Return of the startup factory
Startup incubators turned into cash incinerators during the dotcom bubble and burst. Now they're back, and Business 2.0 looks at whether they're any better at breeding the next Google.
(Business 2.0 Magazine) -- Naval Ravikant is a classic Silicon Valley entrepreneur: He never stops moving. In the past decade, he's helped launch four companies, including consumer reviews site Epinions, and invested in many more as a VC, including blog aggregator Technorati.
And he isn't about to slow down now. His next project, he explains while jogging around a Peet's Coffee & Tea in San Francisco, will bring a group of engineers together, share resources, crank out a bunch of Web-based companies, and hope for at least one hit that makes a pile of money for the whole enterprise.
During the dotcom bubble, such startup factories were called incubators. At the peak, there were about 700 for-profit incubators, most focused on technology, according to the National Business Incubation Association. Many were notoriously high-pressure environments where a lucrative exit strategy was more important than the half-baked products.
More than 80 percent of them collapsed when the bubble burst. At its height, "people were pitching companies to incubate the incubators," says Charles River Ventures VC George Zachary.
Not surprisingly, today's entrepreneurs shy away from the word "incubator." Ravikant says his venture, tentatively named Hit Forge, will be based on a Hollywood model. "This is like a movie studio," he says. "It's about milestone-based development, piloting concepts, access to distribution" -- not to mention finding the next blockbuster. "The Web is the most hit-driven business the world has ever seen," Ravikant says. "The problem is finding that next hit."
But is the Internet studio idea different enough from its predecessors to nurture the startups? Or will the pressure to make a fast buck once again turn incubators into incinerators? After all, the force driving this concept is the same: the need to throw as many ideas against the wall as possible to see which one sticks.
"More and more of us are becoming aware that you don't necessarily know what is going to be successful," says Blogger founder Evan Williams, whose latest venture is an Incubator 2.0 enterprise called Obvious.
Ravikant, like Williams, is trying to think differently. He has recruited a core group of four engineers with track records of successful Internet launches and set them loose on building new products for the Web. Though Ravikant won't divulge specifics, he says they are currently developing a file-sharing platform, a Web-based e-mail client, a social network, a legal betting site, and a recommendation engine for blog posts.
Ravikant runs a tight ship, with hard deadlines. "The engineers have the freedom to experiment, but they have 90 days to ship a product," he says. "The product has to grow organically, without any marketing." Those that are still growing on their own 12 months later get to live.
They also receive more funding, and Ravikant plugs them into a distribution network he's building. Web products that don't hit their growth numbers get killed -- a far cry from the old incubator system, which kept bad ideas alive for years.
Another key difference is the cost of failure. Since a Web 2.0 idea can get to market for as little as $50,000, Ravikant can afford to try things, tweaking products after they ship, in a way that even the most successful incubators (such as Bill Gross's Idealab) never could in the dotcom era. That might prove to be a model for more than just incubators.
"In 10 years, venture capital could look a lot more like what Ravikant is doing," says Jim Armstrong of Clearstone Venture Partners, which was Idealab's VC arm and now hopes to put $5 million into Hit Forge. "The old way of building companies is broken, and Naval's way could be the future."
Still, scaling up multiple ideas at the same time is brain-crunchingly difficult. "Is Ravikant going to be able to act as the CEO for all these companies?" asks Zachary.
Besides, he adds, there's already a place where thousands of engineers are finding out whether their ideas will thrive in the wild. It's called Google (Charts, Fortune 500). "In the next year, there are going to be at least 20 people coming out of Google who are going to do the same thing," Zachary predicts. "Why not? They can grab five engineers from the company, take $20 million in Google stock, and roll their own incubator."
But Ravikant is as confident of his enterprise -- and distribution network -- as you'd expect from a veteran entrepreneur (or movie studio boss). "We are going to build as many as 20 companies a year," Ravikant says. "We need to find one hit to succeed. We can do that."
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From the May 1, 2007 issue