When Kevin Wall and his partner Art Bilger put together a $300 million investment fund and set up Westwood-based Shelter Ventures a few months ago, they and their marketing staff grappled with how to describe themselves.
The business model was to commit financial and human capital to help tech entrepreneurs from a very early stage with their business plans. With some trepidation, they decided to call themselves an "incubator."
"I was against it, and only agreed reluctantly," Wall said.
That's understandable, because seemingly overnight, "incubator" has become something of a dirty word or at least an unfashionable one. While two years ago there were only a handful of organizations calling themselves incubators, and most of them were nonprofits, today, profit-hungry incubators are a dime a dozen. In fact, the nine-letter word is now so commonplace that the very company that popularized it, Idealab, no longer refers to itself as an incubator. Moreover, the very idea of incubators is coming under more scrutiny than ever.
At a time when the stock market is shying away from Internet companies, particularly commerce-based ones, there are questions as to what incubators are really building. Are they creating viable businesses, or little more than flashy brand names that go public with huge valuations only to plummet in a matter of months?
"Incubators are cool, so there are a lot of people who are now calling themselves incubators, but have no idea how to execute a business plan," said Tyler Orion, executive director of the Pacific Incubation Network, an organization of nonprofit and for-profit incubators. "It's a matter of buyer beware. It behooves entrepreneurs to use their best judgment in working with (incubators.)"
The term "incubator" originally applied to nonprofit organizations, often associated with universities, that helped build nascent businesses by providing them with resources the entrepreneurs couldn't afford themselves. EC2, the business incubator project at USC's Annenberg School for Communication, is one such traditional incubator that concentrates on Internet companies.
But the word took on new meaning when entrepreneur Bill Gross formed his Idealab incubator in Pasadena in 1996 and set about creating Internet companies from his offices.
The Idealab model has been to come up with a winning idea, hire management, develop the business strategy and eventually go public. It is one that many are emulating.
Perhaps the most prominent local Idealab copycat is eCompanies, started by EarthLink Network founder Sky Dayton and former Walt Disney Co. executive Jake Winebaum. Like Idealab, eCompanies has a venture capital arm, but it is incubating companies at the rate of one a month, providing services such as financing, strategy, recruiting and marketing to its hatchlings.
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