The New Incubators Report

David Tisch, TechStars · Gabe Zichermann, Founder Institute · 

Brian Cohen, NY Angels · Moderated by Alan Brody

Sponsored by Herrick, Feinstein

Three styles of incubators were highlighted at The New Incubator iBreakfast last week - giving our audience of entrepreneurs and investors a view of options that may never have been available before.

Start Ups if You're Under 30 
The buzz has been with TechStars, a new kind of incubator that, like Y-Combinator and others is part of the so-called "agile start-up" movement. Unlike the old days of betting on an expensive build-up based on the Entrepreneur's theory of what the market wants, here the idea is to build cheaply - even living at the incubator - while allowing the market to tell you what they want. At that point, the start-up pivots to where the market is.

A good example of this is ignighter.com - a TechStars start-up for group dating - that found its true market in Southeast Asia and India where group rather than one-on-one dating is the norm. Despite knowing almost nothing about India, the founders were now in the Indian dating software business.

With TechStars, a vast number of applicants are viewed before a handful are selected to receive $6,000 per principal up to a total of $18,000 for around 6% of equity and a few months to produce. They are given space, business and technical resources and then access to additional investors. The house typically has options on an additional 20% or so of equity. This tends to favor young, lean start-ups that can dedicate themselves, move fast and adapt. Their success rate has been quite compelling.

According to David Tisch, who runs New York's TechStars chapter, of a crop of 70 companies, 70% have received additional funding or been acquired by companies like AOL and IAC. (The program was originated by David Cohen, a serial entrepreneur in Colorado.)

Start-Ups if You're Over 30 
The Founder Institute is almost the opposite of TechStars since it favors people that may already have a job, business or a career and are taking a part time approach to evolving their Start-Up. They may even be execs reinventing themselves by way of a their Start-Up. As New York manager, Gabe Zichermann says, the vast majority are "not out of college but are post business or retirement." After a sign-up fee, Founder Institute members, a group created by Adeo Adessi and now in over a dozen of cities and countries, give up about 3% of their equity and go through an entrepreneur's program that sharpens their plan and puts them on their road to seek funding and customers.

For All Ages: New York Angels
Brian Cohen is the Vice-Chairman of New York's venerable angel group that has made scores of investment over the years - over $60 million in over 40 deals. Their view is more traditional - good plans, good young management, straight angel deals. At one point, NY Angels, was involved in its own lean incubator, SparkSpace but exited it after a few years because they felt their operating model did not require it.

While the panel offered a cordial cross-view of start-ups, there was some controversy over the idea of a start-up as being the "new cool" - something akin to being a screenwriter in L.A. The work of Entrepreneurs, some of the panelists opined, is really quite mundane and that calling them "stars" is not such a great idea. "Success," said Cohen, "is the worst teacher."

After the presentations and discussion, we invited starts-ups of various levels to come up from the audience to make elevator pitches. This was instructive in a number of ways:

1. All starts-ups seem to need some type of interaction with peers, business experts and investors to find their new business path
2. People with experience often dwell on their past accomplishments rather than their business ideas
3. Investors can still find a good a good idea in an uncertain pitch

The pitches covered a lot of educational areas: financial, hiring etc. Investors are often leery of education but seem to give a second look to pitches that find a genuine pain point with actual dollars at stake. Likewise, businesses that reach kids are only of interest if parents with checkbooks are standing behind them....

New kinds of apps are always of interest. One testy moment occurred when a software entrepreneur asked the what value would be given to having patents. Due to the fast-changing nature of software tech, the group were not very enthusiastic about it. They appear to be valued in Biotech and medical and other devices where there is a long approval lag but when it comes to software the patent bloom seems to be off the rose.

The iBreakfast/iEvening will be return on April 5 with its famous Executive & Entrepreneur Workshop and Pitching Event.

The VC Outlook - Report from June 24 Event

Charlie Federman, Crossbar Capital • Jeanne Sullivan, Co-Chair, StarVest • Owen Davis, NYC Seed • Ben Boissevain, Agile Equity • F. Morgan Rodd, Milestone Ventures

We usually do a VC Outlook iBreakfast once or perhaps twice a year – and they are good. But somehow the June 24th event was special in an extraordinary way.

Maybe it’s the strange times we are in. People really needed to understand where we are headed and so Investors, by telling us where they are placing their bets – are also giving us a view into the future.

It is also a tricky time because, on the one hand, there appears to be a rising tide of private equity. On the other hand, we see a lot of entrepreneurs but for all their enthusiasm, also lack a vision about the future. Most of all, entrepreneurs may not be thinking of what the Venture marketplace wants – only what they want to do.

We understand that deals have become cheaper and investors can cherry-pick them in a way they may not have been able to do in the past. But what are they looking for?

So this iBreakfast was a wake-up call to “game” the Venture marketplace – getting your plan in line with what the market wants instead of wondering what’s wrong with the market…...

According this iBreakfast - here is the lay of the land:

Most of the exits are closed – the IPO market is all but dead, few investors speak of building a great profitable company in the old enterprise-building sense of the word. M&A is the main exit. Fortunately, many companies have strong balance sheets and after having laid off staff, they are finding that buying start-ups is the cheapest form of R&D. Great. Perhaps even better, foreign companies too, are eyeing the US market and they will often pay a premium if they feel they can get market entry.

So what are investors looking for? According to Jeanne Sullivan, the companies they look for include tech-enabled service businesses, platforms and any high perceived value service that once required custom tailoring, that can be delivered in a mass format is in demand.

Charlie Federman of Crossbar, a noted early stage investor looks for the first new idea in a marketplace. First to market is big deal and if properly executed, usually carries over in the long term. He especially likes ones that "export deflation" - i.e. offer a really low-cost alternative to a current business under price pressure. More importly, he looks for entrepreneurs who can adapt, since most start-ups find their real opportunity later. The business they end up is never quite what they started with. Somewhere, they’re going to have to take a left turn. Will they be ready to respond to that…..?

Owen Davis has analyzed various investment deals and has laid out a kind of roadmap that would be an invaluable guide for an entrepreneur to determine which sector has the highest probability of raising capital in the New York area. Hint: social media and communities highest pitch topic – least invested in.

(Note to Entrepreneurs: check back with us for the best bets.)

Morgan Rodd noted that Milestone Ventures was increasingly interested in tech-enabled medical services.

Based on the surge of investor/entrepreneurial interest we will be producing a new series of Start-Up bootcamps, business and deal structure sessions and more investor meetings.

View Presentations
Ben Boissevain - Agile Equity

The 27 Year Old Rule - Where Big Ideas Come From

There is a lot more than a grain of truth to Steve Levey’s assertion in Newsweek that the biggest ideas come from people under 27. Psychologists have long noted that most professionals and artists and not few revolutionaries develop their big ideas in their 20s (think Einstein,Marx and Picasso) or began incubating them in those days (think Freud & Darwin). On top of that many investors like Fred Wilson of Union Square Ventures have mulled over it, realizing they're not that thrilled about dealing with entrepreneurs under 30.

In the past 10 years, the iBreakfast has hosted thousands of new business idea presentations and we have developed our own classification system for handicapping the investiblity of entrepreneurs by age group.

(Note that true serial entrepreneurs, especially ones that succeeded early are in a class of their own to be discussed separately.)

THE YOUNG ONES: START-UPS 27 and UNDER
Moonshots: Big on concept but usually lacking in key details. Young entrepreneurs, unencumbered by mortgages and howling bambinos are free and hungry enough to go for broke. Too often though, bean counters get in their way. Their young egos are unpredictable and investors, seeking bargains, tend to offer low valuations or onerous term sheets. The young ‘uns tend to be strong-headed and yet.....they start Google, Paypal, YouTube, Federal Express, Yahoo, Virgin Records, Microsoft, Apple…..

The bubble years may have opened up the purses of many a stingy investor but that has changed and investors have largely reverted to type. That is why, in the long run, New York tends to lose the best ideas Silicon Valley because they are either more nurturing over there or because, a hot head who rejects a tough termsheet in NY turns to jelly when an even tougher one comes from an industry rock star in the Valley.

THE MIDDLE YEARS 27-50
These are the most investible. Fewer home runs but a lot of triples and of course, base hits. But there is an almost mathematical certainty that an industry pro with 10 years experience in a growth industry and a plan based on an actual market need or a genuine domain innovation, a briefcase full of warm leads and a bit of skin in the game is going to get funded. These are consistently the most investible entrepreneurs in the game – entrepreneurship’s true middle to upper-middle class. If you, as an entrepreneur fit this profile…..the check’s in the mail.

These are the kinds of people who start Salesforce.com, eBay, eTrade and other businesses with actual substance (but also Craiglist and Wikipedia, whose business models mystifies most investors). While a lot of middling, unknown companies come out of this field - your base hits that never quite progress - these people do really well when their idea coincides with a dramatic growth in their sector. They tend to know what they are doing and are less likely to drop the ball.

THE GRAYBEARDS 50-75
Like an old wine, when it comes to the geezer group, the bottle is usually in better shape than the content. The tannins may have softened but so has their oomph and they may not be ready for a 24/7 lifestyle with madcap deadlines. On the other hand, if they have had entrepreneurial experience or bring a good team with them they could do it.

They are best if they are an evolved version of the Middle Players but with more experience, a better team, more potent connections and a better understanding of the need they’re filling.

The Dubious but Always Interesting Graybeards Are:

1. The Immortality Seeker. Like a graying Indiana Jones they are on a quest to make meaning of their careers. Usually, it’s the Temple of Doom and, like the Pharoah’s attendants who built it, you, the investor will probably get buried with him.

2. May-December Team
You tend to see these at big money events for the same reason that you see old lotharios with young babes. The old manager finds a smart kid and backs him with resources, contacts and of course, adult supervision. But generally, the geezer’s ego gets in the way. The kid bridles or just gets diaper rash and shops his even bigger idea at a business hangout on line or at the iBreakfast (sure, why not?). Unless there’s a special dynamic, like these two really worked together in a previous life or the kid married the geezer’s daughter and has 7 years to work off his debt, watch out!

3. The Geezer just has to Do it.
While this looks like a quest for immortality the main difference is the motivation is tied to a genuinely good idea, the entrepreneur is prepared to do what it takes and the business flows from his past experience. Plus he may have a really experienced team (hopefully, with just enough tannins to keep the wine flowing) and extra skin in the game. This could be a thumbs up! Just don’t expect a home run, but ya never know! Plus, you won't have worry about them being lost to nightclubbing.

SOME THOUGHTS ABOUT SERIAL ENTREPRENEURS
If yo are lucky enough to have an idea take off while you’re still at college (think Bo Peabody of Tripod, Dean Kamen of Segway or Kevin O’Connell of DoubleClick), you truly are the landed gentry of the community. However, things can go wrong. Even Spielberg produced 1941, Edison’s talking dolls (the ones with little phonographs in their bellies) were all returned and so on. Generally though, as long as they stop reading their PR, they rule!