BW Online | October 13, 2000 | Now, Incubators Are Huddling with Multinationals

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OCTOBER 13, 2000

MANAGEMENT

Now, Incubators Are Huddling with Multinationals
With IPO dollars hard to come by, startup hatcheries and big biz are teaming for "concepts, cash, and customers"

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Hatching, fostering, nurturing, guiding. For-profit incubators, those companies formed around the idea of spawning other companies, can't help but conjuring up maternal imagery. Yet their future of late has hardly looked warm and fuzzy.

Analysts and incubator CEOs agree that just a fraction of the 350-odd incubators formed in the heady days of the Internet bubble are likely to survive. Now, in a bid to weather the expected shakeout, a small but growing number of independent incubators are morphing into a new kind of startup assembly line -- one that's geared more to working with multinational corporations than with the entrepreneur off the street.

Dow Chemical's Oct. 9 announcement of its partnership with campsix, a San Francisco incubator, illustrates the trend. Along with Andersen Consulting, they're launching a new company, iVenturi, that plans to sell a Web-based product-development system targeted at other industrial giants. Another example: Santa Monica-based incubator eCompanies and Sprint PCS recently formed eCompanies Wireless, a new incubator focused exclusively on spawning startups that will offer wireless applications for businesses and consumers. Under the agreement, Sprint is providing $15 million in capital, as well as technology and research.

THE THREE Cs. Other incubators, including Cambridge Incubator in Massachusetts and incuVest, insist they're close to striking similar deals. Until the ink is dry, though, they're not naming names. "Right now, we have 15 or so major, blue-chip multinationals in different stages of discussion with us," says Richard Morgan, a venture capitalist who co-founded incuVest, a year-old New York-based company that has already raised $100 million to launch new technology companies in connection with corporations and universities.

For incubators -- generally startups themselves -- the benefits of working with large corporations are "concepts, cash, and customers," says David Wright, an analyst with Aberdeen Group Inc., a consulting firm. Clearly, all three are critical. The cash and customers allow incubators to share their risk. But it's the concepts that hold the most appeal.

Rather than sifting through hundreds of ideas from would-be entrepreneurs, the incubators aim to mine the intellectual property -- from patents to business strategies -- housed within many major companies. "There's a lot of fantastic ideas, not only within patents that are never used, but within the lab notebooks of R&D professionals," says Wright.

SOME "MUSTY" IDEAS. Not every patent or idea, of course, is promising enough to form the basis of a new company. "Some of them," says Morgan, "are pretty musty." But those backed by solid research -- and that serve a specific business need -- gain added cachet through an association with a brand name such as Dow. It helps, too, if the big company investing in the startup plans to be a customer, too.

That's the case with iVenturi, which will provide secure Web sites allowing engineers on different continents to work together without e-mailing bulky files back and forth. The goal is to shave 10% to 20% off the time it typically takes to develop new products. And with American companies spending $100 billion on product development each year, that time could translate into real money.

For Dow and other companies, an incubator's attraction is two-fold: speed and Internet expertise. Most high-tech incubators offer workspace, along with legal, financial, recruiting, engineering, and marketing services. The theory is that by taking care of such chores, startups will have more time to focus on their core businesses. Most incubators boast, too, of having a step-by-step system to create startups -- within six months to a year. In exchange, they typically claim a substantial chunk of the new company -- sometimes as high as 50% -- in equity.

CONFIDENCE BOOST. By contrast, it can take years -- a glacial pace in the Internet age -- for large companies to launch new initiatives. At the same time, Old Economy companies are realizing that intellectual property once held in a "bear hug" may now be worth far more on the open market, says Snehal Desai, director of e-business for Dow. "They're seeing people taking companies public at massive valuations and they're looking at their own technology and saying, 'Why can't we do that?'" adds Morgan of incuVest.

Some companies, of course, have managed to launch successful spin-offs. Others have created their own in-house incubators -- to generally mixed results, says Dinah Adkins, president of the National Business Incubation Assn. Two of the biggest potential pitfalls: not giving the in-house entrepreneurs enough freedom or funding to get their ventures off the ground.

Even so, at Dow, the decision to work with an incubator didn't come easily. The company spent a year looking internally for e-business ideas before looking for a partner. "[campsix has] given us enough confidence they can help us get from point A to point B faster than we think we could do it ourselves," says Desai. Eventually, he says, Dow hopes to take iVenturi public. The company is in the midst of its first funding round, which is expected to close at $6 million to $8 million.

TENTATIVE START. Still, there's little doubt that the arrangement is a trial run -- and a risky one at that. From the corporate side, campsix, like most for-profit incubators, lacks a long-term track record. So it's hard to judge whether CEO David B. Wamsley -- a veteran of Internet businesses -- and his team can deliver on their promises. And from the incubator side, there's the danger of getting bogged down in a culture clash with more cautious corporate execs.

Whether Dow will entrust campsix or another incubator with intellectual property again "depends on how the first effort goes," says Desai. "The expectation is that we need to monitor it," he adds. "We're going in there with our eyes wide open, knowing that we're working with a startup to help do a startup."

Indeed, the outlook for incubators in general is rather grim. Since the dot-com shakeout, the IPO market has dried up, leaving many incubators with little hope of reaping the quick returns they once eyed. Of the hundreds of incubators started in the past 12 to 18 months, only 30% will survive in their current form, predicts Wright of the Aberdeen Group. Others, he says, will transform themselves into venture-capital firms or real estate brokers, or simply disappear.

"People say to me, 'The incubator model is flawed,'" says Nicole Weber, a senior analyst with research firm International Data Corp. "My response to that is, 'Which incubator model are you talking about?'" It's too early to say whether those angling for corporate partners will be the ones that succeed. But given the diversity of the incubator field, the laws of natural selection suggests that at least some will adapt and survive.