Way back, two or three years ago maybe, it seemed like everyone wanted to be a hedge fund manager. Then there was a moment when there was nothing cooler than founding an Internet company. But that quickly gave way to a chic for being a venture capitalist. Lately, this too has faded, and it seems like everyone wants to be an Internet incubator.
It doesn’t sound very glamorous: An incubator backs a portfolio of entrepreneurs in exchange for equity stakes in each one’s company, much as a VC would but with a couple of key differences. First, the investments tend to be smaller. Second, there is a degree of handholding that VCs aren’t equipped to offer, such as providing office space, back office accounting, legal service functions, and marketing help. The most famous example is Idealab, founded by Bill Gross. Idealab was a very visible success, and visible successes in any field tend to attract new entrants. The barriers to entry seem low: a building, basic infrastructure, and the willingness to send out a press release touting your incubistic qualities.
Seven months ago or so, an entrepreneurial acquaintance of mine, Jed Weissberg, came up with an idea for a games-by-e-mail company he is calling LetsPlay. He went looking for incubator backing in New York City and found nothing. Two months later, he started asking around again, and something had happened: incubiquity. “Everyone was an incubator,” he says. “I literally had relatives, more than one, who had made a little money doing things that had nothing to do with the Internet, saying ‘I am an Internet incubator.’ ” (He got several funding offers before signing on with LaunchCenter 39, which impressed him as having experienced, credible founders.) According to Forbes, about 100 incubators have been created in the past nine months. Why? Why is this, suddenly, the thing everyone wants to be?
Part of the explanation has to do with the speed at which this economy moves, which is a relatively new thing; part of it has to do with sickening riches, which is less of a new thing; and part, I think, has to do with a change in the way Americans seem to think about business, as evidenced by The New New Thing. In that book, serial entrepreneur Jim Clark is described by Michael Lewis as being practically a conceptual artist: He walks into a room, spits out his concept, and walks out to thunderous applause (and sickening riches). Clark’s role fits perfectly with our peculiar cultural moment: Building a business, more so than writing a novel, making a movie, or getting into the Whitney, has somehow come to seem like the most creative act imaginable.
After all, to get your novel taken seriously, you’d probably have to slog your way through the Iowa Writers’ Workshop. The path to the Whitney Biennial is just as regimented: You need credentials. But to get a company built, you just need an idea and some money, and the guts to fling yourself into the marketplace–the one place where creativity actually trumps credentials. At least, that’s the idea. “It’s cool,” observes Timothy Rowe, the CEO of Cambridge Incubator, “because our society puts so much value on inventing and creating and building from scratch, and really has put something of a negative value on working for an established organization. This taps into something pretty basic in American mythology.”
Thus the incubator boom ushers us into the age of the conceptual art economy, and allows the incubators themselves to have a kind of claim to authorship in a slew of companies. Incubators are described as something like movie studios, or maybe like Berry Gordy’s Motown hit factory–find the talent, shape it, nurture it, make it a hit. Except that instead of presiding over records that sell a million copies, or movies that do $100 million at the box office, incubators will, in theory, spit out multibillion-dollar companies. Not every investment will pay off on such a scale, but because incubators get a chunk of equity extremely early in the capital-formation chain, if a couple of its companies go platinum, as it were, the payday is huge. Idealab owns about 29 percent of eToys, for example, which it reportedly acquired at 15 cents a share–even with eToys’ stock languishing at about $6 share, that’s pretty good upside. And in the conceptual art economy, that’s what it’s all about: the mythology of authorship, plus the portfolio effect. “It’s the fun without the risk,” Rowe says.
This is such an appealing idea that it has caused a fair number of people and companies who are doing something quite different to label themselves incubators. Those who are not for real will be shaken out (or simply relabel themselves). The creations of conceptual artists tend to be ephemeral, a quality at odds with lasting shareholder value (anyone who bought eToys at its 52-week high of $86 a share might have something to say about this problem). Still, it seems reasonable to believe that more serious incubators, with real infrastructure and experienced principals, like Cambridge Incubator, Idealab, eCompanies, etc., can serve a legitimate function in the future.
What seems less likely is that the current romance will always continue. Sky Dayton, a co-founder of eCompanies, which at age 10 months counts as a venerable incubator, argues that this is not merely a cool way to build companies but, at some point, the only way to build companies. As he talks about it, the process of spitting out startups does sound surprisingly like an assembly line, and the incubator’s job like that of a shop foreman. Eventually, I guess, if you want to do something really creative and weird, you’ll end up having to go to art school.