Ec2

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SARA FISHER

Staff Reporter

Bill Gross’ Internet incubator Idealab! may be getting all the headlines these days, but the incubator over at USC is hatching its own share of start-ups as well though at a much slower pace.

Egg Company 2, which is the school’s Annenberg incubator project, has one company preparing for an initial public offering and two others that have been acquired by larger players. While that pales against Idealab’s three IPOs with several more in the pipeline comparisons are tricky when it comes to high-tech incubators.

EC2 specializes in what can be characterized as “patient capital.” Instead of focusing on churning out financial success stories like Idealab, this incubator provides resources designed to cultivate companies that advance new-media technology and build L.A.’s tech industry.

“EC2 fills a critical vacuum in Southern California’s technology industry,” said Cliff Numark, program director of the Los Angeles Technology Alliance. “It both builds strong companies by providing incredible resources, and implements real knowledge sharing that is helping to advance the entire local tech industry.”

Opening its doors three years ago as the practical development arm of USC’s Annenberg Center, EC2 provides its selected new-media start-ups with human, intellectual and state-of-the-art physical resources.

Incubator companies get free office space, ultra-fast computers, Internet connections and other high-tech equipment as well as access to tech experts both on EC2’s staff and on USC’s faculty. What they don’t get is any funding from EC2.

The incubator attracts about two dozen business proposals a month, of which half are seriously reviewed by its board. Companies are evaluated on the strength of their management teams, the strength of their technology, and their existing funding. Successful applicants usually have two out of three categories going for them.

“We look at the value of what the companies want to accomplish rather than the potential financial return,” said Executive Director Jon Goodman.

Of course, financial success is the natural end game for incubated companies. And the first wave of EC2 start-ups has recently hit some critical benchmarks.

On June 13, alum Women.com Network Inc. filed for an IPO, though the Internet company, which features Web services and online shopping geared to a female audience, moved to San Mateo when a Hearst Corp. subsidiary took a major stake in it.

Another current EC2 occupant, Verix Software, has stayed local after being acquired. The e-commerce software developer was purchased by Novato-based Inference Corp. last month.

Since its inception, the incubator has housed about 14 companies. Start-ups can stay a maximum of three years, which means that its first wave of companies is just now reaching the graduation date. The incubator also has about a dozen “member” companies that utilize EC2 resources but are not physically located in the incubator.

One such member company is Westlake Village-based NetZero Inc., which offers free Internet access in return for detailed demographic information.

EC2 can afford to take the long view in part because of its financial model. Unlike many incubators, which often are dependent on the success of one wave of companies to finance the next, EC2’s budget is fully funded by the Annenberg Center.

It does take a small stake in its start-ups never more than 5 percent. As the companies go public or get acquired, those stakes generate income that Goodman describes as “pure gravy.” The incubator also does contract work as a beta-tester for new technologies coming out of other companies.

EC2’s financial structure elicits praise from its occupants, several of whom expressed pleasure at having their ownership relatively undiluted. But it also has drawn ire from USC faculty members, who characterize the incubator as a money-eating machine.

Elizabeth Daly, executive director of the Annenberg Center and dean of USC’s film school, easily dismissed the criticism. In academia, where funding is almost always tight, such infighting is not unusual.

“The incubator’s primary goal is not to make money or to realize any return on investment,” Daly said. “We’ve had two successes and no failures. I’m amazed and pleased with what we have achieved in such a short period of time.”

Goodman added that it would be unrealistic to expect substantial returns when the incubator makes no initial monetary investment in the companies.

So far, EC2’s companies have been almost exclusively Internet-related. But as the new-media industry races forward to the next hot thing, EC2 is branching out. Digital television and wireless communications are new areas of emphasis for the incubator, which is looking for new companies in those industries.

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