valuation, it is nearly impossible for a fund to generate 10x on these wins if they have pumped $20m into the deal (unless the average pre-$ was -$2m). This will drive returns down on larger funds that continue to drive larger sums into portfolio companies.
This will be a mess eventually. Avoid it or take smaller amounts of capital ($3-7m). As Seinfeld famously stated: "Become master of your own domain…"
Blog of the Week: Signal vs Noise
From time to time (maybe even weekly…), I’ll try to list a blog of the week. These will of bloggers in the entrepreneurial or venture world. One of Chicago’s finest is Signal vs Noise which is created by the founders of 37Signal. It is very entertaining and often has great suggestions for entrepreneurs. One of Jason Fried’s recent posts "Getting in too-much touch" has a counter-intuitive but common sense framework around collaboration and productivity within companies. Check it out and join their over 20,000 subscribers!
Blog of the Week: Signal vs Noise
From time to time (maybe even weekly…), I’ll try to list a blog of the week. These will of bloggers in the entrepreneurial or venture world. One of Chicago’s finest is Signal vs Noise which is created by the founders of 37Signal. It is very entertaining and often has great suggestions for entrepreneurs. One of Jason Fried’s recent posts "Getting in too-much touch" has a counter-intuitive but common sense framework around collaboration and productivity within companies. Check it out and join their over 20,000 subscribers!
Doing Good: Buffett To Give Away Fortune
Wow! In an upcoming Fortune cover story, Warren Buffett has announced that he will give away 85% of his fortune in the coming years versus waiting until after he has passed away. This is a living, $35 billion+ donation, surpassing his friend, Bill Gates. Of even more interest is that he plans to give over 5/6th of this to the Bill & Melinda Gates Foundation. Gates plans to step down from his operating role at Microsoft in the coming two years to focus nearly exclusively on this Foundation. The Gates Foundation along with a number of newly formed foundations exemplify what will be an increasing trend (and one predicted by Peter Drucker over 15 years ago). Successful people, having made significant money, will look for outlets to find greater meaning and connection in their lives. This will be the basis of "venture philanthropy". If innovation and entrepreneurship are key to solving many of our business challenges, aren’t they even more important in solving our societal ones?
The Morino Institute sponsored a study on this field in 2001 called Venture Philanthropy: The Changing Landscape. An interesting read. This is an area of increasing focus for me and key to our nation’s future. I believe that all entrepreneurs should search for those areas of potential change that have meaning to them and to begin to layout a game plan for how to bring innovation to that area as they do in their own business.
As Whitney Tilson recently wrote regarding Gates:
"In my email on philanthropy a week or so ago, I
cited both Buffett and Gates as philanthropic examplars and wrote: "I
think that 100 years from now, Bill Gates will be remembered more for his
philanthropic accomplishments than for his business ones. I think every person who’s been
fortunate enough to accumulate extreme wealth should want a similar
legacy." I now think that Buffett too may well be remembered
by future generations as one of the all-time most important
philanthropists."
Britney Teaches Physics
Created by several doctorial students at the University of Essex several years ago, this guide is a riot (in a nerdy kind of way). In Britney’s Guide to Semiconductor Physics, with Ms. Spears’ help, the boys provide an useful overview and introduction to semiconductors. Just in case you had an interest this weekend…
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The Basics of Semiconductors | ||||||||||||||
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Semiconductor Crystal Structures | ||||||||||||||
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Vertical Cavity Surface Emitting Lasers
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