History. Models. Beginner Tips
The practice of the last months of last year finally confirmed the majority of active participants in the Internet market in the idea that there are no radical differences between the network business and the business in its more traditional forms. The Gold Rush is steadily coming to naught. The time has come to take intermediate results, adjust plans and get down to business that will not bring the majority of fabulous wealth in one night, but may well give a good income in the medium and long term.
Despite the spilled cold shower, no one disputes the fact that the birth of the new economy really took place. The most irreconcilable critics and skeptics abandon their warm places and seek a new application for their talents and entrepreneurial acumen.
What is the difference between the “old” economy and the economy of the “new”? We will consider only the most obvious differences (see table. 1).
Changing the business environment usually brings with it new opportunities that simplify the creation of companies, and new threats that greatly complicate their success.
Companies that could not quickly gain a foothold in the market, form correct and stable alliances, attract adequate sources of financing, use market opportunities, manage numerous intangible success factors, go off the road much faster than before.
I will give five aspects that determine, in my opinion, the success of a modern young company in the high-tech market.
- The speed of development corresponding to the speed of market development. If you have an idea, act. There is no time for carrying it – it will be necessary to polish and grind in the implementation process.
- Ability for partnership and synergy (that is, a state where joining forces leads to much greater success – when two plus two is much more than four). No company in the new economy will survive alone – the formation of alliances and partnerships is inevitable.
- Ability to innovate and continuous development. There are no fixed truths, no one can feel safe. Innovation and development should be embedded in the structure of the company and put on stream.
- Cultivation of talents. And first of all, those talents that lie in the field of key competence of the company. These talents are her main asset.
- Global thinking. Perhaps this is easier said than done. Nevertheless, I would be fairly careful about projects that are clearly focused only on the local, local market.
What questions should you answer yourself, trying to enter the world market?
Is my business model suitable for operations on a global scale (the scale of a “global presence”)?
What types of online and offline businesses are more suitable for a global online presence?
Which market should you focus on?
With whom does it make sense to enter into partnerships in order to gain access to the global market?
What should be the organizational structure?
How can you scale your business to global markets?
Reasons for the emergence of incubators
First of all, we should mention the fact that over the past few years (from the strength of 6–8) the role of money has changed significantly. This observation especially concerns the front line of the development of new production forces – hi-tech, and above all information and biotechnologies. Money is increasingly beginning to acquire the properties of commodity, that is, a product, a commodity.
First of all, I, of course, talk about venture money, about venture investment.
In 1999, the total volume of venture capital funds increased by 67% compared to the previous year and exceeded $ 46 billion (for comparison, in 1990 this figure was $ 2.65 billion). At the same time, the size of individual funds exceeds $ 1 billion. Such a mass of money looking for applications creates a number of problems, and one of them is the increasing difficulty of finding ways to place them in small start-up companies (Table 2).
At the same time, the emphasis is shifting from startups of late stages (pre-IPO) to companies that are in the early stages of development. The latter account for approximately half of the companies invested, and accounted for 42% of the total investment.
If we talk about investments only in Internet companies, then in 1999 the amount of investments amounted to $ 19.9 billion.
Under these conditions, business incubators and, in particular, such a variety as Internet incubators, become one of the reliable conductors of venture capital investments in start-up young companies.
What is an incubator?
An incubator is a controlled environment that provides care, cultivation and protection for new enterprises at the very early stage of their development – until they become ready for self-sustaining development.
Student Agencies Inc., which appeared in Ithaca, New York in 1942, was recognized as the first incubator. Student Agencies Inc. engaged in the incubation of enterprises created by students. The real big incubator was ARD (American Research Development), created in 1946 by Massachusetts Technology Institute president Carl Compton and several MIT graduates. Most of the first incubators were created as non-profit or non-profit organizations. And several decades passed before the “incubator movement” gained momentum, which was marked by the transition from non-profit to a commercial concept.
Business incubators that appeared then – and have already become classic – provided a standard set of services (which will be discussed below) to enterprises of certain industries (biotechnology, telecommunications, etc.). At the same time, by creating a unified infrastructure, it was possible to achieve significant savings in its maintenance, provide high-quality services and create a communication environment that contributed to the intensive development of companies. Such incubators at first took money for their services.
However, gradually, as more and more enterprises showed staggering growth, including an increase in their value, the owners of incubators began to accept shares of such companies as payment. After that, the incubator became vitally interested in attracting venture investors (after all, someone had to sell these shares), and more and more venture investors began to get acquainted with the business incubator model.
Thus, it only remained to take the last small step – and the venture capitalists took it in the mid-90s. They began to create business incubators themselves in order to begin to bear fruit during the entire period of growth of companies. And despite the fact that now they also carried all the risk, this did not stop them from giving the idea that final shine that we see now. Further, of course, specialization began within the community of business incubators, their Internet variants appeared.
I must say that venture capitalists turned out to be good gardeners: today in the world there are much more than 500 Internet incubators alone.
Further, by the word “incubator” we will mean only Internet incubators.
Classification of Internet Incubators
We offer the following type of classification:
Venture incubators. They make up approximately 54% of the total.
Venture Accelerators Their share is about 38%.
Venture portals – 4%.
Network incubators are also about 4%.
They differ in the set and essence of the services they provide. The boundaries between different types of incubators are very blurred, and their own name often lets in even more fog.
Venture incubators are the most common type. They provide the most comprehensive range of services, namely:
office infrastructure (premises, furniture, office equipment, computers, internal network, external communications, Internet access, conference rooms, etc.);
back office (qualified personnel, technical support, modern software, etc.);
technological support (expert assistance, setting up a management system, development of intellectual property);
consulting support (both with the incubator’s own resources and through the involvement of industry experts);
training services (including internships in other companies, increasing the level of competence of managers and specialists);
legal and accounting services;
human resources management (search and hiring of required key specialists);
incubator umbrella brand and existing relationships (for example, when interacting with venture investors, public authorities, similar large companies from other countries).
The venture accelerator is more of a service company providing assistance to start-up enterprises in the following areas:
consulting services for the preparation of a business plan, marketing and positioning of the project, market launch;
assistance in the process of “due diligence” (that is, thorough familiarization with the company) to startups and potential venture or other investors;
other types of service that are necessary for a start-up company and for which it pays for its own shares.
However, sometimes accelerators also provide office infrastructure or other types of services more characteristic of venture incubators. In this case, such accelerators are usually structural units of venture funds or consulting firms such as Andersen Consulting (now Accenture), McKinsey, etc.
A venture portal is an Internet or extranet site that brings together a community of novice and experienced Internet entrepreneurs, consultants and investors.
This site allows entrepreneurs to present their business plans to investors, get help in fine-tuning them, and investors to find good investment opportunities. Examples include Vfinance.com, NVST.com, TheElevator.com, Garage.com.
Network incubators. They can be called, with a great deal of conventionality, the “major league” of Internet incubators. As a rule, they are a mixture of venture capital funds and a management company. In favor of this point of view, the fact that the most prominent representative of this category of incubators – CMGI – has an investment fund of $ 1 billion. Of course, having such a money fund, CMGI does not go to the smallest detail and makes investments of the second or third round, often speaking in as a strategic investor. Therefore, CMGI often works with companies located in different cities, placing only a working group or division of the incubated company in the incubator.
Other examples of such incubators are Internet Capital Group and Net Value Holdings.
There are other possibilities for classifying incubators. In my opinion, the most important of these are the following.
Vertical incubators. These include incubators that specialize in growing companies that belong to the same vertical market – for example, the mobile commerce market. In such an incubator, there may be companies involved in infrastructure development, for example, at the level of data transfer protocols, security, etc., and companies specializing in mobile content and sales through mobile access devices.
Incubators focused on internal ideas. Most often, this group includes incubators created with the participation of large multinational companies. Such incubators are engaged in the development of companies born within these corporations, based on their internal ideas. Another option for relying on internal ideas is incubators specializing in b2b companies. So, if incubators are organized by people who are experts in some offline field of business, they fully represent the opportunities that this business can simplify and intensify the exchange of information. They have the opportunity to form development teams on the basis of their own ideas, attract qualified managers and carry out general supervision of their work.
A typical average investment in one company by Western incubators is $ 2 million. At the same time, the minimum bar ranges from $ 50-500 thousand.
The approximate size of the block of shares of companies claimed by the incubator depends on what category it belongs to.
So, venture incubators operate in the largest range – usually from 25 to 60%.
Accelerators, like network incubators, as a rule, gain from 5 to 25%.
The difference between them most often lies in the fact that in the case of accelerators, the remaining share belongs to the managers of the company or project, in the case of network incubators, usually a significant part of the shares is distributed among several co-investors and / or circulates on the free market, while the managers of the company own small blocks of shares.
The business model of venture portals often involves subscription forms of payments for access to the service.
If we talk about Russian practice, then the average investment size of a venture incubator in one company is $ 50-100 thousand, and the share of shares received by the incubator in exchange for investment lies in the range of 40-60%.
Of course, the general approach is that the more developed the project at the time of the start of incubation, the greater the investment in it is possible and the smaller the share in it will be received by the incubator.
The calculation of the necessary investments and the shares acquired in exchange for them in the company is made based on the assessment of the project or company as an existing or potential business with all its components (idea, team, market in which the project operates, etc.).
There is no established system for evaluating Internet companies, at least in Russia.
The proposed standard approach, based on the calculation of standard project indicators (such as NPV, IRR, payback period, etc.), supplemented by a marketing analysis of the market size and the prospects for the project to gain a certain share of it, may well serve as the basis for starting a discussion of the project or company prospects .
However, experience shows that all this is fundamentally reevaluated at the due diligence stage, therefore, in most cases, the personal qualities of the project team, its ability to perceive new ideas, as well as adapt and integrate into the general context of the project come to the fore.
On the way to the incubator
What should an entrepreneur know when contacting an incubator? We divide the answer into two parts – external and internal. So, outside you should focus on the following points:
How suitable is the business model used by the incubator for your company? What services do you need? What can you do without?
Which companies are already in the incubator? How can you help each other?
What is the previous experience of incubator managers, employees and even investors? What does it consist of? How useful will it be to your project?
What good connections can an incubator put at your disposal? What is their value to you?
Are there examples of successful incubator-grown companies? What kind of companies are these? How illustrative is their example for you?
The inner side, the entrepreneur’s view of himself and his project, is perhaps even more important.
How far have you progressed in the development of your project and how far does this “far” correspond to the requirements that the incubator has for incoming projects?
What stage of development is the project at? What to do next?
What are the main difficulties of the next steps? Is it possible to commit them alone?
What exactly do you expect from an incubator?
Are you ready for the next three to five years from morning to late evening to deal only with this project, forgetting about everything else?
In order to better understand the point of view from which the venture investor in general and the incubator in particular look at the project appraisal process, we will try to give one of the models for evaluating the attractiveness of projects that we use in our work.
Each Internet entrepreneur, if desired, can use this model to evaluate his project even before he makes a proposal to the incubator.
This model demonstrates the typical process of development of an Internet project and makes it possible to take into account factors such as its investment attractiveness, the likelihood of successful negotiations on investment, the degree of success of the project team, etc. The model allows you to standardize the description of the project in the process of due diligence, and can also serve that mirror in which the team will see the future of their project.
Project status at point “A” (starting point of the spiral)
The project is at the initial level – there is an idea, a group of developers, there is no implementation, there are no consumers.
In this case, the project team is ready to cede a significant share in the project, taking very little to itself – up to several percent.
The project value at this point is the lowest.
By project value, we understand its value to the investor as a good way to invest money.
Project status at point “B”
The project team has achieved the goals that it set itself at the very beginning. The project is ready to launch, the project team has become a team.
In this case, the project owners are not very inclined to part with a large share in the project, because they believe that now they will completely cope on their own, and want to reap the benefits of their efforts without sharing with anyone. The share in the project, which they claim in the process of negotiations with investors, tends to 100%.
Project Status at A ’
The project owners encountered problems in the development process of the project, see its weaknesses and have a new plan to dramatically accelerate the development of the project. Often at this moment the resources, due to which the project was still growing, are exhausted.
In this case, the project owners are again ready to part with a significant share in order to be able to take the next step.
The difference in the project value at points A and A ’is the team D, you can also call it the“ distance between the turns of the spiral ”), reflects the team’s ability to develop the project.
Condition at point “B’ ”
The project owners again took the project to a new level, they want to realize their success and are not inclined to take someone to share.
“Participation lines” clearly show that the spiral is oblique: as the project value increases (moving upward), points “A” and “B” synchronously shift to the right, demonstrating the awareness of the project team of its value and, accordingly, their desire to reserve as much as possible share in it.
“Most Interesting Area” means the area in which the incubator as a venture investor is most interested in working.
“Least interesting area” – respectively, in which it is not interesting.
The name of the part of the spiral on which the project is located (for example, the first half of the first turn), allows you to definitely and briefly give a general description of this project in the coordinate system used.
Of course, a model is a model, and a project frozen on one point does not happen. Moreover, some part of the project may be located at point “A”, and some – at point “B” – we are talking only about the dominant trend.
Despite the simplicity of the model, it allows you to make adequate predictions regarding the development and prospects of future relationships with project teams offering their offspring for incubation.
And finally, a few words in conclusion. One of the basic principles that the venture investor in general and the incubator in particular follows is the principle of partnership – the venture investor does not so much offer money as himself with all his skills, experience, connections as a partner. Therefore, the main advice is to look at the incubator not as a simple source of money (a “cash cow”), but as a possible like-minded person and friend with whom you can share the hardships and joys of a long road to success.
|Old Economy||New Economy|
|Building on knowledge and skills||Learning is a lifelong continuous process|
|Reliance on security (in the broadest sense of the word) and stability||Risk appetite|
|Orientation to preserve old jobs||Orientation to create new jobs|
|Reliance on capital||Reliance on knowledge and intellectual property. Capital becomes more a working tool, a factor of production|
|Striving to maintain status quo||Speed and change|
|The concept of “win-lose” (one of the parties benefits from the transaction more than the other) and the “zero balance” (both parties simply seek to minimize their losses)||The concept of “win-win” when each of the parties to the transaction receives a clear gain from the transaction|
|High degree of external regulation||Formation of new alliances and self-regulation|
|Parameter||1998 year||1999 year||Growth percentage|
|Total investment in startup companies||Over $ 14 billion||Over $ 35 billion||250|
|Number of companies invested||About 2800||About 4000||41|
|Average investment in a technology company||$5,15 million||$ 9.6 million||87|
Source: Pricewaterhouse Coopers research
The first “Internet Incubator”
The development of the Internet stimulates the emergence of a large number of groups that have original and promising ideas, many of them need support at the initial stage. “Internet Incubator” provides developers of projects that are promising from the point of view of commercial development and attractive to potential investors, financing, infrastructure (office, equipment, Internet access), consultations, the opportunity to participate in marketing programs and other services necessary for a quick start. In exchange, the Incubator receives a share in the authorized capital.
The first project placed in the “Incubator” was the online auction www.stavka.ru. According to Andrei Vakulenko, CEO of Internet Incubator, the choice is not accidental: the project is being implemented by a professional development team, the solution promises to be unique in terms of flexibility and customization options for users’ needs.
At the initial stage, which, according to the estimates of the leaders of the Internet Incubator, will last 6-8 months, it is planned to invest from 20 to 100 thousand dollars in the project. In the future, it is possible to attract venture capital.
According to the representatives of the Internet Incubator, they are ready to consider any type of business related to the Internet. The main requirements for projects are the presence of an entrepreneur leader, a professional team, and a clear strategy for the next 3-5 years.
The share of the Internet Incubator in the authorized capital will be from 20 to 50%. It is established on the basis of project cost estimates. Perhaps the participation of an external investor. At the same time, the total share of the external investor and the Incubator will not exceed 50%. Maintaining a controlling stake in project personnel is a principled position.
Currently, the financial capabilities of the Incubator allow you to place 10-15 projects. It is expected that in 3-4 months, additional investments of $ 5-10 million will be received.