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Incubators Help Power Revival of the Startup

Elizabeth Alterman,|Special to CNBC.com
Monday, 14 Nov 2011 | 9:26 AM ET
Photo: Colin Anderson | Getty Images

Years after the dotcom boom and bust, startups are once again getting a benevolent boost from business incubators and accelerators.

These breeding grounds for innovation and creativity reduce the risk of small business failures by offering everything from facilities and funding and to much-needed mentoring and marketing.

While incubators work with entrepreneurs in the very early phases of development and may not have any time limits, accelerators work with later-stage companies that may have patent-worthy technology and often require a quicker turnaround.

Some incubators are non-profit government programs; others may be backed by chambers of commerce or academic-related associations. Accelerators, on the other hand, are backed by angel investors or venture capital firms looking for a small equity stake.

One of the world’s leading startup accelerators, TechStars, founded by David Cohen, not only provides seed funding from more than 75 venture capital firms and angel investors, but also offers mentoring from top entrepreneurs. Started in 2006 in Boulder, Colo., the concept became so popular it spawned locations in Boston, New York City, and Seattle.

In 2005 alone, the National Business Incubation Association estimates that North American incubators assisted more than 27,000 start-up companies that provided full-time employment for more than 100,000 workers and generated annual revenue of more than $17 billion.

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“You are seeing the TechStars mentorship-driven model being replicated around the world,” says Cohen. “We are supporting that by open sourcing the TechStars model. Some 35-plus partners around the world have taken our model and applied it in their communities. These are all independent. I think you'll see a real proliferation of the seed accelerator model globally.”

Bringing the model to the masses, TechStars just completed a six-part reality series on cable TV. Cohen believes the exposure will likely make the concept more mainstream and also “build awareness of the value of giving back as a mentor to young startups, as well as to show how hard it really is to build a successful company.”

Small Change, Big Impact

Another well-known accelerator, Y-Combinator, was co-founded in 2005 by Harvard graduate Paul Graham as a way to offer funding and expertise to fledgling companies.

Since then, the accelerator has nurtured over 300 entrepreneurs by investing a small amount of money — $18,000 on average — in a large number of startups twice a year.

Once selected, the new business ventures move to Silicon Valley for a veritable three-month boot camp to get in the best position before pitching themselves to possible investors. Halfway through the process, Y-Combinator acts as the matchmaker between the startup and angel investors or venture capital firms.

The process culminates in “Demo Day” — a chance for entrepreneurs to present their idea, at whatever its latest level of development, to investors.

“Right now, what’s really hot, of course, is app development,” says Tracy Kitts, vice president and chief operating officer of the NBIA, who ran a business incubator for nine years. “Biotech has certainly been big for a couple of years.”

Johnson & Johnson recently announced plans to convert a wing of its La Jolla, Calif.-based drug research center into an incubator for startup drug development and medical device companies. The pharmaceutical giant intends to recruit as many as 20 small companies to occupy 35,000 square feet that have been empty since the company consolidated local operations.

Kitts of NBIA also notes that incubators are helping to bridge the gap for those wishing to break into niche markets overseas.

Thanks to NBIA’s "Soft Landings" program, companies looking to pursue business in foreign markets can benefit from incubators in the form of translation services, domestic market research and entry assistance, access to capital and potential funders as well as information on import and export laws.

New Fundraising Model

Lesa Mitchell, vice president of advancing innovation at the Ewing Marion Kauffman Foundation, one of the world’s largest foundations devoted to entrepreneurship, notes private accelerators (for profit) come with a long list of advisors with experience working in a global arena.

“Many of the mistakes that are made early in the life of a new firm have down-stream implications,” says Mitchell. “If you don't start off thinking global it may have very negative implications. But, if you are starting a company in one country with the idea of who the customer is without thinking about customers in other parts of the world, it could be a problem. Working very early in the life of a firm with advisors that have done business in many parts of the world is a huge advantage to a new company team.”

Yesterday And Today

Though the concept is hardly a new one —the first U.S. business incubator, The Batavia Industrial Center opened in Batavia, N.Y., in 1959 — the idea of supplying entrepreneurs with a variety of business-assistance services didn’t gain momentum until the late 1970s, according to NBIA.

Since the late 1990s, the model, which is highly adaptable, has taken off, according to Kitts of NBIA.

Not just a U.S. phenomenon, Kitts of NBIA estimates that there are about 7,000 business incubators worldwide, with between 50 and 65 countries represented in the NBIA’s membership at any given time.

Historically, NBIA-member incubators have reported that 87 percent of all firms that have graduated from their incubators are still in business, while 84 percent remained in the incubator's community.

According to TechStars’ website, over 80 percent of TechStars companies have been funded with venture capital after TechStars or have quickly become profitable on their own.

Playing To The Crowd

Businesses aren’t the only ones benefiting from the kindness of strangers. In 2009, Perry Chen started a platform for artists to display their wares in the hopes of snagging a patron or two. Kickstarter.com, which relies on the notion of crowd-funding — a lot of people contributing a small amount of money — selects projects, posts them on their site for others to view, and gives them 90 days to raise the requested funds or the deal dies.

Since its inception, Kickerstarter.com has raised over $70 million for those seeking funding. As opposed to an equity stake in a film or album, those who back the artists on the site are often given a memento for their part in the process.

Michael Lucio Sternbach, musician and filmmaker, says he found out about Kickstarter.com from a friend who was using the site to fund an independent film.

“This filmmaker put all her life savings into this project and was pretty much broke as a result,” Sternback explains. “Kickstarter enabled her to get the funding needed to complete the film.”

Sternbach says he decided to use the platform to make his band, Out Like Lambs’ album in a “DIY fashion.” Not pleased with the gimmicky things record labels asked him to do, the artist created a video in the hope of raising $2,500 to put out a 10" vinyl record.

“The process was amazing,” Sternbach says. "Each day, we got to observe online the donations coming in; it was a thrill for everyone. We met our goal. You could really feel the love throughout the whole process. “

Out Like Lambs' just approved the test pressings and is awaiting receipt of 500 10" vinyl records

“From there, we'll be giving a free copy of the record to each contributor,” says Sternbach, who intends to use the platform again in the near future to fund a short documentary. “Sometimes we just need a helping hand to turn these artistic dreams into realities. Imagine, if I wanted to make a shoebox diorama of mermaids in outer space and needed fifty bucks to do it, totally feasible.”

For those with the next great idea but nothing in the bank, incubators, accelerators and crowdfunding sites can offer a lifeline to the final destination.

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