Historical Perspective: At Least This Time Around We Don't Have Incubators For Incubators

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Attention Kmart Shoppers: Your Social Elements Are On Aisle 3

Silicon Valley and the Internet community in general gets a lot of criticism and jeering over some of the absurd ideas that turn into venture funded startups. People make fun of the business plans (or lack of business in the plans), the vowel-free company names and the wide variety of copycats that pop up any time a service gets even a smidgen of traction. But memory fades fast, it seems. Because no matter how silly some of today’s startups are, they’re nothing compared to the laugh-out-loud nonsense that was treated seriously less than a decade ago.

I’m not just talking about three massively funded pet food delivery services. Nor am I talking about blowing a billion dollars on home grocery delivery. No, I’m talking about possibly the most absurd idea to come out of the bubble years: Incubators for incubators.

Startup incubators are businesses that help startups get on their feet. They supply office space, human labor for things like legal and human resource expenses that are easily outsourced, and other services. In return they get equity in the startup.

The incubator model, which has been infinitely tweaked, can work. Some great startups came out of well known incubators like idealab, such as GoTo.com, which later changed its name to Overture and was bought by Yahoo for $1.63 billion. But for the most part incubators have been the punch line in bad jokes about the bubble, and deservedly so.

But they were hot in the late nineties, particularly off the back of perceived idealab success. So when, in 1999, a slew of startups decided to not just be incubators but rather incubators of incubators, it sort of made sense. At least, it made sense to Red Herring writer Sarah Lai Stirland, who wrote a masterful article on the flowering niche. The article is long gone but was preserved at Vault.com and I’ve copied it below for historical hilarity (I have no idea what the copyright status of this is, but if someone has a fit we’ll gladly take it down – but I won’t delete it from my hard drive, no way).

The article profiles not one but a whopping four “incubators of incubators,” or companies that would incubate companies that would incubate startups: Incubatorincubator.com, KnowledgeCube, InQbiz, and The Atlantic.

The article begins with “Jonathan Abrams has a cunning plan: capitalize on the incubator craze by starting an incubator of incubators.” (yeah, that Jonathan Abrams, who’s now the founder of Socializr). Everything that follows is absolutely hilarious.

An early quote from Abrams: “It used to be that after you sold your company to Yahoo (Nasdaq: YHOO) or Microsoft (Nasdaq: MSFT) for $200 million, you might start another company. But now that has become passe, and anyone with a glimmer of pseudo-success is starting an incubator.” When told about the other three incubators of incubators, Abrams said “Wow, I had no idea I had competition.”

Before you stomp on Abrams: he says it was all a joke and he was amazed Red Herring took it so seriously. He says in an email yesterday explaining the article “i was working on my first startup HotLinks, a social bookmarking company circa 1999, and was talking to an editor at Red Herring about HotLinks and he kept going on about incubators (which were a hot topic at the time) and I spontaneously made a joke that I was gonna start an incubator for incubators. This is typical nerd/programmer recursive/meta humor, like when I did FriendFeedFeed.com. anyways, some writer from Red Herring calls me about it and wants to write a serious article about it, so we went along with it as a joke, not really 100% believing they were gonna take it seriously. at least I think thats about what happened, this was a while back… the whole thing was pretty silly”

I believe Abrams, since his quotes are so off the wall. But the rest of the article is apparently serious. I’d highlight the best parts but, really, the whole thing is the best part. Just read it all.

Here it is:

Who will incubate the incubators?

Jonathan Abrams has a cunning plan: capitalize on the incubator craze by starting an incubator of incubators.

For-profit incubators are a form of training-wheels venture funding that are supposed to help novice entrepreneurs along before they receive larger sums from traditional venture capitalists. Idealab founder Bill Gross is seen as the pioneer of commercial Internet incubators, but investors tend to view them as nascent CMGI (Nasdaq: CMGI)s, the publicly traded venture capital fund that had its share value increase 19,541 percent since starting its venture activities in 1995.

“It used to be that after you sold your company to Yahoo (Nasdaq: YHOO) or Microsoft (Nasdaq: MSFT) for $200 million, you might start another company. But now that has become pass?, and anyone with a glimmer of pseudo-success is starting an incubator,” notes Mr. Abrams.

Part of the attraction comes from the business model: incubators routinely take 50 percent equity stakes in new ventures, and they also establish the value of the services that they provide their companies, according to research done by Ben Cary, a second-year student at Harvard Business School, for the Cambridge Incubator. On top of that, incubators can boost their valuations when and if they go public, since they can claim that all their companies work together to provide each other services and assets, increasing the value of the companies and by extension that of the holding company.

Without a trace of irony, the 30-year-old Mr. Abrams proposes to leapfrog that process himself by helping would-be business hatcheries beat their competitors. Mr. Abrams, who launched an Internet search portal called Hotlinks last September and who is funded by @Ventures, a subsidiary of CMGI, says that his incubator of incubators will help to speed up the whole process. He already has gone so far as to reserve the domain name Incubatorincubator.com, although he hasn’t figured out a schedule for implementing this idea yet.

“Incubatorincubator.com will be taking perhaps 5 to 10 percent of the equity of the incubators. This will in turn mean we indirectly get a stake in the companies those incubators incubate, since the incubators will take stakes in those companies, and we will have a stake in the incubators. This will provide us with a very large portfolio!” Mr. Abrams says.

THE RACE IS ON
Though Mr. Abrams’s idea sounds surreal, he isn’t the only that has it. Groups with names like KnowledgeCube, InQbiz, and The Atlantic are doing it, as well.

“Wow, I had no idea I had competition,” says Mr. Abrams.

He does, and his competitors are going global. A small group of financiers, working independently, are starting to incubate incubators around the globe by providing their own resources and packaging these resources with local and global technology partnerships.

In effect, they’re spreading the commercial model of incubation by teaming up with and training local management teams to establish their own incubators, which eventually will become nodes of global incubator networks. While bigger companies such as Softbank, CMGI, and Hong Kong’s Pacific Century Cyberworks are also busy setting up global venture networks, the deals being set up by incubators are typically smaller, ranging from $50 million to $500 million.

GOING GLOCAL
Each of the incubators has its own gimmick. KnowledgeCube is an eight-month-old New York company that calls itself an e-technology accelerator and aims to go “glocal,” which means making the most of both local and global business relationships.

“We’re really training these people to run local incubators,” explains Matt Bruck, KnowledgeCube’s vice president of corporate development. “So we incubate both technology companies and local incubators. We believe we have created the prototype for incubation.”

KnowledgeCube directly incubates technology startups in New York, Boston, and Seattle, but also is building satellite “Cubes” around the globe.

The local incubators will be set up like traditional venture capital funds in which KnowledgeCube is both an investor and a partner, says Mr. Bruck. As he describes it, KnowledgeCube incubates the local incubators in the traditional sense of incubation by providing them with the expertise, funding, and connections to get them up and running quickly. Other partners in the local venture fund/incubator will be local conglomerates who have the connections and expertise within those specific markets, Mr. Bruck says.

Mr. Bruck says that deals are in place for Cubes in Hong Kong and S?o Paolo, Brazil. The effort is so new that the company won’t disclose how much it aims to spend or who will be involved, since terms still are being negotiated and the intended executives have yet to give notice at their current jobs. But Mr. Bruck says that managers of the regional offices will have local business connections and American business experience (one is an investment banker, the other an entrepreneur, and both are currently living in New York).

KnowledgeCube’s management has good pedigrees. President and CEO Max P. Michaels was an investment banker at Morgan Stanley Dean Witter (Nasdaq: MWD) and a McKinsey consultant, while senior vice president of technology and operations Dave Tottle was most recently an executive at Lucent Technologies (NYSE: LU). Mr. Tottle, Mr. Michaels, and Mr. Bruck are all MIT alumni and have snagged Ed Roberts, an MIT Sloan School of Management professor and former partner and cofounder of Boston-based venture capital firm Zero Stage Capital, as the chairman of the advisory board.

NO GARDEN-VARIETY INCUBATOR
Sitting in his Hong Kong hotel room speaking on the phone with Redherring.com, John-Michael Lind is loath to call his startup, InQbiz, an incubator, but that is effectively what his business is — a global incubator of incubators. Mr. Lind prefers to call it a global network of incubators, though even then he dislikes using the term, saying it’s overused and abused.

“What’s happening is if anybody provides any portion of the range of services needed, they’ll call themselves an incubator,” he says in disgust.

For his part, Mr. Lind sees himself in the business of exporting and importing intellectual capital from various countries around the world to places where it’s applicable. For example, companies within the InQbiz network will have most of their IT support outsourced to India, where such support is cheaper than elsewhere in the world, while some of the business plans for the startups may be modeled after U.S. Internet startups. Like other incubators, his ultimate aim is to create a network between the various startups in order to share their knowledge, users, technology, and expertise.

InQbiz invests money in startups around the world and hooks international professional services and technology companies such as Sun Microsystems (Nasdaq: SUNW) and Oracle (Nasdaq: ORCL) up to local entrepreneurs. Like KnowledgeCube, it also will establish local incubators through strategic partnerships with local companies. Mr. Lind, an entrepreneur who in 1997 founded Strategic Partners, an emerging markets corporate finance firm specializing in telecommunications and finance, has so far established InQbiz incubators in Bombay, India, and Cape Town, South Africa. He was in Hong Kong to interview candidates to help him to set up an incubator there. He also has plans to set up an incubator in Singapore and to partner with local firms in Japan and Korea.

The local InQbiz incubators typically take a 50 percent interest in the incubated companies. Companies that are being incubated in InQbiz India include StrategicNewspapers.com, a sort of Verticalnet (Nasdaq: VERT) of India; eEngineering, a portal for outsourced engineering workforce solutions; Findstone, a business-to-business site for trading industrial stone; and SoulKurry.com, a portal for Indian women.

Mr. Lind expects most of these startups to complete IPOs on their countries’ main stock exchanges, rather than on Nasdaq. He anticipates InQbiz completing an IPO sometime within the next year to fund the growth of its network.

OVER THERE
On the other side of the world in Greenwich, Connecticut, a global asset management firm called The Atlantic is just gearing up to establish a global incubator of incubators.

The Atlantic, which just started a holding company called eMIT Capital (short for emerging markets technology), plans on taking a 50 percent stake in local incubators that it partners with. The markets that it’s eyeing include Latin America, Central and Eastern Europe, Russia, South Africa, and China. Since the managers were still fund-raising at the time, they declined to provide any more details about their plans.

But Scott Gordon, CEO of eMIT Capital and former president and CEO of ING Emerging Markets Investors, does say that with such low consumer penetration rates in emerging markets, the best opportunities are in the so-called business-to-business arena. Again, the company’s pitch to local entrepreneurs is its ability to provide seed capital, in addition to a global network of business connections.

All the activity surprises one person who’s prominent in the incubator business.

“Is there such an animal out there?” asks Alberto Saavedra, who sits on the board of advisors for a number of incubators, including Venture Catalyst in Santa Monica, California; Software Greenhouse in Barcelona, Spain; and Talentum in Buenos Aires, Argentina.

Incubating runs in the family: his wife is a taxonomies manager at Business.com, a company being incubated by the Jake Winebaum/Sky Dayton incubator eCompanies.

While making pizza at his house in Los Angeles, Mr. Saavedra says he’s been cooking up ideas for two such incubators of his own: one perhaps for IBM (NYSE: IBM) and another for the government of Uruguay. He claims individuals working for those entities have told him that they have large sums of money to invest.

“The point is to train management teams to start incubators, since there aren’t enough of them,” he says. “That’s my thought process — I haven’t thought that much about it.”

Meanwhile, he says that he’s also coined another new term for the incubator lexicon: the one-man incubator.

“For some reason, a lot of people who want to do startups come to me for advice, so I provide it in exchange for shares,” he says. “This is a bit of fun, so I’m doing it. Next week I might not care about other companies though, and I might start my own.”

Hmmm, self-incubation. Wonder what the market will think of that?

TROUBLE AHEAD?
The market’s reaction is key. While the current market turmoil doesn’t seem to scare any of the people to whom Redherring.com spoke, incubators — let alone incubators of incubators — have the most to lose, since the majority have little or no track records of success.

InQbiz’s Mr. Lind says that his confidence stems from his belief that incubation as a business model is a fundamentally new way of doing business, though a volatile market might mean slower expansion and less acquisition currency for the Internet companies.

“The emerging markets are tough after [Tuesday]; it’s like the tail wagging the dog,” he says, referring to Tuesday’s bizarre market volatility, which saw the Nasdaq Composite Index drop 575 points, or 13.6 percent, at one point, only to rally back to finish the day down less than 75 points.

Back in Mountain View, California, Mr. Abrams shrugs off the Nasdaq’s wild wobbles.

“It’s a just a blip,” he says.

Time, and the market, will tell.

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