Seeking More High-Tech Home Runs, Softbank Places a Bet on 'Incubator'
By LISA BRANSTEN, October 15, 1999
THE WALL STREET JOURNAL INTERACTIVE EDITION
© Copyright 1999 Dow Jones & Company, Inc.
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One of the most successful Internet investors is about to hatch a new
project.
A venture-capital arm of Softbank Corp. is moving into new offices in
Mountain View, Calif., to launch Hotbank, an incubator for new technology
startups. Incubators are a red-hot trend in venture capital. They offer
facilities where multiple start-ups have ready access to office space,
support services and hands-on help from experienced managers. The current
effort by Softbank Venture Capital is particularly ambitious. The Mountain
View facility will have room to start and nurture 10 to 12 new technology
companies.
And Softbank doesn't plan to stop with Silicon Valley. Gary Reischel,
Softbank Venture Capital's executive managing director, wants to help
support a nationwide network of incubators that will be funded by others but
carry the HotBank brand. A Boston affiliate is slated to open in November,
and a total of six are expected by the end of the year. The venture firm's
parent has an enviable track record in backing new technologies. For
example, it funded such successful start-ups as Yahoo! Inc. and E*Trade
Group Inc.
Incubators have been tried in various forms since the early 1980s. But many
of the early facilities were set up by local business-development agencies
or nonprofit organizations or as part of do-good efforts by large
corporations, and often had little to show for their efforts. The new
incubators are attracting entrepreneurs from Silicon Valley, southern
California, Atlanta and elsewhere and have already produced some notable
hits. For example, idealab!, a Pasadena, Calif., venture started in 1998 by
entrepreneur Bill Gross, has launched such companies as Internet toy
retailer eToys Inc. and GoTo.com Inc., which runs an Internet search engine.
For an initial investment of a few hundred thousand dollars, idealab's stake
in eToys is now valued at more than $1 billion.
Incubators are particularly useful now that Internet businesses are forming
and changing so fast. New enterprises need constant consultation with their
investors, something that is much easier if venture partners have offices in
the same building as the companies they fund. "The model of the ivory tower
venture capitalists going to visit their companies -- I think that's
broken," Softbank's Mr. Reischel says. Another factor driving the new
incubators is a desire by venture capitalists to build relationships with
entrepreneurs early in the life cycles of their companies, says Mike
Roberts, executive director of entrepreneurial studies at Harvard
University's Graduate School of Business. Incubator services offer a way for
venture-capital firms to make themselves more attractive than rival
financial backers.
'Deal Flow'
"For people who write $10 million checks at the drop of a hat ... [an
incubator] is a very inexpensive way to attract deal flow," Mr. Roberts
says. One potential pitfall of incubators is that venture capitalists may
not have the time to closely monitor these very early-stage companies, even
if they are in the same location. "It's a model that requires more time"
from investors, Mr. Roberts says. "Presumably these people were busy before
they started the incubator. Where does the extra time come from?"
But backers of the concept say physical proximity brings many benefits --
including the chance to swap ideas with other entrepreneurs and with
investors that have worked with many businesses. At idealab, for example,
Mr. Gross has made such informal interaction easier by setting up a
glassed-in office along the flat base of a semicircular space, from which he
can see the different "pods" of companies at work.
David Eisner, chief executive officer of iExchange.com Inc., developed his
business plans with the aid of brainstorming sessions with Mr. Gross. He
says ideaLab's facilities were extremely helpful in launching his company,
which operates a Web site that consolidates information about stocks from
analysts, chat rooms and other sources. "None of the infrastructure issues
that most founders of new companies have to face did I have to face," Mr.
Eisner says. "I didn't need to find space, to buy office furniture, to set
up an accounting system." Also, although he quickly had to hire his own team
of Web site developers, he says, "ideaLab came up with ... Web-development
people to get us started." Other recently founded private incubators include
eCompanies, started by Skye Dayton, founder and chairman of the Internet
service provider EarthLink Network Inc., and Jake Winebaum, former head of
Walt Disney Co.'s Buena Vista Internet group. That duo raised a $130 million
fund to finance start-ups. And in August, Jeff Levy, who founded Internet ad
measurement company RelevantKnowledge, Inc. and sold it to rival Media
Metrix Inc., founded eHatchery, an incubator based in Atlanta.
Some venture capitalists see the possibility of long-range cooperation among
start-ups they fund as akin to the networks of associations among some
Japanese companies. Kleiner Perkins Caufield & Byers, the best-known Silicon
Valley venture firm, even uses the Japanese term "keiretsu" to describe its
strategy.
Legal Papers
Other benefits are expected to be more concrete. The Silicon Valley office
of HotBank will have people on staff to help companies with such
administrative tasks as drawing up legal papers, getting bank financing and
even negotiating with media outlets for advertising space. Softbank Venture
Capital plans to spend about $2 million on the 40,000-square-foot Silicon
Valley incubator, which will be able to draw from a $600 million Softbank
venture fund. It expects that the average investment in an incubator-based
firm will be $300,000 to $1 million, much smaller than a typical venture
investment. The hatchlings won't be allowed to stay in the nest long: They
will have to get a second round of financing and be out of the incubator in
six months, Mr. Reischel says.