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Investing in Incubator Companies: The How and The Why
He’s brought incubation advisement to Russia.
He’s helped Washington University rank first nationally in the number of licensed technologies.
He’s greased the wheels for tech collaborations and business incubation development throughout the state of Indiana.
And he’s acted on behalf of the National Business Incubation Association (NBIA) and presented an intensive training program to incubation professionals in China and Malaysia.
He’s Mark Long, former president and CEO of both Indiana University Research and Technology Corporation (IURTC) and Indiana University Emerging Technologies Center (IUETC), a life sciences incubator.
With over 3 decades of experience under his belt, Long is now the man behind Long Performance Advisors (LPA), a consulting firm specialized in business incubation, technology transfer, and business and economic development.
If you’re interested in founding an incubation facility or are keen on investing in incubator companies as part of your angel investing strategy, you’ll want to hear what Long has to say.
Long’s Story
VH: How did you get into the incubation field? What’s your story?
ML: I’ve been in the medical diagnostics/device business quite a while, in a private company and in a division of a larger company. So, I’ve seen the “technical side” of business and have observed new technologies being taken to market.
As the former Director of Technology Transfer at Washington University in St. Louis, I worked closely with the incubators there (the Center for Emerging Technologies and the Nidus Center) and saw the positive economic impact incubators could have on a community/state.
At Indiana University, I had the chance to build an incubator from the ground up and build new startups to put in that incubator – the best of both worlds. It was a great experience, and I learned even more about how incubators positively affect the local economy.
VH: Throughout the years of operating and helping others in the incubation industry, which favorite anecdote can you recall?
ML: Well, we’ve all had the “chickens” story – which really did happen. When the news release went out about the start of our facility, we received a phone call asking if we wanted to purchase heaters for our eggs…
Mark Long "The King"!
But my favorite story happened on one Halloween night. The fire/burglar alarm at our building kept going off for “no good reason.” (It turned out that there was a short in the wires.) I had to drive back to the building to enter the code number, shut it off, and check the building for safety.
Remember, it was Halloween, and I was in “full costume.” It was about 8pm, and some of the scientists were still there in their labs. You can imagine the confusion on their faces when “Elvis Presley” suddenly popped up in the building, walking around, checking all the stations for fire and glass breakage while asking if everyone was okay. Good thing the police didn’t show up!
Working with Incubators / Investing in Incubator Companies
VH: Both angel investors and incubators invest at the earliest stages of a company. Can you give some examples as to how angels can benefit from working closely with an incubator?
ML: The true benefit of working with an incubator for angels is “pre-screening.” When an angel investor works with an incubator, that investor has the advantage of knowing the candidates in that facility have been “pre-screened” for selection into that incubator.
Most facilities have a rigorous entrance qualification. The company’s financials, management team, and business plan have all been carefully examined before the company is approved for admission into the facility. This spares the angel investor some due diligence and gives some assurance that the company is legitimate or it’d not have been admitted in the first place.
This may not be true everywhere, but a quick review of the facility’s admissions criteria will help the angel investor determine the degree of diligence that’s already been performed.
VH: Are there any criteria that angels must satisfy before the incubator would partner with them? Or is money the only concern?
ML: Money can never be the only concern. Investors must be “qualified” investors. They must have an interest in the true mission of the incubator and its clients, and they must understand the process of incubation.
My favorite quote about incubation is “It’s an incubator, not a microwave.” In other words, it takes time. Investors who don’t understand the incubator’s mission and how an incubator works won’t be satisfied with investing in incubator companies.
VH: How should an angel evaluate an incubator to determine whether it’s worthwhile?
ML: Typical metrics include the incubator’s –
- mission
- pipeline
- graduation rates
- management team
- history or track record
- focus or types of companies it services, e.g. mixed use, biotech, hi-tech, kitchen, cleantech, information tech
VH: What’s the process of working with an incubator? What should the angel expect?
ML: Many incubators don’t have a formal, structured process or agreement for working with angels. Rather, they serve as a “conduit” or type of “marriage broker” who connects the angels with suitable companies that need funding.
The primary mission of most incubators is to “do what it takes” to ensure the success of their clients. In most cases, that typically includes assisting clients to find proper funding. Therefore, terms, process, investment structure, etc. will vary from deal-to-deal.
Join Venture Hype next week as the rock star imparts his expertise in founding an incubation facility — an interview not to be missed for those who are serious about this option.
* VH: Special thanks to Sandra Cochrane for recommending Mark “Elvis” Long.
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Whom to Back: Gen Y vs. Old Guys Entrepreneurs
Credit: ezioman
They’re young. They’re brash. They expect an immediate payoff, have no respect for their elders, and think technology can replace good, old-fashioned elbow grease.
And work Saturday? ROTFLOL (translation: Rolling on the floor, laughing out loud.)
They’re Generation Y. At least that’s the stereotype.
But angels might want to withhold judgment on these brash young hotshots. They might be worth knowing after all: Turns out, Gen Y entrepreneurs are more likely to succeed in a recession.
The Kids Are All Right
That’s the findings of one “study.” The American Express (AMEX) OPEN Small Business Monitor surveyed small businesses and found 80% of young entrepreneurs, ages 18-28, have a more positive outlook on prospects in the recovering economy.
In its annual 30 under 30 look at upcoming superstars, Inc. calls these young guns a “dynamic group of self-starters that has managed to raise money, launch new products, build new technologies, and tap into underserved markets.”
Old Guys Are All Right Too
But in his brilliantly opinionated article, Vivek Wadhwa finds that when it comes to founding successful startups, old guys rule. Companies with an “old guy” at the helm are far more likely to survive and thrive than companies run by founders who just started growing facial hair.
“The old guy,” which he defines as someone who is 40 years old or more and has at least 2 kids, have been around the block; they’re motivated to get out of their middle-class life and they know a thing or two about running a business.
Heavenly Match
So angels, look beyond generational perceptions, and misperceptions, to see the very real advantages Gen Y and Old Guys can each bring to the table.
As a young South Caroline entrepreneur points out — young guns are more flexible and innovative to make a profit but old guys are more capable of dealing with the ebbs and flows of business.
Experienced angel and Gen Y entrepreneur – could be a match made in heaven.
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Research on Women Angel Investors
If you look at the startup and angel investing arena over time, you’ll find that it truly has been a man’s world. In many cases — it’s been a White man’s world.
The research on female angels isn’t one to please the feminist. According to the Center for Venture Research, one third of respondents to a research study [pdf] believe women investors are at a disadvantage because their sources of wealth are more often inherited than earned. Such individuals, then, might not have the professional experience or credibility of investors who created their own wealth.
The Social Science Research Network has also found evidence that female angels have lower levels of confidence compared to men. Also, women tend to be more risk adverse by nature, which can lead to missed opportunities in riskier deals.
The Future Can Be Bright for Female Investors
While findings throughout the industry support the assumptions that women are indeed the weaker sex when it comes to investing, it doesn’t mean that the future isn’t bright for female angels. It simply means they need to get a little money, nerve, and experience to play in the game.
As Dr. Hardaway so eloquently expressed, “I’ve been in about 50 real estate deals and about fifteen tech deals. I am actually a deal junkie. Most of the men I talk to don’t have my stomach for roller coaster rides. But guess what? I’m a woman. They are SMALL deals. I’ve never lost everything, and I have had a fabulous time. I will obviously do this until I completely lose my senses.”
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Angels, Is the Entrepreneur Willing to Flip Burgers?
So you’re listening to the pitch. It’s intriguing, without a doubt. The presentation is spot on, the financials add up, the CEO is a ball of fire.
But angels, ask yourself: Is this entrepreneur willing to flip a few burgers? Or at least willing to make some sales calls or write a few product specs? You know … do the dirty work?
Flip a Few Burgers
Sometimes, that’s what it will take. Smart startup founders should be willing to take a hands-on approach, says entrepreneur-turned-investor Mark Suster. That’s right – they should flip burgers.
Suster did it both ways – hands-off and hands-on. In his first tech startup, Suster and his partner landed US$16.5 million in capital before they were even working it full-time; they hired a team of executives and a corral of developers. This was in 2000 – as market valuations fell, the fledgling startup had to cut its staff by more than half in one day. Then, Suster says, he was forced to do the hands-on stuff – make sales calls, make decisions about technical operations. He was flipping the burgers and getting an education in how his company worked.
Grill Marks
The second time around, Suster stayed closer to the flame. This time, his startup raised only US$500,000 – and had a shoestring staff as a result. Suster did more of the down-and-dirty work himself, including marketing, sales, even designing the company logo.
“I did the grunt work. And this is how it should be in startups,” he says.
Just don’t confuse a willingness to take a hands-on approach with the steamrolling Know-It-Alls. The latter, the Armies of One, think they can do it better than anyone else. So they do. And usually, it becomes quite apparent they can’t do everything they think they can. It can be a fine line, but an important distinction.
Lean Times
Often, flipping burgers is a simple matter of survival. Face it: Angels are investing less. A study just released by the Center for Venture Research shows investments were down 27%, to US$9.1 billion, in 2009. The average deal size shrank considerably — by 31% — as well.
That’s not to say angels have shut Heaven’s gate. Angels are investing less, but they’re spreading the wealth thinner and farther afield – they’re spending less on more startups. With less venture capital upfront, the playing field has changed. As a result, the Do-It-Yourself approach is becoming one of the new rules of angel investing.
“Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations, and focusing on an aspect of the business that can generate revenue,” the New York Times wrote last week.
Red Flags
Angels, consider the burger litmus test when as part of the pitch. As the competition heats up, which entrepreneurs are best equipped to withstand the grilling?
As Suster says, if the “CEO can’t drive the demo or the financial model themselves it is a big red flag.”
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Interesting Finding on Angel Investments in 2009
Much like the majority of the economy, angel investments have felt the crunch of 2009. In fact, according to a University of New Hampshire Center for Venture Research analysis, The Angel Investor Market in Q1Q2 2009: A Halt in the Market Contraction, total investments are down 27% over the first half of 2008.
The interesting finding from this analysis is that while overall investment dollars are down, the total number of ventures that received funding in the same period increased 6% over last year. The number of active investors in the first half of 2009 was virtually unchanged from 2008.
A Change in Focus
One very obvious change between 2009 and 2008 is the number of investments in the seed and startup stage for angels. In the first half of 2009, 27% of angel investments focused on this area. While this appears to be a strong number, it is actually a 19% decrease from the year prior and the smallest percentage focused on this area in several years.
“This change in investment behavior is likely an indication of both a need to increase investments in existing portfolio companies and a change in angel’s risk tolerance,” said Jeffrey Sohl, director of the UNH Center for Venture Research at the Whittemore School of Business and Economics.
Trend Recognized Early On
Investors and others watching the market are likely not surprised at the UNH finding as this lower spending trend was identified earlier in the year. The Charlotte Business Journal reported in March that the dollar amount of angel investments had declined 26% nationwide versus 2007, although the volume of deals had remained largely unchanged.
This trend is interesting in that angel investors appear to still want to invest their money, but the number of dollars per opportunity has changed. While these cautious individuals are striving to spread the risk, startups are finding that their valuations are no longer the bloated approximations of a booming economy and instead more realistic and achievable.
Predictions Challenged
In late 2008, a number of industry participants were attempting to predict what 2009 would hold for the
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