This is a thought we have been mulling over ever since we attended the BBC Innovation Labs, and after reading
Sam Sethi's post on Incubation in Vecosys we thought it was time to put some thoughts down.
Since we set up
Broadsight we've worked with quite a few cutting edge startup companies, some more established technology companies, and people doing cutting edge work in larger companies. We've also chatted to many startups in the various UK events like FOWA 07, Open Coffee, Beers & Innovation etc.
The stories we hear have a number of very common threads:
- The propositions and their business models, albeit often in different sectors, are usually fairly similar, there are definitely comman "groups" of models.
- The platform requirements are also fairly similar (Web / CMS / Social net / Ad Server / Analytics)
- The attempts to get early stage funding are all depressingly similar - its very hard and time consuming - Angel Aggregation alone is hard, never mind getting the cash.
- By and large their requirements are fairly similar (even of the stuff they don't know that they need such as design for scaling) - space, support, senior management, service platforms etc
This would all suggest that an Incubation model has real benefits - centralised resources and support, an ability to aggregate those flighty Angels.
However, all (are there any left?) the UK Incubators in Web 1.0 imploded after the popping of Bubble 1.0, yet startups continued to start up - so what is wrong with the Incubator model? Now (and this marks us as fogeys I guess ) we were all around in Web 1.0, and knew of many of the Incubators in Web 1.0 in the UK, and some in the US.
Off the top of the head, the 4 things about UK incubators that (in our opinion anyway) doomed them were:
- In Too Late - most UK Incubators started far too late in the cycle, and this drove their behaviour - the other 3 failures I note below were largely driven by being in too late, and most were caught with their eggs largely unhatched. In fact the "in too late" seems to be a fairly standard occurrence in UK tech ventureland......it is impossible to get funding when the new markets are in early stage, and then there is "follow the pack" funding once markets are "validated" - ie everyone else is doing it already. There was a McKinsey study c 2002 that showed that even in the USA, the VCs / Incubators etc that entered after c 1998 all lost money (I can't lay hands on it right now, will link as soon as it is found).
- Excessive overheads - they were spending way too much - this is probably because too often the Incubation business models were predicated on taking companies off for an IPO pop too early (due to late entry). Endeth the Bubble, endeth the business model.
- Trying to pick winners. The big difference I noticed between the US and the UK was pithily put by Esther Dyson - in the US, they fund a lot of crazy ideas early. The role of the Incubator is to incubate and let the market pick. (Esther did note that in Europe, because funding is so hard, if you get it there is a more open road - a good reason to get in early in Incubation 2.0! )
- Poor risk / reward for the entrepreneur - in general the combination of valuation, ownership, interference by wishing to "add value" and justify the fees, foisting unsuitable senior execs on the companies too early (to get the IPO pop accelerated) etc etc made many entrepreneurs extremely wary eventually.
In the "post incubation" era we've taken a few startups to funding and also worked with a few companies left picking up the pieces from their "Web 1.0" startup hangovers, and the impression I am left with from Funding UK is (no doubt deeply unfairly) almost a dual mode behaviour:
Mode 1 (early days) - If its new tech, don't fund it - its too risky and hard. Would fail Flickr test (ie would these guys have funded Flickr). Result is that the Technology does not get out early enough
Mode 2 (bubble mode, when every other Funder is chasing the same stuff) - Fund anything that moves, including the nth Iteration of Flickr, and overfund it in the hope it will grow to be No 1.
To be fair, the funders we have worked with have in our view now taken these early risks, but it was sometime painful going - everyone wants a level of analytic certainty that just does not occur in the early days of products just (or in process of being) invented, for markets that do not exist.
These thoughts above were put down as a quick lunch starter , further thoughts/ comments were:
- On Incubator 1.0 from an old friend who was there - essentially his view was that it was inextricably linked with Bubble 1.0 - many of the people who were setting up Incubators were more interested in the bandwagon than actually creating great businesses.
- From
Mike Butcher's tbites - noting the Channel 4 program on Bubble 2.0. Though it was over the top, the raw material was definitely there!
Two further comments by people who were there first time around:
- Many of the people running the Incubators had never set up a start-up in their lives, they were typically financiers of some description or another who were fairly recently into internet technology. When things got tough, the only solution they seemed to have to any problem was to fire the supposed (ir)responsible party - even the CEO, and put in a new one of their choosing - often at exorbitant cost.
- The UK incubators couldn't provide the quality of advice and access that US players like Idealab could, and never really solved the access to funding problem, and in fact many of the other benefits of incubation could be fairly easily self provisioned once it became clearer what an early startup needed to do.
Nonetheless, there are some definite benefits to incubation environments. Our experience at the BBC Innovation labs and at various Mashup type events is that if there is a level of camaraderie and collegiate behaviour, and good facilitation, then ideas and plans can be accelerated fairly rapidly and blind alleys avoided.
