Technology incubators got a bad press when the dotcom bubble burst. Today, they're back, promising new, improved formulas for start-up success—all for a price, of course. Will entrepreneurs take the bait?

Mention incubators to any technology entrepreneur and you're likely to get a decidedly lukewarm response. Having played a major part in fuelling the dotcom bubble of the late 1990s, they are now viewed by many in the industry as anachronistic at best, a fool's errand at worst.

Yet here is experienced dotcom entrepreneur Maziar Darvish launching an incubator for high-tech and digital start-ups. Darvish founded Internet Business Group and floated it on the AIM after internet-related stocks started to dive in 2000. His was one of the successful ventures, surviving to give him a decent exit to online marketing group TMN (for $19m), and valuable experience of surviving a downturn.

His new venture, Neutron, is what he describes as a "second generation" incubator. Like traditional, publicly funded incubators, it offers advice to fledgling businesses. But echoing the old dotcom model, it also provides seed funding to a select group of entrepreneurs in exchange for a stake in the business (a hefty 75 per cent).

Where it differs from the old model is that it selects a small group of promising ideas and plays surrogate parent, effectively taking over the running of the early-stage business until it is a sizeable concern. What a start-up loses in equity, it makes up for in its chances of success. Darvish projects a hit rate of "80 to 90 per cent".

Slightly less demanding in terms of equity is another incubator 2.0 model, Seedcamp. Like Neutron, Seedcamp offers a combination of financial and advisory support. But it has a faster turnover of start-ups, investing less time and money for a much smaller slice of the business (between five and 10 per cent). Seedcamp's set-up is more along the lines of Y Combinator and Techstars, the highly selective, US-based summer camps for start-ups, and has only the basic concept of equity-driven, digital business incubation in common with Neutron. But both hint at the potential for a revival of the old e-business incubator model-an idea many will view with trepidation.

Internet investment incubators proliferated in the dotcom boom, inspired by Bill Gross's California-based Idealab, which is still going strong. But they were expensive to run and "resources weren't well used", according to Reshma Sohoni, the CEO of Seedcamp and a former 3i adviser. "I saw a lot of waste in older model incubators," she says. "Today's model strips away the capital expenditures. We're not trying to be all things now, just to help entrepreneurs tap into an ecosystem [of experience and contacts] and offer them guidance." Today's entrepreneurs don't need help finding premises, agrees Darvish, who believes it was this cosseting that was old-era incubators' undoing. Put simply, an incubator's hand-holding only served to disguise the fact that they were backing ventures that "didn't really have the substance to become bigger."

Of the original UK-based incubators, only Brainspark still exists (and, arguably, NewMedia Spark, now plain Spark Ventures). The others are either going out of business or moving into the more traditional realms of pure venture capital funding.

So why resurrect a dead model? Europe's market for digital start-ups is fragmented, argues Sohoni, making deals slower to execute. "What takes a day in Israel and the US can take a week here," she says. There's a need to "pool that ecosystem", so that a business from Slovenia can access the same level of support as one in London or Germany.

There's also the funding gap to fill. Sohoni adds: "I see a lot of me-too start-ups forming. Investment's not always available outside the angel community."

But for Darvish and Sohoni, the second generation incubator's most powerful selling tool (besides funding) is its network of experienced digital entrepreneurs. "Making money online is a very different thing. There is not so much a shortage of investment capital as knowledge capital," says Darvish. 

But is this new? Another veteran of the dotcom boom, Julie Meyer, has run Ariadne as a "virtuous circle of entrepreneurs backing entrepreneurs" for seven years. Also a seed finance specialist for high-tech and digital start-ups, Ariadne aggregates capital support and highly experienced advisers and their networks to capitalise on businesses at what Meyer calls "hot kitchen" stage, i.e when "the only people really qualified to help a new chef are the four-star chefs who've earned those stars themselves."

Arguably, Neutron and Seedcamp's creators are simply taking seed funding to an "added value" level. It's a great promise, if they can deliver.
"People say they can add value but there's only a small group who manage to do it. You'd need to be working on a smaller number of deals, which is expensive in terms of time," says Paddy MccGwire, founding partner of Cobalt Corporate Finance, a specialist adviser to telecoms, media and technology companies. "But experience plus cash plus contacts is genuinely value-added investing. These introductions can be incredibly powerful. They save a quantum of time and effort."

Will these new incubators succeed where predecessors failed? "The stockmarket revaluation bubble has burst, which is a good thing, because it stops people chasing valuations that are not supported by fundamentals," says Darvish. "This second generation model of incubator is about owning and running the business with the entrepreneur."

The challenge for Neutron is that it has set the bar high by taking such a large chunk of equity. This is where Seedcamp may fare better: its more distributed model and lower outlay of time and cash is closer to the public-funded, premises—centric incubators such as Sussex Innovation Centre, Sheffield Technology Parks and Swansea Technium Digital, all of which have survived.

Darvish foresees others trying to replicate the model if Neutron proves successful. "People are watching closely to see if it works or not." Meanwhile, entrepreneurs will seek assurance that their backers can deliver this time. Says MccGwire: "Work should be performance linked, so that if you've only got 25 per cent of your cake, it's a much bigger cake than you would've been able to make on your own."

Germ of an idea
Incubator name Seedcamp
Model Entrepreneurs are selected for funding and support after an intensive seven-day "trial"

The pitch
Seedcamp is part-way between traditional incubator (in providing access to support and advice, and being regionally anchored in London) and an investment incubator (it takes between five and 10 per cent of equity and offers selected companies up to €50,000).

Its biggest asset is its 250-strong and expanding global network of high-tech entrepreneurs and investors—"the Google guys have been so supportive," says Reshma Sohoni, its CEO, guilelessly.

So, along with a core team of four, which includes Saul Klein of Index Ventures and The Accelerator Group, it can access the likes of VC houses Atlas and Amadeus, Skype's Niklas Zennström, original dotcom-era incubator Azeem Azhar (remember eSouk?) or Mike Shaver, founder of open source champion Mozilla, for support.

How it works
Seedcamp is centred on an intensive, week-long event in September. Taking applications from June through August, a panel of judges selects 20 promising entrepreneurial ventures to attend Seedcamp Week, where they can network with the likes of Mozilla's Shaver.

They whittle the teams in which to invest down to five. Those receive three months of support, mentoring and access to Seedcamp's contacts and funding. The focus is London, so entrepreneurs must be willing to move.

Funding model
The group raised enough for three years (around €3m), and more investors are on board this year.

This year, it will make €50,000 the maximum investment, changing the model to €10,000 per team member, and a further €10,000 overall for the team. It takes an equity stake of between five and 10 per cent.

The value for the network
The VCs see 50 or 60 new ideas, spot emerging trends and get a feel for what's happening among early-stage start-ups. Says Shaver: "It's a great opportunity to help entrepreneurs make good decisions, but also to represent Mozilla and its vision of what the Web can do."

Standout features
It's pan-European, with a 2007 company, Zemanta, originating in Slovenia and another, Rent Mine Online, based in Amsterdam and Bulgaria.

It has a global network: "There are no shortcuts in marketing or product development, but you can short-cut connections," says Sohoni. "It's about people sticking to what they know. And everyone needs to find a way of rising above the noise. Loose partnerships won't work unless you can offer something of value. Business is taking up larger and larger mindspace as well as walletspace."

Success stories
Of last year's crop, four out of six raised next-stage funding:
Zemanta; MyBuilder; Kublax; Rent Mine Online

The 75 per cent club
Incubator name Neutron
Model Investors offer "extreme incubation" to an exclusive group of businesses-in return for a hefty share of the spoils

The pitch
Focusing on the execution of a small number of high-potential deals, three-month-old Neutron will only get involved in companies in which it becomes a 75 per cent shareholder. "We are not passive advisers. We will deliver a level of expertise that the entrepreneurs couldn't get elsewhere," says Darvish.

Neutron's core team of five is supplemented by around 10 worldwide, and all specialise in growing businesses, particularly internet start-ups. "We know what doesn't work and have a pretty good idea of what does. I am more than confident of an 80 to 90 per cent track record," says Darvish.
Neutron has a particular interest in the travel industry: most of its team has expertise in the sector.

How it works
The plan is to work on no more than four projects at once. Neutron takes on responsibility to create and develop the business to the point of exit. "Our skill set is in growing the business from nothing to £20m in sales and £1m to £2m profit."

It is currently working on three early-stage developments. Deals come through contacts or through the team actively seeking them out -"incubation to the extreme"—where Neutron puts together a business plan and finds the right people to become minority shareholders.

"Chosen" start-ups must have scalability, which means at least £10m in sales. One of Neutron's first investments, AssuredTrade, is an online marketplace for businesses to source leads-a vast, but relatively untapped market for online platforms. Darvish says barriers to entry are also essential: "There's no point in investing cash, time and energy if someone can easily replicate it."

Funding model
Neutron's core team provides the backing, with some traditional angel investors also part of its extended network. The question is, does it take too much equity? "Initially, we meet with resistance, but it usually makes sense to entrepreneurs once we've explained it. It's a question of giving away a large chunk to make the whole larger, or enduring death by 1,000 cuts," Darvish says.

Standout features
Focuses closely on a few, high-potential ideas. Its investors know how to make money from the internet. "Ideas are inherently cheap, so you have to focus on execution," says Darvish.

Success stories
AssuredTrade.com, Squeeze Holidays