Just Managing: The Myth of the Turnkey Company

There's a lot of buzz today about business incubators, which have become so hot that they are not only taking their seedlings public, they're also selling their own root stock.

Idealabs, one of the first and best-known Internet incubators, recently announced plans to go public (and was thus unable to speak publicly), while others, such as CMGI and ICG, are richly valued by shareholders enamored with the idea of rapidly seeding companies. The rise of business incubators is underscored by a belief that smart operators can make the startup process routine. By providing a shared, standardized set of business processes and tools, a centralized idea factory can quickly capitalize on great ideas.

Incubators, however, are suffering a backlash. That's because many are sprouting up out of nowhere, asking for too much equity in their sprouts and pretending to have more knowledge and authority than they actually do. Tell me, would you really want a college student as your business guru just because he's managed to raise venture money?

Such concerns, which are certainly valid, could be called the low-hanging fruit of incubator bashing. I have a different set of concerns. For instance, the current crop of company-birthing centers are not incubators in the traditional sense.

The National Business Incubation Association's executive director, Dinah Adkins, points out that the vast majority of the more than 800 business incubators are nonprofit entities designed more for economic development than as investment vehicles.

This new breed functions more like venture capitalists of five or 10 years ago. Before the recent onslaught of money forced them to seek larger initial stakes in their companies, venture capitalists would help fledgling companies with small investments and connections to the right people and resources. Today, they are chasing such big ventures that they can't afford to get involved at the inchoate phase.

That's created a market for incubators like eCompanies, the richly publicized venture of Internet heavyweights Jake Winebaum and Sky Dayton. It enjoys the same type of selectivity that the elite VC firms have traditionally displayed. Having raised more than $130 million to invest, the company is still choosing with the utmost caution. According to Christian Gunning, eCompanies will proceed with about eight ideas this year. The hyped new venture receives about 300 business plans a month yet goes in-house for 80 to 90 percent of the companies it backs. In other words, few beginners have any legitimate chance of benefiting from its expertise and connections.

Moreover, investment incubators raise a key startup issue: Can you build a "turnkey" operation? Is it possible for smart operators to compile enough prefabricated components to rapidly form a viable company around a great idea? Intuitively the idea makes sense. After all, people who drive cars don't necessarily need to know how to build an engine. Likewise, how many people using a spreadsheet or e-mail could debug a problem in the code?

Here's one reason why simultaneously meeting the common needs of Internet companies (from Web design and experienced help to capital) isn't enough to ensure success: Despite everything everybody says about Internet speed, there are fundamental elements of building a company that you can't accelerate. And the most important element is learning. Traditional companies stay in traditional incubators for close to 2 1/2 years, says Adkins, a period in which the founder develops a tremendous amount of experience and education about what the startup needs. Learning takes time. It is a natural, organic process and can't be forced, regardless of external market exigencies.

The learning curve raises another critical issue, which is that owners tend to discover the unique makeup that works best for their unique company. Owners need to realize the value of building their company from the ground up, assembling the tools themselves. There's nothing wrong from tapping into such resources from one source, but it isn't necessarily the right answer. Company builders who learn how to adopt the most appropriate processes and resources for their specific enterprise are those who understand how to adapt on a dime in this fast-moving economy.

Building a company is, above all, a heuristic process: The act of building the company teaches you what you need to know. Early failure, for example, often pushes companies into a market that they should occupy or forces them to adapt a product to better suit their market. Many incubators consider themselves "accelerators," with an ability to bring a company to fruition in 90 to 180 days. Under the new laws of the Internet economy, that's certainly possible. But failure to tend to the oldest need of endeavors - human knowledge - will do nothing but accelerate failure.

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Just Managing – articles that Tom wrote for The Industry Standard and some Business Articles written for Inc., Fortune Small Business, Harvard Management Update, and other places.


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