Incubators are Usually Dumb, This One Might Not Be

July 26, 2010, by Alexander Haislip

Incubator. Just the sound of the word may call to mind raucous Internet entrepreneurs spinning around in Aeron chairs, burning through money.

Yet a new incubator in Texas might have a shot at reinvigorating the idea for startups in the region. The North Texas Enterprise Center for Technology (NTEC), announced today it was working with 10 venture capital firms to stimulate the growth and development of cleantech and medical device startups in the Frisco, Texas area.

Incubators are designed to give a several startup companies a place to work and some degree of back-office support while they are in their most formative stages. The idea is that half a dozen startups can occupy the same office space when each has only three or four employees and can move out into bigger offices when they raise venture capital dollars or develop a level of self-sustaining sales. It’s a good way for small companies to pool their resources and save money.

The dotcom boom gave incubators a bad name. Several real estate firms in San Francisco opened trendy office space in South Park and other areas in the South of Market area of the city to startups looking for a home. The real estate owners traded rent for stock options, hoping their tenants would create billion dollar Internet companies.

It was a scheme that worked for some, no doubt. But real estate owners are not especially well suited to evaluating early stage startups. So a decade after the boom, incubators are seen by many as a cesspool of amateur entrepreneurs and poorly executed startups.

That’s a fate that NTEC should avoid. It’s equipped with three things that the real estate developers of San Francisco lacked.

First, it has recruited people with serious chops to help the startups it works with accelerate their development. Its directors and advisers hail from tech giants such as Texas Instruments, Blue Cross Blue Shield and several major research hospitals in the region.

Second, the incubator isn’t going to compete with venture capitalists to find and finance early stage startups. It’s going to invite out-of-state venture firms to come to the incubator to find potential investments. Partners include Arboretum Partners, Chrysalis Ventures, Noro-Mosely Partners and H.I.G. Bioventures, among others. There’s a real need for this type of partnership in Texas, where startups only raise about a tenth as much as startups in Silicon Valley do during any given year.

Third, NTEC has a clear and well-reasoned mandate. The program is focused on medical device and cleantech startups that can actually benefit from sharing production and prototyping equipment.

Since the dotcom boom, medical device startups are the only ones proven to flourish inside incubators. NTEC is situated to provide a regional alternative to two prominent venture capital supported incubators in other parts of the country: The Foundry, which focuses on medical device startups in Menlo Park, Calif., and Accelerator, which works with healthcare-focused biotechnology startups in Seattle. Each is designed to do a lot of the hand-holding necessary for an early stage technology venture without taking up lots of resources.

The Foundry is backed by Split Rock Ventures and Morganthaler Ventures, each a well-known venture firm with significant life sciences experience. It works with one or two startups at a time, helping them navigate intellectual property agreements with universities, giving them office space to work, lending them tools to prototype their medical devices and lending a hand with the management and administration of the startup.

Accelerator is a management company created by a group of health care-focused venture firms, a real estate firm and the Seattle-based Institute for Systems Biology. Its aim is to utilize the same management, office space and resources to save on costs for the three to five startups looking to prove their worth. Accelerator’s executives focus on getting startups to critical milestones as quickly as possible. That can help the startups raise less money when they go on to collect later rounds of venture capital investment.

Working with The Foundry or Accelerator doesn’t oblige a startup to raise venture capital dollars from the firms that support each incubator. But it does give the venture firms a close relationship with the startup, making it highly likely that they will work together for a subsequent financing round.

It’s unclear exactly what relationship the 10 venture firms who are partnering with NTEC will have to the startups financed there, but it should be a fertile hunting ground for innovation in the region.