From out of the ashes
Tod Maffin has a piece covering the rise of the new incubator. With Boris and Danny starting a new incubator, Bootup Labs and others talking about creating new modern incubators. Does anyone remember CMGI? Idealab? ICG? I like to remember them circa 1999 in the views of The Industry Standard, Red Herring and Business 2.0 not during the hard times after the dot-com bust. While success like Paul Graham’s YCombinator and its StartupSchool have made us forget about the first generation of internet incubators. But I was surprised to see that all three were still around in different capacities.
The services offered by companies Idealab sound familiar:
In addition to capital, Idealab provides a full range of resources to infuse start-ups with the support they need to rapidly introduce innovative products and services. Resources include office space and the accompanying office services, development and technology, graphic design, marketing, competitive research, legal, accounting and business development support and services. In addition, Idealab provides advice on strategy, branding and corporate structure.
Sounds like the value-added services that Mark Evans and I have talked about. It all reminds me of a former company founded by the now CEO of Mozilla. Reactivity, before it became the SOA, Web Services, XML Firewall company that was acquired by Cisco, it was a startup factory. There was a services business where designers, developers, product managers, architects learned the skills and culture of rapidly designing, building and shipping software products. And there was a Ventures business focused on “incubating and developing bleeding edge market ideas and technology”.
It was a very simple model. Use the consulting services business to educate your “founders” about the process of designing, building and shipping software. Look for difficult, real-world problems that can be solved by software solutions that you can invest in as a venture process.
- Consulting Services – This is essentially a linear scale business. You can charge more per hour (however, hourly rates are generally determined by market forces). You can work more hours, but honestly there are labour laws even if they don’t seem to apply to lawyers or management consultants. Or you can hire more consultants, but eventually you’d be Accenture.
- Equity for Consulting Services – Take a portion of your fees in equity from your client. This requires additional due diligence, you need to understand your client, their business, the opportunity and their financials. You also need to understand the IRR of your own business, and the tradeoffs of the cash necessary for keeping the lights on versus investing in your own activities. The biggest challenge is getting the amount of equity to cash payment correct.
- New Venture Creation – Take a founders stake in the companies your employees spinout. You create an internal venture process that evaluates ideas, technologies, and opportunities. At Reactivity, this was a combination of technology investigation and Entrepreneurs-in-Residence working at building the marketing and business plans around emerging businesses. Like any venture you need to understand valuation and returns.
This sounds very similar to the model being used by Infusion Angels and the reformed Brightspark (see StartupNorth for additional details). Instead of a fee, paid to an incubator, you earned you’re value by providing consulting services. Same intent, different execution.
Incubators command a 25 percent to 40 percent stake in a company, according to a study conducted by Mr. Hansen and his colleagues. And many of the incubators in the study required a fee along with an equity stake. – Laura M. Holson, NY Times
There have been a number of changes in startup costs, new math . Joe Kraus talked about the changes in 2005. It makes it possible for firms like YCombinator to do a “standard deal [that] is $5000 + $5000 per founder, for 6%ish of the company”. Small investments. Run programs like Startup School to educate your young entrepreneurs. Then look for quick exits, acquisitions are preferred (Reddit, Zenter, Parakey). The question for me is about what does the exit market look like for the incubated companies in Canada. Is it the TSX Venture Exchange? Are they going to have to run profitably? Can these companies pull a Flickr?