

There Is an Incubator Bubble—And It Will Pop - hung
http://www.xconomy.com/national/2011/08/12/theres-an-incubator-bubble-and-it-will-pop/

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wisty
An incubator bubble isn't a scary bubble.

Bubbles are scary when they fill one criteria - investment in the bottom of
the pyramid is feeding the top, making the whole thing look more profitable
than it is.

For example, in the tech bubble, the new companies were buying Sun servers,
Oracle databases, and Yahoo! ads. This made Sun, Oracle, and Yahoo very
profitable, which encouraged more tech investment. But that snake can't eat
itself forever, and when investment slowed it all went bust.

Likewise, housing bubbles affect (effect?) so much of the economy they can't
help but feed off themselves.

And in a classic Ponzi scheme, the mechanism is the same - the bottom feeds
the top, so people think that there are outsize gains to be made. Those gains
evaporate once new entrants slow.

Now, there's some new startups like Heroku who are "selling picks in a gold
rush". But there's plenty of others like Groupon and AirBnB who are selling to
the wider economy. The successful internet start-ups don't _usually_ feed off
new entrants, so I don't think a really scary bubble can form.

That said, if a bunch of random airheads (who are these 60+ new incubators?
top tier VC? bottom tier VC? government? universities? there will be winners
and losers here) think they can attract the same talent as Paul Graham, and
vet business and technology plans as successfully, they may stand to lose
their shirts.

~~~
namityadav
Off topic, but I think you'll appreciate this:

Affect is a verb (Housing bubbles affect so much of the economy), and effect
is a noun (The effect of the housing bubbles is so much). My poor formula to
remember that effect is a noun: Remember the term "after-effect"

~~~
teaspoon
Actually, either word is both a noun and a verb.

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Jun8
Wow, and they sell this guide for $149! I think "bubble" is misused here. For
example, one talks about the "housing bubble" in China (currently a big
problem there). What this means (in layman's terms, which is how I understand
complicated economic stuff like this) is that the value of something has gone
way up than normal due to some factor, which may or may not be artificial
manipulation (since price of something is dynamically determined, the meaning
of "higher than normal" is a bit complex).

Now, in the case of incubators, they report that there's a 3x increase 2
years. This may be healthy development filling a need or it may that there are
a lot unnecessary incubators. You can't tell at this stage, since the optimum
number of incubators determined by market conditions is hard to tell.

The more you think about the harder it seems to judge the success of
incubators, but in the end it comes down to money earned: how much it invested
- values of current holdings is one simple way of doing it, I think (although
this doesn't take into account other criteria, such as attracting companies to
a region, which may important for some incubators).

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furyg3
I wonder if this has anything to do with the Incubator Incubator
<http://incubatorincubator.com/>

~~~
jwingy
I almost wasn't sure if that was real or not till the front page changed to
the guy with the big expression holding a white piece of paper with the words
"CONTRACT" in large, dark, font. Well played.

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canistr
Seems more like there is a bubble of people calling out other bubbles.

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startupfounder
"you need one of your alumni companies each year to achieve an exit in the $25
million range"

In the case of a company like WUFOO, YC & PG did a follow on round of ~$100k
bringing YC's total equity stake to say 10% and with an exit of $35m YC made
off with $3.5.

The point being the initial $15k investment is to gain access to great
companies at the beginning so that investors can make follow on rounds in the
best companies in the class. This is where the real money is made with
incubators and how this differs from the privies bubble where VC's would
invest $10m in an idea for a company with zero revenue. Looks like capital
efficiency to me...

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goblgobl
There could be many reasons we're seeing a rise in the number of incubators,
principally the cost of technology startups are falling (makes sense from a
diversification standpoint to invest the same $$$ in 10 companies that you
would in one) and as a investor/mentor you stand to reduce your capital risk
if you have some say in the early stages of product development.

Investing in early stage is cheaper and riskier. Investing in later stages
(when a company has traction/growth - VC/PE stages) becomes more expensive,
but is less riskier. The incubator model has the advantage of managing some of
that early stage risk that angel investors traditionally didn't control by
having experienced entrepreneurs on-board/within a network and in a collegial
environment.

Any successful model will attract competitors, so you now have more
incubators. He's equating the rise in incubators as a sign of a bubble. It
would only be a bubble if you had tons of incubators sitting on cash and not
finding any place to invest it. His second mistake is equating failed
incubators, that result from poor investment decisions/leadership, with some
kind of market correction ("the bubble bursts").

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jonnathanson
An incubator bubble isn't "scary," per se, but it can lead to inefficiencies
in the tech sector over the long run. Given that acquisitions -- seldom IPOs
-- are the end game for most of the new breed of startups, a bubble in the
financing stages of the startup world would naturally make startups much
pricier to the end-stage acquirers (Google, Facebook, et al.). The cost of
buying a feature, team, or technology goes up over time.

You could make the argument that this creates wonderful incentives for the
startup environment in general, thereby attracting much more talent to the
space. But in large part, this talent is poached or drawn away from existing
tech companies. Increasingly, you're even seeing talent bounce from one pre-
exit startup (!) to another. In addition, there may come a point where the
end-stage acquisition market dries up, because the price of acquisitions gets
too high for positive payback/ROI on would-be-acquirers' balance sheets. Once
that happens, the bubble officially pops.

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cmetcalfe
I think the main take away is that the best will survive. Those who figure out
the model, figure out what types of people and companies to accept, and figure
out how to best get them off the ground.

The idea of trying the incubator model in other areas such as health care and
clean tech is an interesting idea and I'm interested to see if it will have
the same effect on start ups that are much more expensive to start.

After being in 3 different incubators (2 government run, and 1 private in the
US) I've learned a great deal about what works and what doesn't. The
government doesn't work. If the folks who run the incubator have no stake in
the companies and no interest as to whether they'll eventually be successful
other than bragging rights, they will work as little as possible to not get
fired.

Now when the incubator is run as a start up itself, the whole incentive system
changes for the better. They want to work just as hard as you to make sure
everyone is successful. Go YC!

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vectorpush
I don't think we're dealing with a bubble, at least not the bubble we've come
to associate with epic disaster. Of course, there is hype aplenty, and
instances like the Groupon IPO have shown that startup mania is becoming a bit
overzealous, but this zeal very positively affects the business environment.
By showing there is a _real interest and value in ideas_ , these incubators
are setting a tangible example of how it pays to innovate and come up with
unique solutions. Perhaps the reason why startups are outliers in this economy
is because its one of the few sectors where innovation isn't being stifled by
the old guard, instead, the gatekeepers of industry are setting a trend of
investment and mentorship.

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jjm
Or you could just see it as an efficient accelerator (duh).

An accelerator that speeds up the the rate of 'new business' failure.

The upside is that resources can be pooled in to a pinpointed funnel of
repeatable goals. The downside is the mechanics of the model is scalable, but
the quality is not.

There are competitors in every market space, to think that this wouldn't
happen to 'incubators' is insane.

This is not a bubble, its business.

Not to mention that what the economy needs are good performing companies, I
tend to think incubators and accelerators provide this.

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imjk
"it’s hard to imagine that today’s tepid consumer and business markets have
room to absorb all of the products and services offered by the hundreds of new
startups that the incubators are now churning out each year."

I think he's overlooking the element of disruption here. While it's true that
certain markets will need to expand to fit these new companies, many of these
startups are entering markets with the hopes of exploiting inefficiencies in
more traditional companies, or simply doing things better.

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bitsweet
_As far as I know there isn’t a single example of an incubated company going
public._

My understanding is that incubators are relatively new. It is not really
reasonable to say the lack of IPOs indicate if incubators are successful or
not...I believe the first yc class was like 6 years ago. LinkedIn, for
example, took 9 years before it IPO'd.

~~~
arihant
Also, do they need to go public? YC has a handful of partners afaik and they
had a bunch of exits in past couple of years.

What will YC gain from an IPO?

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Hisoka
Are there any stats available that show the historic performance of YC or
TechStars funded companies? I know YC has hit a number of homeruns in Heroku,
and AirBnb, but what is their success rate? 10% 5%?

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mbesto
Stop using the word bubble.

Seriously, why is this getting upvotes?

