Peep Peep

In a business climate where the line between laying the golden egg and becoming poultry is a fine one, can an incubator provide the help you need?

NASDAQ paints a picture that, at times, is grim; at others, uplifting. But there's no doubt: Tech companies that were riding a huge wave of prosperity just one year ago are now trying to plan for the erratic ebb and flow of a slightly less confident economy. Does that mean potential dotcoms have decided to wait for the next big wave? Hardly. Internet start-ups are still popping up in large numbers, and fueling those businesses are investors wanting to get in on the game. One of the fastest-growing areas of investment is the incubator.

As the name implies, start-up companies still in the "egg" come to incubators to get hatched. Armed with nothing but their experience and an idea, entrepreneurs can be in business overnight if selected by an incubator company. Entrepreneurs who would have started out in the garage can now start their companies in fully furnished offices with phone lines and servers, some cash if needed and high-level mentors just down the hall.

Today's incubators are a different breed than their predecessors. Whereas incubators were once the purview of universities and small-business organizations that typically charged entrepreneurs fees for their services, most new incubators are for-profit entities that help you in exchange for a piece of your company.

Choosing incubation over angel or venture capital financing means choosing different risks and rewards. Angels and VCs don't help as much on a day-to-day basis; the incubator, however, is always there. The incubator staff fills needed functions, freeing you up to focus on your com-pany's larger goals and strategies.

But you give up substantial equity with for-profit incubators. Tyler Orion, executive director of the Pacific Incubation Network, a San Jose, California, incubation organization that serves all Pacific Rim incubators, emphasizes the need to investigate for-profit incubators. "In for-profits, you'll give up 50 to 75 percent of equity," Orion says. "You have to carefully evaluate what you get and what it's worth. You cannot presume you're going to get what is promised. And you should talk to one of the companies they're working with."

Steve Sanford, CEO and co-founder of Icebox.com, and Peter Gumbel, editor in chief of Business.com, say their incubator experiences were invaluable in moving their companies forward in the competitive world of the Internet.

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This article was originally published in the February 2001 print edition of Entrepreneur with the headline: Peep Peep.

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