Work Like It’s 1999: High-Tech Incubators

Work Like Its 1999: High-Tech Incubators
On the top floor of an ugly office building in Mountain View, Calif., a dozen entrepreneurial dreams are taking flight. Raissa Nebie, a 31-year-old former investment banker from Ivory Coast, is putting the finishing touches on Spoondate, her top-secret dating site for food lovers. Andrew Maguire, a recent Columbia University grad , is racking up listings for InternMatch, a Web service that pairs college students with paid internships. The airy space, with few walls, a panoramic view of Silicon Valley and a gaggle of first-time CEOs like Maguire and Nebie, is home to 500 Startups Accelerator, the latest high-tech incubator.

If all this seems a bit 1999, it is. Technology incubators, which invest in and nurture new tech businesses, proliferated during the last dotcom boom but then got a bad reputation in the bust, when firms like CMGI and eCompanies lost billions of dollars on countless start-up failures whose names have long been forgotten.
That’s one reason new incubators like 500 Startups call their businesses accelerators instead. These new accelerators tend to invest less money in each start-up and receive a smaller stake of the company in exchange. For example, 500 Startups trades office space, mentoring and up to $100,000 in capital for 5% of each new venture it backs. TechStars, which was founded in Boulder, Colo., gives companies just $18,000 over a three-month period before showing entrepreneurs the door. The old-school incubator Idealab , on the other hand, invests a minimum of $250,000 and keeps a 70% share of each firm.

But the idea is the same: accelerator owners offer seed finance and nurture early-stage start-ups with tips on everything from how to fine-tune their user interfaces to how to reach their target customers in order to boost chances for success. “It’s not like 1999, where anybody with a business plan could get $10 million,” notes Peter Relan, whose YouWeb incubator in Mountain View funds just two entrepreneurs a year with $100,000 each. “You want them to be hungry,” he adds.
Semantics aside, it’s clear that technology incubators are back in vogue. Although there are no reliable statistics on how many have opened in recent years, new ones are announced almost weekly. And they’re not just in Silicon Valley. They’re popping up in Chicago, New York City, Shanghai, even Bangalore, India. “There has never been a better time for Internet start-ups,” says 500 Startups founder Dave McClure, 44, a former PayPal executive and longtime investor in Silicon Valley start-ups. Thanks to lower costs for things like servers and programmers, he says, “we are able to take a larger number of bets with a much smaller amount of capital.”

Incubators are spreading their money around as thinly as possible for good reason. The tech landscape is changing so fast — thanks to the rise of social media, smart phones and the iPad — that investors who want a piece of the next big thing must hedge their bets. “It’s awfully hard to pick winners or losers at this stage,” notes equity analyst Colin Sebastian of Lazard Capital Markets. For every 10 investments, chances are only one will prosper.
But the proliferation of accelerators raises the question of whether a new dotcom bubble is brewing. Social-media giants like Facebook, Twitter, Groupon and Zynga are grabbing headlines for their astronomical valuations before even going public. And lots of the newbie businesses being funded by accelerators seem to have dubious prospects. Perhaps the most glaring example is the $150,000 recently offered to each of 43 start-ups currently sponsored by Y Combinator in Mountain View: the outside investors who put up the money had never even met with most of the individual companies they are now backing. “It’s very cool to be an angel investor, and checks are being written willy-nilly,” notes investor Chris Sacca.

Even though fewer total dollars are at stake per company, the old “spray and pray” investment mentality doesn’t seem to have changed much since the go-go 1990s. “There is too much capital chasing too few good ideas, and that is creating a bubble,” notes economist Umair Haque, author of The New Capitalist Manifesto. Many of the new sites being hatched feel like reruns of the first dotcom boom, even if they operate on smaller budgets. Y Combinator’s latest start-up, for example, is a browser-based fax service called HelloFax. Nifty? Yes. Visionary? No.

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