Date: August 18, 2000 From the print edition of CityBusiness Incubators Shifting Focus Some go dormant Mark Reilly Senior Reporter The proliferation of Internet incubators was one of the hallmarks of the tech euphoria that lasted through 1999, with about a half-dozen in the Twin Cities and more around Minnesota launched to nurture start-up firms. But a shaky public market for technology issues and changing views on the proper role of incubators have taken a toll. Several of the incubators started last year have shifted their focus to new types of startups or begun raising money to act more as mini-venture funds. Others have gone quasi-dormant - not seeking to fill open space in their offices and disconnecting contact numbers posted on their Web sites. Last year's model saw investors and real estate owners seeking to capitalize on the tech boom by offering space and services to cash-poor startups in exchange for equity that, in theory, could be worth millions. The wisdom of 2000 seems to be that start-up tech firms need money and networking opportunities more than a spare nook in a renovated warehouse. "You're not seeing what was happening last year, when there were incubators popping up all over," said Harlan Jacobs, a Twin Cities investor and owner of an established local incubator, Columbia Heights-based Genesis Business Centers. "In some cases, anybody with a few thousand square feet of space and a T-1 line was opening up as an incubator." The picture is much the same on the national scene. After several high-profile technology-oriented incubators went public during the Internet-stock boom, the ranks of incubators surged - climbing to 800 by early 2000 from 600 in 1999, according to the National Business Incubator Association. But the stock-market falloff, which has hit Internet companies hardest, has worsened their outlook: Shares of Internet Capital Group and CMGI are down as much as 80 percent from their highs, and several incubators that had filed for public offerings have since shelved their plans. There's little doubt about the reasons: Incubators, in their purest form, accept equity stakes from start-up companies in return for space and services. In theory, those stakes will pay off when the startup grows up, acquires more venture capital and either goes public or gets bought. But in a market that assigns low valuations to Internet companies, incubators wind up saddled with unsellable assets. Not all the news is gloomy. Several local private incubators are quite active and there are still plans to launch more; Jacobs, for example, is negotiating with a local industrial company to found an incubator inside its research facilities. And smaller Minnesota cities are still moving ahead; last month, Duluth launched its Soft Center facility, which houses a variety of emerging technology business and includes an incubator. Still, the slowdown in the tech market has been felt, said John Risdall, chief executive of Risdall, a New Brighton-based advertising firm that also quietly runs an incubator venture. "It's affected everybody," he said. "The whole Internet economy is running at half-speed right now." If the market for Internet startups stays cool, some observers expect some smaller incubators to fade away. "A lot of these private incubators are more about real estate business and getting tenants than actually growing technology companies," said Randy Olson, of Minnesota Seed Capital Network (MCSN), which organizes events to link entrepreneurs and local investors. In fact, some argue that organizations like MSCN and NetSuds may be more valuable to fledgling tech firms than any incubator. "Startups don't need office equipment, they need investor contacts," said Steve Johanns, co-founder of Minneapolis-based The Farm Team, which coaches owners of new companies on building their businesses. Technology entrepreneurs being hosted by incubators, though, say that they still offer needed services. Taking space in an incubator, which can offer flexible leasing arrangements along with other services, can be crucial for fledgling firms that need to watch their spending, said Gary Anderson, CEO at Netbriefings.com, St. Paul. "It's an extra thing off our backs," he said. "If we were working in a regular office space, we'd have to deal with three-year leases where we'd always be either undercommitting or overcommitting." Matt Noah, the head of NetSuds, said he still sees a local need for incubators, and wishes there were more. "There is still a need for physical incubating facilities," he said, adding that he may launch his own effort. Others, though, note that one of the earliest arguments for incubators was that they allowed startups to jointly access what was a scarce commodity: high-speed Internet lines. With basic broadband connections now available throughout the Twin Cities, that selling point has vanished, said Olson. "These days the real demand for high-speed lines is outstate, which is where a lot of thriving incubators are," he said. Some Twin Cities incubators say they're going strong, as well. Risdall's firm, which in the past has scored with startup stakes, has invested in about 15 local companies so far this year. The Risdall Advertising Interactive Incubator doesn't conform to the strict definition of an incubator - it only houses one venture, Funeral.com - instead providing business-development services to the other startups under its wing. StartupZoo, another incubator launched last year, is also working to raise capital to fund startups. Located in Minneapolis' Warehouse District, the incubator maintains enough space for about five companies. David Fitzgerald, senior vice president of business development, acknowledged that investors are more leery of tech ventures this year. "The downturn has toughened up the money situation," he said. But he added that "the new market makes a good argument for what an incubator can do: help get new ventures off the ground." Randy Geller, head of the St. Paul Business Development Center - an Internet-oriented incubator started last year in the Lowertown neighborhood and affiliated with Jacobs' Genesis Centers, said he hasn't seen an effect from the market upheaval. "I'm still getting a lot of prospects for new ventures here," he said. The St. Paul incubator has three startups in its building but is dominated by Netbriefings.com, which has expanded several times. But the fallout has prompted changes for Entrenaut, the Minneapolis Internet incubator launched last year by investor Paul Crawford. Crawford said Entrenaut, which hosts about six companies, will avoid Internet ventures in sectors that have lost favor - no more portals or dot-com marketing efforts. And Crawford has pulled the plug, at least temporarily, on two of his existing startups: the food-delivery business Chef in a Box, which he's now looking to sell, and the online-philanthropy business OfficeCause. A third company, StoreitOnline.com, has moved to the St. Paul Business Center, though Entrenaut remains an investor. Minneapolis-based RocketPad, started by real-estate owner Joseph Whitney, is also scaling back. Officials had hoped to raise enough funds to back as many as seven startups in offices near Loring Park; instead, spokesman Jim Brod said the incubator is holding steady at two firms, and not looking for more. "Right now we have our hands pretty full," he said, though he added that RocketPad officials expect the technology market to rebound. "We have faith in the Internet economy," he said. For some incubators, the tech-stock downturn has actually been good news. Genesis Business Centers once focused mainly on medical technology companies, which have been shunned by Net-obsessed investors. "The dot-com mania has been a terrible scourge for med-tech, biotechnology and industrial startups, but it's over," Jacobs said. "Things have basically turned up as a result, and it's a lot easier to raise money now." Jacobs added that incubators that focus exclusively on Internet technology, as many of the newcomers initially did, have a more common problem than a poor stock market. "No matter how many incubators there are, there are only so many good startups," Jacobs said.     For more information, please contact:   John Risdall, Chairman Risdall Advertising 2475 15th St. N.W. New Brighton, MN 55112 ph: 612-631-1098 fax: 612-631-2561 e-mail:   back
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