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Incubator overload: Are start-ups that help start-ups facing a shakeout?

Thursday, August 10, 2000

By Bob Starzynski, Post-Gazette Staff Writer

Of the six true technology incubators in the Pittsburgh region, only one is more than a year old. And that local granddaddy of the industry just hit its second birthday. Talk about being on the cusp of something new.

 
    A guide to local incubators

 
 

Wait a minute. Technology incubators? There's nothing new about that idea. Such facilities, which provide a nurturing environment for young tech companies, have been around for years.

But not here.

In the past two years, the concept of technology incubation has been redesigned, rejuvenated and rediscovered. A sudden flood of the market occurred nationally as these facilities began cropping up daily elsewhere. Then, suddenly, the craze hit Pittsburgh earlier this year. And the new breed hit the local market with force.

According to the National Business Incubation Association, these facilities are cropping up at a rate of nearly 20 per month nationally, with some 800 in operation.

But now, just months after the craze started, incubators quickly are becoming the subject of doom-and-gloom predictions by naysaying market observers.

This is how it happened.

The good old days

The first technology incubators were created more than 30 years ago by universities and state-run organizations. They were cheap office facilities where start-up companies -- especially those in need of biotechnology lab space -- could hole up and conduct research until they were ready to stand alone.

These facilities were generally nonprofit, meaning it didn't matter much if incubating companies succeeded, as long as they could pay their modest rent. In the fast-paced business world, incubators were often seen as black holes -- companies that went in with much promise seemed to just disappear after a while.

Still, the old-style incubators did generate some early New Economy successes, such as Internet service provider Mindspring, which grew out of an incubator tied to Georgia Tech University in Atlanta. But most of the companies that succeeded from such programs still ended up below the radar screens of Wall Street and the general public.

By the early 1990s, government and university officials, corporate leaders and the media began to question whether these incubators produced enough success stories to justify their funding.

Meanwhile, the Pittsburgh region began generating good entrepreneurial ideas in the university community, and those ideas were spun out into stand-alone companies that usually took office space in Oakland or Downtown. But there were no incubators tied to the universities or funded by the state.

The closest thing Pittsburgh had to an incubator was the troubled Ben Franklin Technology Center of Western Pennsylvania, which provided some financing and professional services support, but no incubation space. That center has since been recast as Innovation Works, and is still a part of the state's Ben Franklin network.

Mr. Gross to the rescue

In 1996, an entrepreneur in Pasadena, Calif., named Bill Gross breathed new life into the concept of a technology incubator.

Gross, who created the now-famous idealab! that year, decided to apply some modern-day, for-profit thinking to the incubator model.

He created companies from internally generated business plans, rather than waiting for existing companies to come to him for cheap space.

He took an equity stake in his incubatees, rather than just collecting a rent check.

He provided more than office space and administrative services. Legal and accounting service, business development services, venture capital assistance, strategic partnership development and executive recruiting all fell under his bailiwick.

He networked his incubatees together, establishing sales channels, marketing relationships and technology development collaboration among them.

By last year, Gross had become a household name in technology circles. He had created and incubated such companies as eToys, GoTo.com and Tickets.com, and these companies were making him money hand over fist.

Copycats came from every direction to help Gross reinvent the incubator model.

Have cake and eat it too

Each incubator touted that it could provide its companies with every service imaginable. And each claimed to have some type of differentiator.

One may have a venture capital fund as part of its operation. Another may have a relationship with a large technology company. Yet another may have a virtual facility and offer no office space at all.

As idealab! became an overnight sensation, incubators emerged in every form. Big tech companies created their own in-house incubators to spawn new businesses. Successful entrepreneurs created their own facilities to help other entrepreneurs by applying their personal experience. Young college graduates started incubators to tap the start-ups coming out of the university community.

All were lured by the prospect of generating great wealth while helping others with a broad array of services.

Pittsburgh, here we come

Last year, the Bill Gross phenomenon hit the local technology community when twentysomething brothers Tommy and Henry Wang evolved their information technology development shop into iventurelab.com, an incubator in Oakland.

The brothers Wang, both Carnegie Mellon University graduates, took a rather vanilla building on a quiet side street, put a ping-pong table in the lobby and started churning out ideas for start-ups. A little over a year later, iventurelab has six incubatees and is looking for a much larger facility.

"Pittsburgh is a little behind, but in the past year alone, so much has changed," Henry Wang says. In that time, five other incubators have either opened shop locally or announced plans to hit the market.

In December, several New Economy vets from Lycos and Deloitte & Touche rolled out Internet Venture Works to serve incubatees in Boston and Pittsburgh. They have touted their numerous relationships in the professional services field and their focus on the segment of the Internet market that embraces the transition of the traditional brick-and-mortar companies to the New Economy.

This Spring, three others hit the market.

In Sarver, Butler County, @VentureWorks bought a shell of a public company to use for public financing and bought what it considers high-powered technology development and implementation businesses. In the university community, a group of young CMU grads started Zlingshot to help other entrepreneurs. The organization just signed on office space in Green Tree and plans on hosting a major entrepreneurial bootcamp for the college crowd this fall. In the biotech space, LaunchCyte is putting the finishing touches on the region's first incubator with traditional lab space.

And in the coming weeks, another incubator named Venture Beginnings, will roll out its operations locally.

LaunchCyte CEO Tom Petzinger, a former reporter for the Wall Street Journal, believes that there is room for all of the incubators that have emerged recently. "There is a place for experience in this business," he says. "But there is also a place for youth and exuberance and for people who are breaking the mold."

Not so fast

Just as the Pittsburgh incubators are getting a foothold, the new business model is coming under fire.

So many incubators have flooded the national scene in recent months that they appear to be stepping on each other's toes. And Bill Gross, the idealab! genius, has seen his prized eToys.com experience a public market freefall in the last nine months, as the company's stock price has gone from $86 a share to close at $4 yesterday.

The fear among new-model-incubator naysayers is that too many of the recent incubator arrivals are run by executives with little entrepreneurial experience, not to mention little business experience, period.

Charles Rutstein, an analyst with Forrester Research in Boston, was quoted recently by Bloomberg News as saying, "Here comes the shakeout. Incubator investors will lose interest, and unfocused incubators will die."

Henry Wang, the iventurelab chairman, does not disagree about a shakeout nationally. But he thinks that the existing local incubators can all find a successful niche in the market. "In a way, it does hurt if you lack experience," he says. "But if you go out and quickly prove yourself, that doesn't matter." Wang sees his relationship with the other Pittsburgh-area incubators as collaborative, not competitive.

LaunchCyte's Petzinger concurs with Wang, but is not quite as rosy.

"There is no doubt that there will be an incubator shakeout," he says. "That's natural in all young industries. This rate of formation that we have seen can't be sustained.

"Those that will last will be those who can add the most value to fledgling enterprises. Building a network [for incubatees] is the most important part. This is the point a lot of incubators will fail on."

Many of the new-version operations are shedding the "incubator" name in favor of such alternatives as "accelerator" or "ignitor," or even going back to calling themselves professional services providers. They don't want to be a part of the cliche that incubators have become.

Petzinger, however, is not shy. "I don't care if the label has become unfashionable," he says. "I'm not afraid to say we're an incubator."



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