The Organic Incubator

Actually, Bootup Labs is not an incubator. We're a startup accelerator. I know the distinction may seem subtle to some, but we think it's pretty damn important.

The story I always tell is thinking about this in terms of what the two phrases imply. An incubator has a baby animal inside. If you take the incubator away, the animal dies. We like to work with companies that are like a car: they're on the road, they're heading in a particular direction, they'd just like to do it faster -- so we help put some rocket fuel in their tank with both capital and mentorship.

The Techstars http://techstars.org program, which we're very inspired by, also doesn't use the word incubator or accelerator - they describe themselves as "seed capital and mentorship for startups".

"Business incubators are programs designed to accelerate the successful development of entrepreneurial companies through an array of business support resources and services, developed and orchestrated by incubator management and offered both in the incubator and through its network of contacts."

Taken from Wikipedia. Semantics, Boris, semantics.

Boris - I like what Bootup Labs is doing and think you guys are important to the ecosystem - but so are companies like Invoke and 37 Signals. They are doing it too and they doing it well! This article is about ANOTHER way to incubate/accelerate/launch businesses.

Thank you for writing this article, Amielle. The main thing we always focus on at Invoke is the creation of solid products that fill an actual need. Having a services component to the company helps to identify those needs and then its all about the execution.

Lots of people talk about the VC model being broken and i havent seen any real proposed solutions but to be honest i'm not really looking. We've got a proven model of creating products that generate cash flow, usually immediately, and we're sticking with that.

Expect to see a couple excellent announcements before the year is out ;-)

Outstanding, Amielle, truly outstanding.

I’ve been to about a dozen angel and entrepreneur conferences in the past few months, mostly in the US. Nobody is debating whether the old VC model is broken anymore. It’s an accepted fact. What is getting discussed is what this means for entrepreneurs - and our economy. The consensus is ‘not much’ – in the tech world at least. (If anyone is still interested in some of the background: http://www.angelblog.net/The_VC_Model_is_Broken.html).

The world is changing – quickly. We have two choices – to adapt or to become extinct. So what does this mean for entrepreneurs?

I believe we are in a golden era in tech entrepreneurship. Never before has it been so easy for entrepreneurs to build such valuable companies on so little capital and sell them so early. (Here’s a high def video on a talk I gave recently on this: http://www.angelblog.net/Early_Exits_Your_Golden_Opportunity_at_ORIC.html).

Every city I visit with more than a half million people seems to be building a start-up accelerator like Bootup, Y Combinator or Techstars. While it’s still early, they seem to be a very effective way to grow modern tech companies through the early stages of their evolution.

Your ‘organic incubator’ concept is also an important element in this golden era, and in our economic futures.

Would you agree that two good local examples are Flickr and Club Penguin? Both started when entrepreneurs, who were working on something else, got sidetracked by a new project. My understanding is that these companies were financed entirely by friends and family. I think they are good validations of your comments about capital efficiency.

I enthusiastically endorse your suggestion that every company should grow as far as they can without investors’ capital – and that’s not easy for me to say because a big part of what I do is run an angel investment fund.

You use the word “Darwinian,” and I completely agree. But I prefer to think of this new process as simply more ‘efficient’.

Let’s stop our morbid, retrospective debate about what happened to Venture Capital – that was ‘so’ 20th century. Instead, let’s keep up this type of excellent dialog about how 21st century entrepreneurs can make more money and accelerate the economy we need for our future.

And thanks for the plug on my book - Early Exits.

The problem with going as far as you can without pursuing investors is that sometimes you think you can go farther than you can and by the time you realize you can't, it's too late.

Let's not give the community a false sense of "investors not needed, I'm going it alone" as they continue building their companies slowly and organically while a similar play with deeper pockets takes advantage of the closing market window, ultimately leaving the first guy on the outside looking in wondering what happened?

Folks, there's a balance here. In some cases, it makes sense to NOT try and grow organically, and rather, to solicit outside investment fast and furious to flood the market and take hold of first mover advantage. LayerBoom (if you're out there) - that's my advice with your play. Go slow, and you'll lose.

So, just make sure to talk to lots of smart folks (Basil included) about what you're trying to do, and from the advice you get, deciper what makes sense in your situation with consideration for (a) the size of the market window, (b) how fast it's closing, (c) the competitive environment, (d) barriers to entry (i.e. how hard for other players to bring a solution to market that solves the same problem you're solving).

I think that we all need to be a little careful on how hard we are on the VC community. Although I can completely agree with what Amielle is proposing, and I am giving support in getting a TechStars / Bootup Labs program up and running in Edmonton, there are tech companies that still need traditional venture capital.

Utilizing modern technology stacks, most SaaS products / companies need little capital to get to a potential exit. This is even further minimized when there is a revenue from day one. However, outside of these types of companies, there are still many that need larger amounts of capital, for instance, any technology that encompasses a physical product.

I would argue that maybe venture capital isn't broken, but rather it is moving farther to the right in serving capital intensive tech start ups in even later stages, while there is a large group of emerging tech companies on the left side of the spectrum that require very little money and will have earlier exits.

Personally, I am excited about this as it is opening up a large market for smaller funds and sophisticated angels to get into, receive some good returns and exits and not have to just try and take companies to their VC funding. This space used to always be referred to as the "Funding Gap", but it is appearing that for this new type of tech company, there is no longer a gap as VC money will not be necessary.

Thanks for the clarification Boris, I apologize for the various times I think I've described Bootup as an incubator. Language is always a tricky thing, people's definitions vary.

Comparing Invoke to 37signals? I see what you did thar :P

Srsly though, respect to Invoke, never short of surprises and exceeded expectations.

Organic Incubator? Really? Is that codeword for a lifestyle business?

Get real everyone, you can't create a huge company with Amazon Web Services and two nerds that are allergic to venture capital. Nobody has ever done it in the history of mankind, not Facebook, not MySpace, not YouTube, not anyone.

And it is time to stop ragging on venture capitalists. They are actually pretty smart and perfectly rational IF you understand what motivates them and how they are compensated. And it probably bears saying that there isn't a lot of difference in behavior between angels and venture capitalists, except for the size of check they write.

@basil Can't speak for Club Penguin, but Flickr had sophisticated money in it (though not necessarily VC. They also had a lot of sophistication on their board, including people that had previously sold companies to Yahoo and Google.

I agree with Kevin - let's be a bit more careful about this "the VC model is broken" thesis that everybody love to quote right now. Let's consider a few things here:

- Just because we now need smaller investment amounts to build companies, it doesn't mean that you need no money at all or smart investors to build a truly great company. The VC world has to adopt to that (smaller funds, smaller but more investments) but that doens't mean that it is completely broken.

- Secondly, all this is ONLY true for the internet space - and while I am investing myself only in consumer internet and love that space, this is not the only technologies out there that are being developed. It might be the space with the most public attention but I would argue that other technology verticals might create more overall value to the economy / society than consumer internet does. And most of these (biotech, cleantech, infrastructure, etc.) continue to be extremely capital-intense.

Incubators and accelerators are immensily important for the overall ecosystem but they will not replace investors with deep pockets and smarts that can help build the next Amazon, Google, Facebook or eBay. The VC model is not broken but just evolves - like start-ups evolve every day.

All,

I don't think anyone is suggesting that nobody pursue angel or VC money. The article is certainly NOT about that. There are just other ways to do it, there are also other ways to TIME it better. I.e. if getting capital makes sense, then that's what an entrepreneur ought to do. The key point is whether the acquisition of new capital will support the entrepreneur's business model and their ultimate end-game.

I completely agree with Kevin Swan and Boris Wertz - the model has evolved, but is arguably not broken.That makes sense. I also see VC + Angel money as crucial to certain business models, but not all.

The Organic Incubator is certainly not a lifestyles business, it's an approach to business building and financing - one that is very difficult to do well, and one that deserves recognition. That's all.

Hey Mr. Curry,

I believe Super Rewards did exactly what you said can't be done. Sold for 50m after being built in a back room of a house with no capital.

Also Plenty of Fish comes to mind. Granted these aren't as big as Google, Facebook etc. but they are a lot more than a lifestyle businesses.

Maybe I have some details wrong (let me know) but they both seem like good examples of "nerds-in-the-basement" success without VC money.

Personally I am very interested in VC money, don't get me wrong, I just think there might be a couple different ways for a cookie to crumble.

@mack you missed the point (I didn't say two nerds couldn't make money). superrewards had a nice exit and made lots of money, but didn't create a huge company. same with plentyoffish, nice lifestyle business. but if you want to create a huge successful company, you will need venture capital. if you want to create a lifestyle business or sell early, you can do that without venture capital. but those are different goals that require different financing strategies.

@amielle if it walks like a lifestyle business and quacks like a lifestyle business, then it's a lifestyle business. that doesn't make it bad, it just doesn't make it a scalable model for creating the next Facebook without outside financing

Amielle, this reminds me of a conversation we had this summer.

Agreed, knowledge products (software, websites, content etc) are the result of a kind of economic activity that takes an arbitrary amount of time but not a lot of money (to those who would quote Ben Franklin here, I suggest reading the quote in context). Once we thoroughly understand a problem, plotting its execution, and therefore its capital requirements, becomes systematic. Until then, however, we need little more than sustenance and a reasonable degree of protection from distractions. Unless I am mistaken, the equity financing bet is that we will solve the problem before the money runs out or face the awkward decision to dilute or die out. Combined with pressure from investors to produce merchantable IP early and angle for an exit, along with the well-known threat of founders being marginalized and replaced for their troubles, I can see how this kind of arrangement could lack appeal.

I submit that the most important factor of production for a knowledge product is contiguous blocks of time awarded to individuals with as few interruptions and roadblocks as can be managed. It is even more important than intelligence or technical skill, as these only optimize its utilization. A small organization generating slightly more than subsistence revenue through consulting services could buy its team enough time to generate a product. An individual could perform the occasional one-off project and do the same. Eventually they will generate something worth selling as a product, or give up and do something else.

Financing or no financing is a good debate for MBAs. Let's focus on collaborative idea sharing and business building rather than academics. Playfish should have been out of Vancouver.

Welcome back Kevin Curry. Who could you be....hummmm, I enjoy a good mystery. fun.

First, Boris 'snappy' Mann and I have to fight off a lot off pre-judgments that come when we use the word "Incubator." The old incubator model of 1999-2001 is filled with carnage, and we're often quickly dismissed as 'another one of those'. Sometimes it's just easier to use other words to describe ourselves.

Like Basil and Boris W said, VC was broken for digital media only, but I don't believe it's broken anymore. It has successfully adapted, Bootup Labs, TechStars, YCombinator, etc is the "Darwinian" VC for Internet/Mobile.

Perhaps what everyone is trying to say is that Entrepreneurs need to figure out their strategy first, taking into account ownership, control, return, competition, etc. To execute against their strategy, they may, or may not need to raise capital to finance certain parts of their business. Many Internet/Mobile businesses can get to revenues with their own money, and then bootstrap. Or maybe they need a bit of cash to build the prototype, or a bunch of cash grow faster than the competition. The point is that raising money and who you raise it from is a mere step in executing against your strategy.

The danger comes when taking VC money is the strategy itself.

If Bootup Labs were considered just a place where you give up some equity in exchange for office space, I think we have seriously failed to explain ourselves. We provide much more than just office space. And, although I'm not an expert on WaveFront's model, I do know that they also provide more than just office space. That said, we operate on drastically different terms than WaveFront. For example, Bootup Labs invests up to $150k for up to 15% of the company and encourage the companies to be bootstrapable as quickly as possible. Often companies will not need further financing, so we wont get diluted out. And if they do need more money, they wont need that much, so dilution is minimal. We don't sit on boards, and the company remains in full control of the founders. Also, we build a strong mentor panel who is actively engaged with the companies to help them make connections, raise money (if needed), and even exit the company so investors can get a bigger return more quickly. Unlike traditional VC, we don't need $100M+ exits to succeed.

Please understand, I'm a big fan of the "organic incubator." as you call it. But, I think it's a bit whiny to say that this model is not getting recognition. Check out http://obvious.com/ they made twitter. Invoke and WorkAtPlay are local examples who have received a ton of praise (including a ton from me). And as you mentioned, 37 Signals' Jason Fried has made a religion out of it. If every dev shop doing skunkworks projects on the side called themselves an incubator, there would be 100's of incubators in this city alone.

But now that you brought it up, I'll say this. Until recently, my observation of Vancouver's Internet scene has been much more of a services industry focused on selling 'hours', rather than focused on building products. This is a big reason our city lags behind other cities in building anchor companies that help feed the ecosystem. As a community, we need to **focus** more on building more great products that turn into great companies. Anything we can do to avoid the distraction of dealing with "clients" will accelerate the entire community to becoming a world recognized digital media capital.

Hey, not going to take the time to write a detailed, insightful comment, instead I'm just going to throw it out there that all too often VCs prove themselves to be sleaze who don't care about or understand technology. Of course they'll talk down any model that avoids their trap.

Does "building a big company" need to always be the goal? How about "make something awesome while enjoying and supporting yourself"? Last dang thing I want is dedicate my passion to a big company that will end up in the control of investors.

Also, pseudo-anonymous cowards are cowardly.

@danny I am right under your nose...though its been a while, just return my emails and I will introduce myself ;-)

@gregEh

Entrepreneur says, "that all too often VCs prove themselves to be sleaze who don't care about or understand technology."

VC says, "all too often entrepreneurs prove themselves to be sleaze who take our money but don't care too much about or understand the process of building a business."

Its a matter of perspective...

"Does "building a big company" need to always be the goal?" Yes it does IF you are planning on taking venture capital

"How about "make something awesome while enjoying and supporting yourself"?" That was covered in the class called "Definition of a Lifestyle Business"

"Also, pseudo-anonymous cowards are cowardly." Or just sporting, kind of like a FakeSteveJobs, though without the same incisive observational capabilities and range of wit.

-) good night all!

I added some of my comments at http://www.startupnorth.ca/2009/11/10/the-organic-incubator/

It's unclear to me that a consulting model provides any additional potential for success than a capital based model. There are a number of challenges, in particular, why are consultants any better at performing due diligence than the individuals associated with traditional incubators? One potential upside is the immediate focus on customer problems and needs.

@basilpeters and Craig Hiyashi have already identified that not all businesses need venture for growth and exits.

Does anyone have any data that might support the claim other than anecdotal evidence based on 2 firms?

Hello, I am new to this stream and found it through StartupNorth.

A couple of comments have argued for perspective; I'll add mine.

1. Only 6% of new businesses are based on new technology. Another 6% use some technology (apps etc). So this community represents a small fraction of the start up community.

2. Saying the VC community is dead might be a tad premature, however, I think it is safe to say that the VC business model has not been as successful as was hoped. A personal opinion is that this is because most VCs are not populated by successful entrepreneurs consequently many have been run as simple numbers games and the success rate could not support required returns. That this has occurred when interest rates should have money flocking to VCs is testament to a failed model.

3. VCs (and Angels) complain relentlessly about the poor quality of submissions, generally funding less than 1%. There might be some truth to the claim as some individuals may write plans just to see if they can find some money, not really having assessed their own potential. But of course on the other side is the quality of diligence conducted by the VCs, in my experience highly variable. And of course, you can have all the numbers right but still not have a 'winner'.

4. Further to 3., I don't think there is a good understanding of risk. My background is in hardware with software components and generally are capital intensive and so the risk level tends to be high but the asset becomes very positive on exit. If I'm not mistaken, in Application development there is little capital involved (as has been mentioned in other comments) and consequently the risk is low which is bound to have a negative impact on valuations. Possibly leaving the Angels and VCs feeling quite casual toward the sector.

Hope this is useful, if not comprehensive.

I have developed over 200 products, from consumer to medical electronics and complex systems, internationally. I've started seven companies with four successes, two 'living dead' and two failures. Not a bad record.

I'm interested in helping in the incubation process and would be interested in hearing from anyone who might be interested in utilising some of my experience.

John.