"It may be that the race is not always to the swift," as American writer Damon Runyon used to say, "but that is the way to bet." The strategy may originally have struck a chord with gamblers, but it is also ringing true at bainlab, the Internet start-up development unit of management consultants Bain & Company.
Around the unit, which oversees the progress of fledgling Internet companies as they prepare for launch, entrepreneurs gather on the hip, blue, corduroy-covered stools or by the snack machine to gossip and talk e-shop. Near a row of large windows eight people sit at a glass table covered with computers, the frantic tapping on keyboards punctuated by rapid-fire chatter and laughter. This cheerful surface bedlam, however, is meticulously underpinned by Bain's extensive network of contacts, finance and personnel. Is a fledgling having a problem with a business plan? A supplier? Help is at hand to sort out those start-up hiccups.
And the benefits go well beyond bainlab's rooftop London views. "The computers and the telephones and the address are so useful," says Belfast-born Stephen Sheridan, 31, ceo of www.9feet.com, a business-to-consumer sporting website being helped along by bainlab toward a scheduled April launch date. Bain's consultants, says Sheridan, are also "good sounding boards. The trick is to leverage their help." For the incubators, the situation is equally appealing: a chance to guide their fledglings as a mother hen watches over her chicks--and to reap the profits.
Such "incubating" of Internet start-ups has become the latest craze for those keen to capitalize on Europe's burgeoning e-boom. From Stockholm to Munich, management consultants, venture capitalists and others from all parts of the technology world have taken up the concept. In general, they invest in the start-ups and offer them services ranging from physical premises to advice and access to contacts. Their pound of flesh for those resources is usually an equity stake in the new firm. Although the labels for these units--incubators, greenhouses, accelerators--may vary, the process is essentially about speed, with many ushering their charges from concept to launch in three to six months.
"The quicker that period [to launch], the more effective you're going to be in creating a barrier to entry for anybody else," says Tim Hammond, the London-based ceo of Ideas Hub, a recently arrived incubator which currently has $640,000 invested in one fledgling and is aiming to commit $1.2 million to two more projects before the end of the month. Indeed, lessons from the Internet's brief past have not been lost on Europe's incubators. "We can see what happened in the U.S., and we have a clear view," says Stan Miranda, a co-founder of bainlab. "A very large number of people are pursuing almost every major idea at once, and it's all a question of who's the fastest and who has the most resources."
Sheridan has made the most of those resources in the creation of www.9feet.com. Designed with active sports enthusiasts in mind, the nascent 9feet.com's website will feature information and Q&A pages pertaining to activities such as hiking and cycling. Sheridan says 9feet.com's main revenue stream will come from e-commerce, with visitors able to buy online such specialized items as ultra-warm sleeping bags and paraphernalia like torches.
Sheridan has occupied a corner of bainlab since last September, recruiting personnel, meeting with suppliers and, as is common with start-ups, making the dozens of decisions that will determine the future of his company. "It could be 30 or 40 decisions a day if you count some of the smaller ones," says bainlab's Miranda, who provides guidance to the start-ups, "and [incubatees] don't know which five of those are tactical and which ones are really strategic."
In part, incubators sprung up because many large venture capital firms were unwilling to bother with the small amounts of capital and human resources necessary to develop start-ups. Incubators stepped in to fill the void. They make contact with their fledglings in a variety of ways: start-ups may submit business plans for perusal, or incubators may hear about a good idea through their network of website designers and other suppliers. Some incubators come up with their own ideas for companies and then put together teams to develop them.
Bainlab has set aside $40 million to invest in start-ups globally, and currently has European incubators running in London, Milan and Munich. Accelerator@mckinsey, the incubator of fellow management consultants McKinsey & Co., has units in three European cities and plans to launch them in at least four more. Others, such as Sweden's Starthouse and the pan-European units GorillaPark and antfactory, are run by entrepreneurs with previous Internet or technical experience, and still others are the product of alliances--LaunchPad, for example, is a collaboration between Hewlett-Packard and strategy consultants Credo and Futurestep, the Internet recruitment arm of Korn/Ferry. The stock market likes the concept: since JellyWorks, a U.K. Internet investment company whose portfolio includes incubators listed last December, its share price has increased 17-fold.
In all this frenzy, incubators have also drawn fire. Critics charge that the many new entrants have diluted the concept. Others insist that incubators coddle start-ups to protect their investments--churning out companies that may not be viable. Says Sean Phelan, who spent four years developing www.multimap.com, a site that puts interactive mapping online: "If you know how to build a business, go out and build a business."
James Fry, 24, who started his Internet company from his bedroom in London's Notting Hill, considered incubation before going it alone. With his friend Charles Ostroumoff, 25, Fry is developing a website called yup.co.uk., tailored toward helping the U.K.'s young professionals get online information about the latest trendy restaurants or fashionable holiday destinations. Now located in a small office in London's City, Fry hopes to launch his site in May. At first, he spent much of his time visiting industry folk like website designers and venture capitalists, recording the conversations in a large, purple notebook. He is now concentrating on recruiting. "It [went] a lot slower than I would have expected," he says. "We've had to develop our own learning curve."
In the hurtle of the Internet, such talk is anathema to incubators, who claim that units can update start-ups on issues like investor sentiment, thus saving time. "The reason companies find it hard to move quickly," says Ideas Hub's Hammond, "is because they're having to spend 50% of their time raising money, building relationships with investors, and doing beauty parades. Let the founder get on and run the company."
Although Fry acknowledges that incubation might have sped up yup.co.uk's progress, he is not convinced of the long-term benefits. "It's important that management learns what makes things work," he says. "If six months down the line we want to change our design and we turn around and there's no one there to help us ... that will slow us down when we need to be at our quickest."
The strongest reason for an entrepreneur to shun incubators is that they may take up to 60% of a fledgling's equity. That can leave nascent companies with less room to maneuver when they require further funding or try to lure staff with stock options.
But surrendering equity at least gives companies a future--a smaller slice of pie is better than none at all. "You often see people who are reluctant to bring in outside capital until they're bankrupt," says Jane Royston, founder of IT services firm NatSoft and now a professor of entrepreneurship and innovation at the Swiss Federal Institute of Technology. "That's a bad time to negotiate." Speed, she says, remains the core issue. "An entrepreneur can always catch the money," she says, "but can never make up the time." Those in Europe's growing Internet marketplace seem to be heeding her words.