Downturns Aren’t Deterring New Incubators
“Dot-com” companies may be falling out of favor, but that hasn’t stopped legions of would-be Internet moguls from launching business incubators to create Internet start-ups.
Consider Don Speer. Two years ago, the mild-mannered businessman was running Inland Entertainment, a consulting firm that helped the Barona Band of Mission Indians run a casino in eastern San Diego County. Then he decided to take a different kind of gamble.
Speer launched a series of online casinos. He hired a team of Web developers and was so impressed with their work that he bought their entire company. The gambling sites didn’t make enough money to survive, but he got hooked on the start-up experience. He bought a technology management firm, hired an Internet consultant, changed the company’s name to Venture Catalyst and set up shop as an incubator. Today, Speer’s incubator has 13 start-ups underway, and it has pumped about $10 million into the effort so far.
“What we’re doing today is the same as what we’ve always done--provide venture services to people who need assistance developing their dreams,” Speer said, lounging in the brightly painted meeting room that passes for a corporate boardroom at Venture Catalyst’s San Diego headquarters. “This is way more fun.”
Speer isn’t alone. Southern California is now home to a few dozen Internet incubators launched by consultants, entrepreneurs, venture capitalists and even a church near downtown Los Angeles. Many of them seem to have been inspired by Bill Gross’ Pasadena incubator Idealab, which gained national fame for hatching online retailer EToys, Web search engine Goto.com and free Internet service provider NetZero.
Gross is often credited with inventing the concept of an Internet incubator. Four years ago, he turned an empty warehouse into a dot-com factory. His start-up companies get help with accounting, payroll, Web site design and other business essentials, plus seed capital and a place to work.
Today, Idealab’s seven publicly traded offspring have a combined value of nearly $5.2 billion.
Along the way, Idealab made it look so easy that it inspired more than a few copycats.
“I can’t tell you how many people I get e-mails from saying, ‘I want to start an incubator,’ ” said Rohit Shukla, chief executive of the Los Angeles Regional Technology Alliance, a nonprofit group that nurtures dot-coms and other technology companies. “I don’t answer them anymore.”
Blueprint for Self-Sufficiency
Incubators have been around for decades. Historically, nonprofit incubators were built by government agencies and universities interested in creating jobs and commercializing inventions. The blueprint is for start-up firms to become financially self-supporting within about three years. According to industry research, 87% of incubated firms nationally are still in business.
Today, roughly 15% of the nation’s 800 incubators are in business to make money, according to the National Business Incubator Assn. in Athens, Ohio.
And they are big business. CMGI, a publicly traded Internet incubator based in Andover, Mass., that owns 16 companies and has invested in about 50 others, has a market value of $17.1 billion. Internet Capital Group of Wayne, Pa., which owns interests in more than 50 Net firms, has a market value of $10.4 billion.
The phenomenon isn’t limited to the United States. In Vancouver, Canada, Christine Cerisse is transforming a real estate firm called North American Resort & Golf into a holding company for Internet businesses.
Cerisse has 20 years’ experience in real estate development, so she’s starting a pair of real-estate-related sites where Web surfers can look up recommended real estate agents in cities across the U.S. and Canada.
The sites have developed a system for conducting customer satisfaction surveys, mapping the results geographically and posting them online. Cerisse plans to use that system to create Web sites that offer referrals to other professional services.
On the Road to Moguldom
Part of the lure for some people is the perception of easy money. Early incubators benefited from a “Gold Rush” mentality that prompted investors to pour millions of dollars into untested business plans, hoping that a few of them would become big hits. Now some incubator operators, like Cerisse, are counting on a one-size-fits-all approach to starting companies to keep costs down and investment capital in their coffers.
The incubator model also appeals to would-be empire builders. Launch a start-up and you’ve got one company in your portfolio. Build an incubator and you could be on your way to moguldom, Shukla said.
For most of the last 10 years, Barona Casino was Inland Entertainment’s only customer. As Venture Catalyst, the company still relies on the casino for 65% of its $15.2 million in annual revenue. But now it also has on site five start-ups, including RapidCare.com, which operates a Web site linking asthmatic children with physicians, and Ultrexx.com, a software development firm that relies on a cadre of programmers in India.
As new companies move in, walls are repainted with bold colors and logos to set them apart. Eight more portfolio companies are off-site. VCat also has offices in Santa Monica and Rancho Santa Margarita and a facility being developed in West Los Angeles.
Venture Catalyst receives about 200 business plans a month and is also developing some of its own ideas, such as a build-your-own Web casino planned to launch this fall and an online vitamin exchange, said Sanjay Sabnani, VCat’s president and chief operating officer.
But the company’s foray into dot-com territory has come at a cost. Its annual profit dropped from $2.4 million in 1998 to $790,000 last year, and in the first three months of 2000, the company had a net loss of $614,000 on revenue of $3.5 million.
“Without question, our expenses are higher,” said Speer, who owns about one-third of the company. Revenue is down because the company is accepting equity stakes in companies instead of payments in cash. Venture Catalyst’s stock, which hit a high of $12.75 in February, has since nose-dived along with other Internet stocks. On Friday it closed at $5.94, up 69 cents in Nasdaq trading.
Still, Internet companies are relatively inexpensive for an incubator to develop, said Guy Kawasaki, chief executive of Garage.com, a Silicon Valley company that helps high-tech start-ups get on their feet. “To start a steel mill you need hundreds of millions of dollars, and for an Internet company you just need hundreds of thousands of dollars,” he said.
Inner-City Aspirations
Not that cash is always easy to come by. First AME Church in Los Angeles has spent five years raising money to open an incubator in its neighborhood, near USC. In 1997, the church’s assistance corporation, FAME Renaissance, used a grant from the city of Los Angeles to buy an 80-year-old brick building once owned by Pacific Bell for $300,000.
That was followed by three years of fund-raising to pay for $4 million in renovations. The incubator is on track to open in November and will ultimately house 30 companies.
For the Rev. Mark Whitlock, FAME Renaissance’s executive director, the incubator’s mission is not to cash in on Internet stock offerings but to create jobs for a community that lost 60,000 of them after the 1992 Los Angeles riots. The incubator could also help give a poor community greater access to computers and technology.
“We’re not looking for a quick buck,” Whitlock said. “We’re building a long-term relationship.”
FAME Renaissance staffers spent several years visiting and studying incubators before selecting a focus for theirs. After learning that the church’s neighborhood is home to about 100 entertainment firms, they decided to mix that with technology and incubate multimedia companies, said Linda Smith, FAME Renaissance’s director of business resources.
“We didn’t just come up with this because it was a sexy thing to do. We’ve been methodically pulling together our resources,” Smith said.
When the renovations are complete, the FAME Renaissance incubator will deliver high-speed Internet connections to every desktop, offer video conferencing and distance learning facilities, and house a computer lab. That’s in addition to basic services such as business coaching, access to copy and fax machines, and loans of $1,000 to $500,000. Another arm of FAME Renaissance serves as a venture capital fund, which can also invest up to $1 million in start-ups that are given space in the incubator.
If launching an incubator looks easy from the outside, Whitlock and his colleagues have certainly learned otherwise. According to Barbara Harley, co-chair of the Pacific Incubation Network, an association of West Coast incubators based in San Jose, their experience is the rule, not the exception.
“It’s never as easy as it looks,” Harley said. “It takes a knowledge of the business cycles, it takes an incredible Rolodex, it takes an ability to build teams and to invigorate people.
“It’s almost like being the CEO of four or five companies simultaneously.”
