By Nikki Scott

Version 1.0

In the midst of the ever-present dot com frenzy (that seems to have weathered even a significant drop in NASDAQ), time to market is one of the major determining factors, if not the factor, when it comes to the e-business success. As Guy Kawasaki explained in his "Mother of All Keynotes" at the Spring 2000 Bootcamp for Startups, "Don't Worry, Be Crappy." In short, the Garage.com cofounder explains, "Version 1.0 means never having to say you're sorry." If you have a revolutionary idea, get it out there - and fast. In its first incarnation, "it may be a revolutionary piece of crap," says Kawasaki, but if you really believe in it, get yourself to market. How do you do that? Put your business, crappy or no, in the market faster through the hottest e-business accelerator of the moment - the incubator.

Setting the Scene

We contacted some incubators and incubatees to find out if the experience worked for them.

Jim Burnham is the SVP of Finance at Frontline Capital Group, an incubator specializing in B2B, e-commerce and e-services companies that focus on serving small and medium sized enterprises.

John Suh and Brett Nelson are both from "e-business accelerator" Castling Group. Suh is the Chairman and a cofounder of Castling Group, as well as the CEO of lifung.com, Castling's largest B2B "incubatee." Nelson is a VP at Castling, and the VP of Strategy and Business Development at lifung.com.

On the "incubatee" side, we have David Hodess, President and CEO of Cooking.com, which was incubated at idealab.

~ Why consider an incubator?

According to Castling's Brett Nelson, "there is a dramatically higher success rate for startups grown with an incubator or VC." Incubated status "also tells your customers and potential investors that your business plan is viable, and that people are backing you." Adds Nelson: "The success of a startup company is largely determined within the first 12 to 18 months."

Here's how incubators give you that early mover advantage:

• Office space. This is elementary - and vital. Most incubators house the companies they work with - in fact, many require companies in their portfolios to reside in the same building or campus. This is particularly key in cities like New York and San Francisco, where prime real estate is hard to come by and very expensive. Plus, "in this declined market,"[a nice way to reference the recent NASDAQ crash] remarks Frontline Capital's Jim Burnham, "most landlords are reluctant to enter into a lease with a dot com - especially an early stage company." Flexibility with staffing up is also key. As an incubated startup expands, it won't have to worry about where to put new hires.

• Infrastructure. Most incubators have a broad range of resources at the disposal of their incubatees, saving them valuable time. These range from office automation and technology, to the services of a controller and an office manager, to setting up strategic alliances.

• Support and strategic advice. "If you are a fledgling entrepreneur," explains Nelson, "you may not know everything about things like HR, marketing and taxes - so the advice an incubator can give you can be invaluable."

• Executive recruiting. Any principal of an incubator will agree that a startup is only as good as its management team. To get your business up and running well, notes Suh, "you need high quality, seasoned managers." That's why part of any good incubator's model is to ensure that a startup has a strong management team. At Castling, for example, "we sometimes provide three or four of the top managers." Other incubators use recruiters or tap industry contacts to find the right people for a startup's management team.

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• Camaraderie. "The last major reason for early stage companies to join an incubator," explains Burnham, "is the benefit that comes from being around other companies doing the same thing." Suh and Nelson agree. "If you keep your ears to the ground, you can really learn from the experiences of others - especially if you are new to the industry." Adds Burnham: "Say you want to build your web site. All you have to do is turn around and ask people in your incubator who they used. You're working alongside people who were in your shoes just months before."

"Of course all of these benefits become less crucial if you're well-networked and you're a well-capitalized play," notes Nelson, "because these resources can be bought." If you are just building relationships, however, an incubator provides crucial links.

Choosing an incubator
All incubators are not created equal. In addition to independent incubators like idealab or Frontline Capital, there are incubators/accelerators associated with universities, incubators started by consulting firms, tech-focused incubators started by high tech companies - and the list goes on. Potential incubatees should look for an incubator in their industry and market niche. "The more specifically focused the incubator, the better value you'll get from working with them," says Nelson. "Think about it - if a company has done B2C companies for 10 of its last 12 plays, and you're doing a B2B company, do you really want to be their guinea pig?"

Consider the stage of evolution
Oftentimes the incubator you choose will also depend on what stage your company is at. "If all you've got is an idea [and no business plan], and you want to figure out how to test it" advises Burnham, "you'll probably want to go to an incubator associated with a higher education institution, or a company like idealab. That type of company will take a pure idea, test it out, and grow it." Cooking.com founder and CEO David Hodess took that route - he was a first time entrepreneur when he approached idealab. "I didn't even have a business plan," he admits, "and I wasn't very well connected with the sorts of people who could help me. Fortunately a friend of mine (the founder of eToys) led me to idealab, and I didn't look at anyone else." Judging from the success of Cooking.com, Hodess made the right choice.

~ Every incubator is unique - especially in terms of the benefits they offer their portfolio companies. So once you've found the incubators in your market sector, consider what exactly you want to get out of the relationship. "Are you just looking for office space and infrastructure or do you want management expertise?" asks Burnham. "If you are going into an incubator looking for strategic assistance," adds Suh, "look at the leverage of senior partners to companies in the portfolio. That will help you determine how much personal time the partners/principals will be investing in you. If there are 20 plays per partner, either a few businesses are getting a lot of attention, or none of them are getting much at all."

Chemistry matters
For maximum success, incubatees must agree with their potential incubator's approach to doing business. "I have a particular philosophy on that one," notes Nelson. "Would you invite the partners of the incubator to your wedding? You're going to be spending an inordinate amount of time with these people. Make sure you believe in the way they do business." Echoes Suh: "All that matters to me is the team. The company [the incubator] overall has little to do with the people you'll be elbow to elbow with at 2 a.m. If your philosophies differ, you're going to have problems."

Improving your odds
When you're shopping your business plan, remember that the caliber of your management team is just as important as the quality of your concept. "For an early stage company," notes Nelson, "it's more about putting trust in the people to execute, because I know the business plan is going to change." Burnham agrees: "You need to show that you have, or that you can develop, a good management team. If you don't have a team put together, you should at least know how to go about getting a good, connected management team with top tier talent." The good news is that if you're not well-connected, there are incubators that can help you build that team.

~ Of course "your business plan needs to be focused," adds Burnham. The biggest mistakes he sees include "entrepreneurs trying to be 'jack of all trades, master of none.' People that don't understand the competitive landscape, or the barriers to entry - the basic things you learn in business school." [Speaking of b-school, while the consensus is that 'you don't have to be a Harvard Business School grad to have your concept considered, it's pretty telling that three of our four interviewees are HBS grads.] When determining whether a plan is viable, Suh and Nelson also look for "customer feedback, and a good board of advisors. We want to see that people already in the business believe in your idea."

Also important, "it really helps to have an introduction to an incubator," Hodess reveals. "Having someone who can vouch for you professionally is the single best way to get your idea considered."

Due diligence
It's not time to rejoice once incubators take an interest. "Be really picky," advises Hodess, "take a look at the quality of the companies in their portfolio. He goes on to explain that "you want to make sure the incubator is really delivering value, that they'll be committed to your business, and of course, whether they are people you will want to work alongside for a while." So what questions should you be asking?

The first thing you want to know is their track record - in terms of successes as well as failures. "Ask them for specific references," emphasizes Suh, "but don't stop there. Talk to people they're worked with and find out what they've liked and disliked." "Ask them to tell you about all the deals done in one quarter," advises Nelson. "Ask about a deal that did not go public - then talk to the people involved in that play."

~ After that, make sure you "understand the resources and relationships that the incubator offers you. Most importantly," says Burnham, "a willingness to be right there in the trenches with you. Some incubators say 'we created the environment, you run with it; while others say 'if you need hands-on help, we're right there with you." In short, this means considering what will happen "when the business model hiccups," adds Suh. "Will they be at your side?"

How long will this love last?
Then of course, you'll want to discuss how long you'll be with the incubator. "While there's no set time you should expect," says Nelson, "you want to look for an incubator that is really about hitting critical mass within 6-18 months. If you can't stand on your own within that time frame, you should move on." Both Burnham and Suh agree. "From an incubation standpoint," explains Suh, "the handholding should only last so long. The biggest opportunity cost when you're launching a business is your time, and the time of the senior people on your team." Burnham underscores the fact that "An incubator is not a home for life. Your exit should be part of your business plan." From the incubator's standpoint, he notes, "no incubator operator is going to say 'take as long as you want.' They want a return on their investment.

While none of our contacts had ever heard of a startup being "kicked out" of an incubator, all agreed that businesses tend to "self-select" themselves out "The people [startup management team] vote with their feet. An incubator has little to do with that. Really good people recognize that there is a fine line between commitment to the business and knowing when something doesn't make sense anymore." "Sometimes you flex with the market and reinvent yourself," observes Nelson, "but if Microsoft enters your niche and starts throwing money around, you may have to call it quits." One advantage of working with an incubator, though, is that if you are talented, the relationships you make will help land you other jobs. Says Suh, "Your integrity and skill set will outlive any success or failure."