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Expert Answers to Biz Questions

Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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The Biz Question

I've been looking at Idealab or Ideafactory as far as support, that will make ideas happen fluidly. My question is, anybody had any experiences with either? What are the advantages of working with them rather than doing it "on your own"? It also seems to me that Idealab is more corporate. Thanks.

Answer from our Guest Expert Peter Soh of AdviseInc.com

Good question!

First, since Idealab and Ideafactory are business incubators, let's define what a business incubator is for those who aren't sure what they do.

What a Business Incubator Does for Your Startup

A business incubator provides administrative, technical, marketing, and financial support to startup companies in exchange for equity in the company. In exchange for this equity, the incubator provides a menu of resources for entrepreneurs. Resources could include strategic development, marketing strategies, or a legal team, or in your case, an idea think tank.

As you know, when you're first getting started in business, you can be haunted by an eerie "lone gun" feeling. An incubator helps you break out of that feeling with more confidence. They'll help you avoid many typical mistakes, such inadequate accounting, little or no legal safeguards, and most of all, inadequate capitalization.

How Incubators Get Hatched

Business incubators typically have strong financial backing from pension funds, private equity funds, and accredited investors (investors with net worth of over $1 million). They get started by first-generation entrepreneurs like Bill Gross, founder of Knowledge Adventure (Idealab); David Weatherall, founder of College Marketing Group (CMGI@Ventures); and Skye Dayton, founder of Earthlink, (ECompanies).

Idealab: The Cream of the California Crop

Since I'm more familiar with Idealab, I'll focus on them. Idealab is a Pasadena-based incubator founded by Bill Gross, a Caltech graduate. It's considered one of the preeminent business incubators in Southern California. Gross, who developed several companies before starting Idealab, decided to create an environment for ideas to grow into businesses. Its primary focus is still the B2C (business to consumer model) and it has been on the leading edge of ecommerce since its inception in 1996.

Idealab (www.idealab.com) currently houses 50 or so companies. It has helped spawn Goto.com, Carsdirect.com, eToys, and NetZero. It still remains to be seen if its companies will be successful since many of its companies have yet to turn a profit, but then again, Amazon.com has yet to turn a profit!

Before considering an incubator, here are a few pros and cons to chew over.

The Bright Side to Business Incubators

Business incubators are good news for many startups because:

  • They provide needed infrastructure support.
  • They provide business and networking contacts.
  • They provide referrals for financing or they'll give you the financing you need.

The Dark Side to Business Incubators

Be careful of business incubators because:

  • You lose a possibly larger portion or control of your company (in equity) to the incubator.
  • You lose some flexibility because you're tied to incubator service providers and contacts.

So if you're willing to give up a degree of control in your company in return for needed infrastructure, creativity, or referrals for investors, I'd recommend Idealab or another business incubator.

It remains to be seen if these incubator companies will succeed in the marketplace as a viable alternative to the traditional ways that companies develop. So far, these incubators have helped some of "their" startups go public. But that's often a mixed blessing with Wall Street's recent bashing of ecommerce stocks! Weigh your options and see if you'd rather "go it alone" rather than risk losing more control of your company than you'd like.

Hope this helps you decide whether or not to use a business incubator. Good luck!

Peter Soh of AdviseInc.com

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