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Wait Mate, Should You Incubate?
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.


Something Ventured:
June 23rd, 2000

By Brent Holliday

"Try not to hate...
The edge serrate
A better rate
The youth irate
INXS, Mediate

Before Idealab!, before eCompanies, before eCom Park, before Divine Interventures and before Idea Park, there were technology incubators. In fact many of the 800 or so incubators that existed in North America before it became de rigeur to have your own "Internet accelerator" are non-profit, usually run in association with universities. These were mainly just facilities that could house technology companies that required special lab space and a common receptionist and/or photocopier. Creo grew up in one such "incubator" in Burnaby and then swallowed the building whole. Sonigistix and Synapse were born from a building at UBC that was almost Canada's first "incubator" in the new sense of the word. It was to have $5M fund and a board of mentors and advisers associated with it. The visionary that tried that couldn't raise the money from skeptical folks in 1994. So it became just a building. But today, breathless evangelists will tell you how to grow your company in Internet time using their special formula for cooking companies at one of fifty or so of these that have sprung up in the past 12 months in Canada.

Before I put a pin in the balloon of the fastest growing trend in technology company financing, I thought I'd shed a little light on my experiences "incubating" ideas and companies. Call it the "I've been there" defensive strategy for the onslaught of e-mail after this hits the street...

In early 1995, I was summoned by Terry Hui to the Vancouver Club for a lunch. He told me that he had some grand ideas for businesses on or using the Internet. Three weeks later, I was employee #1 at the newly formed company that would later become Multiactive. Essentially, what we did there for two and a half years was come up with ideas, staff up with technology and business development people and run like hell to create a new business. That is the model of "incubation" chosen by Idealab and eCompanies in the US. They have a staff that comes up with their own ideas and turns them into little hatchling companies with some funding and some direction and then some more people. We did not call it an "incubator" at the time, but Multiactive hatched about 8 of these companies in the time I was there (We bought Maximizer from the ashes of the Modatech bankruptcy, which gave us our biggest company... not really our own idea). A few have survived and are doing quite well. Witness the Brainium being vended into NTS in Maple Ridge recently and ecBuilder (Winner of BCTIA product of the year in 1999) being integrated into Maximizer's Entice as part of its e-commerce offering. Hey, it ain't Idealab, but it is doing alright.

In mid-1997 I came into the VC world to work mainly on the newly created Western Technology Seed Investment Fund. This was the follow-up to Seed Management which had invested in a few very early stage ventures in 1995 and 1996, including NCompass Labs, UWI and others. The reasoning for these funds was that with an underdeveloped angel community and the unwillingness of VC firms to invest in garage type start-ups, a large funding gap was created between friends and family financing and institutional money. The innovation that the WTSIF fund added was the concept of a Company Creator, an experienced start-up entrepreneur that would vet deals with the VCs and then either a) come up with their own ideas or b) jump in and run the earliest stage ventures that lacked experienced management. These Seed funds did not have buildings, just people. In the end, very few original ideas were even tabled at WTSIF, because too many deals were coming in over the transom to have any time to think. So, minus the building, WTSIF was an "incubator" like many of the new breed that take ideas from the outside, attracting entrepreneurs with ideas at the earliest stages. WTSIF has been very successful, spawning Audesi, Soft Tracks, NxtPhase and others, again, without the building and the instant company support staff.

Now, I know what you're saying: The New Economy has really caught fire in the past year and half and that the new style of incubator is focused on these companies, not the standard fare technology companies that WTSIF funded. Well, we'll get to that in a minute.

Here's the fundamental problem with incubators that has plagued seed stage investing since, well, forever. Starting companies is hard. Really freaking hard. No amount of tutoring, mentoring, advising, strategizing, housing or administering can make up for the random chaos of a start-up. Learning by doing is the only way to get a company aloft. And doing means doing it 100% of the time.

I will paraphrase a conversation with a successful technology entrepreneur who is running one of these incubators today: When you succeed at germinating and growing a company by your own hand that is successful, you think that doing it again is simple. You look back and acknowledge that it was hard, but it will be easier the next time because of what you have learned. You kind of feel like Superman and go and do something like start an incubator. Then you realize, "Holy S__t, now I'm trying to start eight of them at the same time." The fact is that you don't feel the same ownership, because it isn't yours and in the end you don't pay as much attention as you should.

The Canadian (and US) media has lifted the exalted incubator to frightening heights. It's the new new thing, so in a way its understandable to highlight the trend and focus on the positive outcomes. What about the failures? Has anyone interviewed the entrepreneur that has been shown the door at one of these places? I have. And here's the poop. After being assured of the access to the mentors and principals associated with the incubator on a daily basis before signing half of your company over (trading value for value, right?), one entrepreneur got 15 minutes a week from the key people. How much do they really understand about your company and what it needs to accelerate, when you get 15 minutes? And they are right down the hall! Sour grapes from an exitee? Maybe. But when you hear it four or five times, even from companies still in these incubators, a trend is forming.

Here's the other thing about these physical location incubators: They are functioning companies looking to make a buck on real estate and services, not the non-profit incubator of yesteryear. Typically, an incubator invests money from a separate pool of funds in your venture when they welcome you through the door. Then, they ask that you pay the incubator company rent and your share of overhead. Then, they strongly suggest that you use their web development team (and pay them of course), their marketing communication department is at your service (for a fee) and their recruiting department is happy to serve (at a cost). So, it's like a shuffle of money from one hand to another. Other than your salary, most of the money goes into their company. (This is merely an example and not all incubators work this way, nor do all of them require that you use their own service. But check out how it works before signing up).

The whole idea of accelerating neophyte companies in Internet time is being challenged. Quite simply, you can't accelerate learning. Presumably, incubators that accept entrepreneurs and their ideas from the outside (as opposed to generating the ideas internally) can add much more value to the entrepreneur that lacks a lot of experience. I mean, if the person has three start-ups under their belt, why would they go to an incubator? So, fundamentally, the incubator is saddled with entrepreneurs on a learning curve. At WTSIF, we had the same issue. Most, if not all, of the people we funded were first timers. No matter how much you offer, in terms of outsourced services and advice, the person still has to grapple with learning the ropes. You can't get around it.

Some new funds have tried to shed the "incubator" label, but have structures that make people perceive them in the same light. These are the publicly traded investment companies like CMGi and ICG. They are not incubators in the sense that they 1) don't invest at the seed stage, typically and 2) they don't have a building. What helps people get confused is that they tout the "accelerator" components, like IT help, recruiting relationships, strategic marketing groups. These folks are just VCs with a different way of raising money. All VCs want to "accelerate" companies through their networks and affiliations. It's easier to do with a complete management team, business plan, finished product and a customer or two. It's not easy to accelerate a company, New Economy or not, when it is at its earliest stages.

Don't get me wrong, incubators are here to stay. They are the new breed of seed fund. In the US, they have filled a vital funding gap where VC funds have become too large to invest $250K to $1M in a garage type start-up. Which is funny, because VCs used to invest at that stage all the time. Now they can't do the deal unless US$5M can go in from their fund. In Canada, the VCs have their own seed stage allocations. In BC, Ventures West, WOF, Smart Seed, Discovery and Greenstone have all set aside some funds for the earliest stages. This makes the delineation in our market a bit fuzzy. As I alluded to earlier, WTSIF did a reasonable job investing in early stage first time entrepreneurs. I bet that the incubators will have a similar track record. I don't think that they will be more successful, though. There's no magic potion. Just one man's opinion, right?

Random Thoughts –
- BC ESTI - The Early Stage Technology Index jumps again to 7 out of 10. Pivotal bought Simba, making some investors and employees happy after years of hard work. The BCTIA awards generated some positive publicity for the technology industry. More and more experienced entrepreneurs are starting new companies and making the rounds for money. And the market has come back to life. All in all a good month and, I believe, a bright summer to come.

- Dotcom e25 announced by the Globe and Mail - This was a great promotional piece trying to highlight some of the successes of our new Internet industry. We need much more of this. However, I simply must comment on the fact that the number two dotcom in Canada, according to Bain and Company's highly scientific rating system, is none other than Book4Golf.com (you guessed it, "incubated" by eCom Park). Hoo boy. I thought they said that these were Internet companies that would be around in 5 years? And the Vancouver representation was Bingo.com, which is in Los Angeles, Onvia.com, which is in Seattle, and Medbroadcast.com, which is actually here. If the e25 was only web destination sites for information or commerce, fine. But they touted Bid.com's move away from consumer auctions to selling software and services for B2B auctions. That means that they are not a destination site anymore. So why isn't ecMarket in there? They are doing the same thing, only better. Overall a good attempt and my gripes are small. But please try and make it more than a contest as to who's PR team is better.

- New VCs in town - New faces for the dartboards of disgruntled entrepreneurs. David Eisler just joined Banyan Private Equity from Scotia McLeod. David and I consulted together many years ago under the Propeller Head banner. You remember us don't you? Feel free to bombard him with business plans. Zahra Mamdani and Rolf Dekleer started at WOF over the past few months. Send twice as many plans to them. They can handle it.

What Do You Think? Talk Back To Brent Holliday


Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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