Can You Really Incubate the Next Big Thing?

Now that we are smack in the middle of a technology up cycle, it isn’t really a surprise that we’re beginning to hear more and more about “incubators.” If you’ve been around the block as many times as I have, you may remember the sharp increase in such experiments about a decade ago. At that time, if a group offered free office space, bandwidth, other perks (including access to capital) and facilities, it was called an incubator. According to a Harvard Business School study, during the dot-com boom, there were 350 incubators.

As the dot-com boom progressed, “incubator” became a much-maligned term. Thus, the idea of a metacompany was born. It was a concept coined by Anil K. Gupta, then a visiting faculty member in the Stanford (University) Technology Ventures Program (and otherwise a professor of strategy and global e-business at the Robert H. Smith School of Business at the University of Maryland at College Park). I wrote about it in the November 2000 issue of Red Herring magazine:

It aggregates the key features of an incubator, a VC firm, and a diversified company. Like a corporation, a metacompany has a CEO and a corporate management team and maintains a significant, but less than 100 percent, ownership stake in a number of ventures, whether they remain closely held or later go public. But unlike VCs and incubators, metacompanies focus on a single area of business.

This morning when I read about Firestarter Labs, a new venture from Craig Walker, who was one of the co-founders of GrandCentral, the service that became Google Voice, I had a feeling of deja vu. In my article from 2000, I mentioned Comstellar Technologies, co-founded by telecom-industry veteran Sanjiv Ahuja (currently CEO of LightSquared, a wireless broadband company), as an example of such a metacompany.  (Walker’s new venture, funded by Google Ventures, will focus on mobile.)

Like many companies and ideas born during more exuberant times, the concept of the metacompany didn’t work out. At the time, I thought it would. I even convinced my then-editor, Jason Pontin  (now editor of MIT Technology Review) to let me write the story.

Like everyone else, I was caught in the optimism of a bubble and at that time almost anything seemed possible, and new business concepts were perfectly plausible. As I often say, in hindsight we are either geniuses or idiots. In this case I turned out to be an idiot. And frankly, I was naive and needed a decade of life kicking me in the butt to understand the difference between what’s essentially a cool idea and what’s a real business.

An Idea Guy

Maybe it’s life, experience or simply a case of once bitten, twice shy, but I’m not a big believer in so-called thought experiments. I like companies with founders who have one idea, focus on it, obsesses about it, and would die for it. Idea banks, R&D labs, or whatever the hell you want to label them, just don’t have the concentrated intellectual horsepower and business talent to make a go of it.

Still, I didn’t want to let my own silly ideas get in the way, so I decided to ping a guy who knows a thing or two about incubators. I called Bill Gross, currently a thorn in Twitter’s derrière and the guy behind the company that started the incubator craze: IdeaLab, a Pasadena, Calif.-based R&D lab of sorts. IdeaLab is 15 years old and has created over 75 startups, a few of which have turned into billion-dollar companies. What I wanted to know from Gross was what worked for him and IdeaLab. He said:

Our advantage as an incubator comes from the fact that we generate our own ideas internally, so that even as we share a 30 percent stake with management and employees, the Idealab stake starts at 70 percent, and there is lots of room to get diluted after multiple rounds of financing.

In his opinion, “It’s very difficult to build companies in today’s competitive environment (or any competitive environment) with regular success.” Why?  Gross explained that the challenge his company has and will always have is people. He said IdeaLab and his ideas are limited by finding the people who can take an idea and an early product and turn it into a business. Yep — not money, not space, not bandwidth or infrastructure — it’s people. It’s true for startups and it’s true for incubators as well. “Our biggest bottleneck is finding the right people to turn ideas into companies,” he said.

“Hired guns don’t really work in early stages,” Gross said. Folks you bring in need to turn these ideas into their own ideas, which is a double-edged sword. “You cannot be entrepreneurial if you are not passionate, but if you turn too far away from the original idea, then it is a problem as well.” This delicate balance is hard to strike and the new idea factories are going to find out the hard way.

Can You Incubate a Facebook?

When I asked Gross that question, he paused for a minute and said perhaps a founder-lead giant like Facebook or Apple is a rare event, but it’s possible to build big companies inside an idea lab, pointing to pay-per-click pioneer, (acquired by Yahoo), CitySearch, Internet Brands and CarsDirect.  But even Gross admitted it’s not an easy process.

“I don’t think we have cracked the nut,” Gross joked. “It’s very hard to make our model work — I wouldn’t even say we have a model that works perfectly repeatedly.” Coming from a guy who has seen more than 30 of over 75 ideas go public or get acquired, it’s a cautious comment. And if that doesn’t convince you that incubators don’t work,  just go searching for the 350-plus incubators that popped up during the last boom.

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