Systematically Up And Running

The revolution upending business today is not simply the Internet or the genesis of thousands of dot-com enterprises launched to harness it.

The legacy of the late 20th century may be the change in the way enterprises are born. Call them incubators, accelerators or business hatcheries, these new entities have unleashed an avalanche of innovation in the very process of creating new companies.

The organic approach to new business creation, with heroic-yet-misunderstood inventors working against long odds in the obscurity of their garages, has been eclipsed. In its place is an efficient mechanism for capturing good ideas and putting them quickly into operation.

Much of the credit for this goes to the venture capital industry. These companies supply entrepreneurs with copious funding, invaluable advice and contacts - essential tools for starting a new business.

But with so many ventures getting started, venture capital firms just don’t have the time to provide the help entrepreneurs need on a day-to-day basis. When it comes to actually building the business, from daily strategy and designing a Web page, to finding space and hiring people, entrepreneurs are largely on their own.

Months are lost reinventing the wheel or tying up loose ends that have nothing to do with realizing the vision that caused them to start the company in the first place. It’s cruel irony for the many who became entrepreneurs in order to escape such details.

The incubator approach moves ideas from the drawing board to the marketplace by loading them into a sort of business catapult and cranking them full of all the skills, infrastructure and back-office support they need to fling them into the competitive arena with devastating speed.

Some of the best known dot-com companies got their start in incubators. Idealab! in Pasadena, Calif., is the birthplace of eToys, NetZero, PetSmart.com and others, while eBay was nurtured at The Enterprise Network, a nonprofit incubator based in San Jose, Calif., that helps cash-poor entrepreneurs get started by providing advice and reduced-cost space in underutilized government-owned buildings.

The latest breed of incubators, sometimes called “active incubators,” are less about space and more about speed. Speed is vitally important because in the electronic economy windows of opportunity open and shut in fleeting moments, with rich rewards going almost entirely to the ones who slip through that `window’ first.

By freeing entrepreneurs to focus solely on constructing their core products rather than the minutiae of starting a business, active incubators accelerate a new company’s time to market by a factor of two or three.

Why the need for speed? Because in the Internet economy, there is no such thing as “second-mover advantage.” Startups are either first or they are failures. In this winner-take-all arena, the name of the game is survival of the fastest.

By outfitting startups for battle in the marketplace, active incubators dramatically increase their chances of being a success. According to the National Business Incubator Association in Athens, Ohio, nearly 80 percent of incubated startups succeed in the marketplace, compared with just 20 percent of all new startups.

Unlike the proven venture capital model, which treats each new business as an asset in a portfolio to be cashed in when successful or written off when not, an active incubator is physically limited in the number of investments it can make and tends to become deeply committed to the success of its member startups.

Incubators are also more financially attached than venture capitalists. New-breed incubators generally use a corporate rather than a partnership structure, gaining the ability to go public themselves but sacrificing their ability to quickly “flip” their investments into the market. They would take a 40 percent federal tax hit if they did.

In a sense, the venture capital model requires a series of temporary affairs while incubators bond and mate for life. Building on this model, graduates of incubators become part of a larger association of other graduates.

The employees of each company in the association are sometimes issued equity options in the incubator so they all have a stake in each other’s success and the companies are bound by common ownership.

This not only motivates everyone to work hard, but creates a structural bias toward cohesion that independent startups lack. The garage where Bill Hewlett and Dave Packard started their company has become something of a shrine in Palo Alto, sort of like the manger where Silicon Valley was born.

But the Hewlett-Packard garage has more in common with Orville Wright’s garage in Dayton, Ohio, or Henry Ford’s in Dearborn, Mich., than with today’s business birthplaces.

Consider how radically things have changed. Fred Smith’s herculean struggle to get Federal Express off the ground in the face of dismissive professors and myopic bankers is today a legend. Those same professors and financiers are trolling campuses for outlandish ideas and long-shot business plans.

In a sense, the balance of power has shifted from financial capital to intellectual capital. The active incubator model understands the new balance and leverages its power to make good ideas into enduring businesses. A simple idea, but one likely to have a lasting impact on the economy of the future.