@LARGE By Scott Kirsner, Globe Staff, 11/6/2000
Bashing Internet incubators has become a participatory sport. It's less like badminton and more like rugby. Everyone wants to pile on, even if they aren't sure why.
''Incubators are for sick babies,'' one venture capitalist told me with a smirk earlier this year.
The headline in The New York Times last week read: ''After Dot-Com Flameout, `Incubator' Is a Despised Word.''
''Don't you mean Internet incinerator?'' my friend Robert snickered. ''All they do is burn money.'' The pummeling has gotten so bad that Cambridge Incubator, as of last week, was considering a name change.
''We're definitely at a low ebb in terms of the public's appreciation for incubators,'' says founder Tim Rowe, ''and the word `incubator' is in the trash.''
The leading candidate for a new name was Cambridge Labs, but perhaps since that sounded too much like the kind of place the doctor sends your urine sample for testing, Rowe decided to stick with the original name.
Howard Anderson has already abandoned the name YankeeTek Incubator in favor of YankeeTek Ventures, though he insists that YankeeTek's investment model didn't change.
''Other guys were doing things so stupidly that we wanted to distance ourselves,'' he says. ''The major problem was that it was amateur night.''
Semantic tinkering aside, other incubators are retrenching more dramatically. In early June, former Lycos CTO Ken Lang told me that he planned to invest $50 million to $100 million this year in starting 10 companies, most of which would spring from his own ideas, with his incubator, 100x. Instead, he has wound up transforming 100x from an incubator to a single operating company focused on peer-to-peer technology (think Napster).
''I've been very good at picking the right trends,'' Lang says humbly. ''I'm betting everything on peer-to-peer now.''
The grapevine has been buzzing for a month or so now with a rumor that Frank Selldorff's and Peter Cowie's Reach Incubator was history. Selldorff says that the grapevine is dead wrong, and that Reach has simply reorganized. Most of Reach's 50 core staffers were moved to full-time jobs at the companies Reach has been incubating, though six people who were focused on looking for new investment opportunities were let go, according to Selldorff. One company, GoToHR, was shut down, and another, PrintConnect, merged with another company - without a significant financial gain for Reach. The majority of the other 14 companies Reach started, though, are either presenting to outside venture capitalists now in search of further funding or have already been funded.
''We're going to play out the hand,'' Selldorf says. ''We're not looking at new business plans through the end of the year. When we've got [our current portfolio companies] out the door, we'll figure out what to do next - start another batch, or do something else.''
The Boston office of Idealab, which has just moved into the old Exeter Street Theatre on the corner of Newbury, and the I-Group Hotbank NE incubator in the Oliver Ames mansion on Comm. Ave., have both decided the best course right now is a steady one.
Ellen Roy of I-Group Hotbank seems to think it was convenient to be lumped in with the incubator group when everyone was saying nice things, but now she's careful to explain that her operation is really ''a full-service early-stage venture firm.'' That is, I-Group Hotbank invests in outside ideas rather than conjuring up its own (as Idealab does), and it doesn't have a big central collection of techies, recruiters, and attorneys. ''We've always had a small staff,'' Roy says, ''and we have the real estate. But we never saw that as the reason [we] were going to win.''
Instead, Roy believes in smart, patient investing.
''It was a beautiful, surreal time when it seemed you could start a company and take it public within 18 months,'' she says. ''But we've always thought of this as a longer-term investment. We said, `Realistically, we ought to be prepared for a more normal cycle.'''
That time is here: Companies need to prove the viability of their business models over four or five years. The market wants elephants, not fruit flies.
At Idealab Boston, they're about to launch their second company (the first was Refer.com, a partnership with WebHire), and they have several in the pipeline.
''Our approach is very labor-intensive and time-intensive,'' says Bruce Johnston, president of Idealab Boston. ''We've been doing the same thing for five years - creating companies. We did it before it was highly fashionable, we did it while it was highly fashionable, and we're doing it after it has been highly fashionable.''
Not all of these players will survive, of course. ''There were 500 incubator starts over the past few years,'' observes Rowe at Cambridge Incubator. ''There will probably be 470 closures.''
The incubator bashers would say Rowe's number is a little low. Some find it arrogant for a small group to try to start batches of companies rather than one company at a time. Others say that you simply can't attract the best entrepreneurs to an incubator environment, and that the slight economies of scale of launching multiple companies using a shared infrastructure don't make up for that.
But I'm more optimistic than most about the future of tech incubators and early-stage venture firms (like I-Group and YankeeTek) that take a hands-on approach to helping launch companies. In particular, I like Anderson's sharp instincts at YankeeTek - he'll often write a check before the end of a first meeting with an entrepreneur. Anderson has backed a good group of companies, including Broadband2Wireless, the new company cofounded by entrepreneurial wunderkind Ric Fulop.
I also like the strong, energetic team at Idealab Boston, although I wonder about the impact of the cult of Bill Gross - all ideas must be approved by Idealab's California-based founder - and the effect of the company's recently postponed IPO on employee morale and retention.
The message the stock market is sending: It wants companies to be more mature before they go public, with a clear idea of where the profits will come from. What the market isn't saying is that technology is no longer a powerful force in the economy.
There are plenty of opportunities still out there to use technology to change the way we live, shop, work, learn, and play - and turn a profit doing it. I happen to believe that some of the better-organized, better-run incubators (and the hands-on early-stage venture firms) will produce companies and attract entrepreneurs that can successfully chase those opportunities.
''You never want to be in the position of that patent inspector in the 19th century, who said, `Everything that can be invented has already been invented.' You'll just never be right,'' says Lars Perkins, Idealab Boston's managing director. I'm with him, and I think a handful of incubators will continue to play a role.
Scott Kirsner is a contributing editor at Wired and Fast Company magazines.
Incubator smackdown
