|BUSINESSWEEK ONLINE : OCTOBER 2, 2000 ISSUE|
More and more B-schools are starting ''business incubators'' to launch startups. Is it education or business? Well, it's both
It's not much to look at, more like a nuclear bunker than a place where businesses are born. There are no windows, and the fluorescent lights cast a dim glow on the concrete walls. ''If there were people being tortured with a medieval device down here, you wouldn't be surprised,'' says 29-year-old James Clark, who toils--and sometimes sleeps--in the space. But don't let the surroundings fool you. There's something less sinister going on in this dungeon, otherwise known as eLauncher, a business incubator started in April at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill.
Is this education or business? A bit of both, really. For their professors, Clark and Lapp's venture will provide a live laboratory for research. The pair are among the lucky few MBA students who get to spend part of their school experience starting a business. UNC didn't put up a dime in financing, but it did give them something much more valuable: access to free facilities and a rolodex full of contacts that they could have spent years trying to corral in the outside world. Competition for entry into incubators such as the one at UNC is intense. Clark and Lapp, for instance, were among dozens of students submitting some 18 business plans, and only five plans made the cut.
The UNC incubator is hardly unique. B-school hatcheries are a relatively recent but fast-growing New Economy phenomenon. The oldest, including those at University of California at Berkeley's Haas School of Business, Babson's F.W. Olin Graduate School of Business, and University of Wisconsin at Madison's School of Business, have been around for only about three years. Some, like UNC, provide facilities, mentoring, and contacts. Others, such as Wisconsin, invest as much as $100,000 in individual businesses. That's peanuts compared to the sums served up by venture capitalists, but still plenty of money coming from a university. Other schools, such as Babson's, will tailor an entire year's course work for student entrepreneurs who are starting a business.
So what are B-schools doing in the incubator game? Quite simply, they're keeping up with the times. The ultimate goal, unlike that of business hatcheries in the real world, such as CMGI Inc. ( CMGI) in Andover, Mass., and idealab! in Pasadena, Calif., is not to hit a home-run investment--or even necessarily make a profit. For them, the endgame is to lure the best students in an era in which the vast majority of B-school students say they eventually want to become entrepreneurs. ''We want to get rid of the tension between getting your MBA and starting your own business,'' says Robert Carraway, director of the Progressive Incubator at the University of Virginia's Darden Graduate School of Business Administration.
VC NIBBLES. For students, getting into an incubator is the opportunity of a lifetime, well worth the price of B-school tuition. Just ask Curt Szymanski, president and chief executive officer of UCLID Software, a company specializing in converting legal documents and land records into digital files. The company was launched in March, 1998, out of the
University of Wisconsin's then year-old Weinert Applied Ventures incubator. The school invested $100,000 in the fledgling venture and took a 5% stake. It's a good deal for Szymanski, who graduated last year.
Szymanski says he didn't enroll in B-school with the idea of starting a business there, but once on campus he realized he would have access to people and resources that would have never been available to him otherwise. ''It gave me a foot in the door,'' says Szymanski, whose company now has 25 employees. Says Wisconsin professor Ted Baker: ''It would take a student at least a decade to build the personal network and the resources that we provide to them in their first three months.''
Venture firms seem to relish the chance to get a first look at a good idea from B-school incubators, although the investments are so new that venture capitalists are loath to discuss them. Incubator companies tend to already have managers, board members, and some initial funding in place. Moreover, investors have the confidence that businesses hatched out of B-school incubators have been vetted by faculty members and boards of businesspeople, making it a good bet that they have potential. That contrasts sharply with the hundreds of business plans that just come in over the transom. ''By the time we get to see these ideas, they are pretty strong,'' says Andy Russell of East River Ventures, an investment firm focused on early-stage tech and new media ventures.
Russell hasn't yet invested money in any single B-school incubator startup. But he's warming up to the idea. East River Ventures is a seed investor in the Columbia Graduate School of Business' Entrepreneurial Greenhouse program, the incubator that the school launched last year. Such investors don't know which companies their monies go to, but say they're contributing to the creation of ideas. Russell is now in talks with several student-run businesses about making first-round investments.
HAPPY DROPOUTS. It's too soon to know which of the B-school incubator projects may become hits. The biggest success stories so far are those startups that have raised millions more than the few hundred thousand dollars of university seed money. Brightpod, for example, another UNC eLauncher venture, hopes to offer wireless Internet services such as instant messaging. It raised $5 million in funding this summer, partly on the strength of its association with the university. Typically, when an outside investor comes in, B-schools cash in their small equity stake, which often defrays costs of the incubator or even turns into a small profit to be reinvested.
Finding outside investors isn't just good for the students. It's good for the B-schools, too, because it helps them stay free of such murky ethical issues as investing in a business whose owner is still a student paying tuition. And what would be the B-school's role, for instance, if a student startup were to become ensnared in a legal battle? Business schools are still sorting out how much to invest, how big a stake to take, and when to steer clear of an investment altogether. Most of them already have policies prohibiting professors from taking stakes or board positions in companies that are run by current students.
One obvious problem that B-school businesses create is that the founders often become so consumed with running their fledgling enterprises that they don't have time to attend classes. To accommodate such students, some schools, like the University of Virginia, are allowing them to finish their second year in two years instead of one. Others, like UNC, are giving students the option to leave the program and come back to finish within a specified time period, usually three to five years.
UNC's Lapp and Clark count themselves among the happy dropouts--they threw in the towel on their MBA program in August. Both say that they will be missing some skills they would have acquired from an MBA program, but they're not sure they will ever go back to school if their business takes off. Still, those sorts of successful quitters are hardly a problem. One good success story could easily attract scores of applicants. ''If students don't see us as a place to pursue their dreams, then we are irrelevant,'' says B. Joseph White, longtime dean of the University of Michigan Business School, which runs its own incubator. That's why basement incubators will be sprouting up all across the B-school landscape in the months and years ahead. And as for hatching successful companies, the B-schools will just keep crossing their fingers.
By Jennifer Merritt in New York
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