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| DECEMBER 14, 1999 |
The Foie-Gras Model: Stuff Startups with Bucks and Hands-On Help for 120 Days
Cambridge Incubator's CEO tells how he launches Web businesses: A Q&A
Founded in July, 1999, by veteran management consultants Timothy Rowe and Andrew Olmsted, Cambridge Incubator is a startup itself that only got its first round of funding this week. Rowe, the company's CEO, was a manager in the e-commerce practice of Boston Consulting Group until May, when he left to start the incubator. Business Week Online's Margaret Popper talked to him recently about the company's tactics. An edited version of the interview follows:
Q: How much money does Cambridge have to invest in incubation?
A: Cambridge Incubator Fund has two different buckets of funding. We have capital we have just raised of $11 million, $10 million of which comes from [the venture-capital firm] Draper Fisher Jurvetson and Boston Consulting Group. From that, we will approve investments of up to $500,000, which is enough to get any business going on the Web and keep it in operation for the first six months to a year.
The second bucket is a $100 million fund that is being co-sponsored by Draper Fisher Jurvetson. Normally, we expect that the first $100,000 or so of funding would come out of the first bucket. The second bucket has no limits, [aside from the usual rule] of not investing more than 10% in any one project.
Q: What is Boston Consulting Group's role in Cambridge Incubator?
A: Often for a big company trying to build a Web presence, the answer is to build a Web site with a different name. You also probably don't want to build the site by yourself, as it's not your area of expertise. So BCG will be bringing its clients to us to build their Web sites. There are plenty of household brand names that would be happy to put $5 million to $10 million into an Internet business. BCG has made a big investment in us. We will share equity in the companies we develop with BCG.
Q: How is what you do different from what a traditional venture-capital firm does?
A: It's a different model from venture capital. We enter the business at an earlier stage, which allows it to grow more quickly. A venture capitalist is about writing checks. We do active incubation.
We buy 50% of each company, whereas a traditional venture capitalist might buy 33%. But we become the co-founders of the company. It's like starting a business with a friend. If you started a business with a friend, you'd probably split it 50-50. We're like that friend but a rich friend.
Q: I thought incubators offered startups things like office space and telephones. Is that what you mean by "active incubation"?
A: The old generation of incubators offered startup companies space. Then came the idealabs of the world, who offer space and money. [Net incubator idealab! was launched by Bill Gross in 1996.] The new generation of incubators offers space, money, skills, people, and services.
We offer our companies relationships with the leading professionals in venture capital. We have a relationship with Testa Hurwitz Thibeault, the law firm that advises on about two-thirds of the venture capital in the Boston area. Our audit support comes from PricewaterhouseCoopers. We have a relationship with a subsidiary of Fidelity called HR Logic, so that we can get favorable rates on group life insurance for our companies. It means that you can start a business here but be treated a little bit like you're a big company because we offer you our relationships with these providers.
We're not advisers. We're doers. When we take on a project, we put in about 10 of our own people in slots that include financial analysis, Web development, recruiting, marketing, network operations, and creative [which would be logo and the design]. This team is at the Web site for two months or so. They hire people from outside to replace themselves. Sometimes the entrepreneur has good skills in one area, so we don't put people there.
Q: If you are putting in the Web-development people for an Internet company, don't you risk taking away the company's original stamp?
A: Web development is classically outsourced to places like Sapient and IXL. It encompasses coding and writing of software. It's common for an entrepreneur team to sketch out "here's what we want the site to look like." A Web-development project manager understands the costs and timing of realizing the entrepreneur's vision. He'll know when he's dealing with a weak Web developer. If the CEO has never built a Web site, he will have a hard time managing Web developers, knowing when to call them on their [inflated time estimates].
Q: Do you expect to make higher returns than a traditional venture capitalist?
A: We expect to make more than traditional venture capitalists because incubators take significantly higher risks. Idealab has a 2,900% internal rate of return (IRR). A top venture capitalist might have a 1,000% IRR. In two months, we're going to have an IRR of 1,500%, but that's a little premature to take to the bank. We think the companies we're developing have well over $1 billion in value. We have four businesses up and running and three more that we're working on. We expect to invest in 10 or 15 by the end of our first full year of operation.
Q: Can you really get a company from plans to launch in less than six months?
A: Six months would be slow. We say four months to launch, with the site up and running. We start the clock when we have a "mature concept."
Q: Does that mean a working business plan?
A: Nobody writes business plans anymore. It's not something we would ask an entrepreneur to put time and energy into, although occasionally an entrepreneur will show up with one he has already done. The standard now is a two-page executive summary or a five-page PowerPoint presentation.
In Internet circles, nobody has time or interest in an entrepreneur writing up a 100-page document. After meeting with an entrepreneur for a couple of hours and reading a couple of pages on the idea, I can tell if it's a business we'll back.
Q: So what's a mature concept?
A: Usually the idea an entrepreneur comes in with is good. But often the ideas aren't buildable in a practical sense. When they come to us, they don't know the cost of achieving their goals. A lot of them think if the idea is good, somehow someone will discover them. That's not true. You have to create the buzz.
Time and time again I've heard about interesting business ideas from friends of friends who are starting up something. I look at the project, and I think, "Neat, but who is ever going to hear about them?" Most entrepreneurs don't have the sense of how to make their ideas buildable, how to get out and build awareness.
Q: How do you create the buzz?
A: Often the answer is what we call the "clever twist." For example, maybe the business is viral, like MCI's Friends & Family program. If you get them to sign up, your family will get a discount too. That's a clever viral approach. Other times, the answer is building a partnership with a big business.
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