Quality, Success Rate Vary for Internet Hatcheries

Do Internet incubators really work?

At a time when these financial havens for high-tech startups have become all the rage, it's an important question. Trouble is, there is no easy answer.

For many fledgling companies, going through an incubation process in which seasoned investors and managers can keep a watchful eye on things is a better idea than going at it alone.

But teaming up with an incubator does not necessarily lead to success. Even Idealab in Pasadena, which serves as the model that many new incubators now try to emulate, has seen some of its startups flounder. Last year, one of Idealab's companies, ideaMarket, did not make it out of the blocks, and another, Launchpad Technologies, was reported to have had its share of trouble.

Incubators are like anything else: the quality varies, especially as more of them keep popping up. In Los Angeles alone, there are now at least two dozen either existing or in development, compared with just a handful a couple of years ago.

Some tangible benefits

"There is a chance that it will become a me-too game," said John Laco, co-chairman of the emerging companies/venture capital practice at O'Melveny & Myers LLP. "But there is definitely a need for these types of enterprises out there I've got stacks of business plans on my desk from small operations, typically two guys working out of a living room, that could benefit tremendously from becoming part of an incubator."

Tyler Orion, executive director of the Pacific Incubator Incubation Network, said startups that go through an incubation program typically have fared better than others, but it is too soon to tell whether the recent influx of Internet incubators will follow the trend.

"For many investors, it will be a numbers game, and they will spread the risk the same way as in the venture capital market where everybody (hits) a few home runs," said Orion. "It remains to be seen how patient that capital is going to be if success doesn't come quickly."

Internet incubators provide entrepreneurs with space and support services, as well as access to venture capital and potential alliances in the industry. In exchange, the incubator gets equity in the startup, often a majority share. This arrangement works best for entrepreneurs who lack the contacts, experience and resources to launch a startup themselves and who have a concept that needs to get executed fast.

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