At the most recent Venture Association of New Jersey (VANJ) meeting on June 19, 2012, in Whippany, Heather Gilchrist, RAK Tech Fund (New York) managing director, led a lively discussion on the pros and cons of coworking spaces, incubators and accelerators.
Speaking from the investor’s viewpoint, she gave entrepreneurs some insight into these new startup work models.
Gilchrist, a former entrepreneur and founder of Grockit, “the world’s first a massively multiplayer online learning game,” is starting her own accelerator in N.Y., Socratic Labs, which will be dedicated to educational technology.
“We are seeing a wealth of incubators, accelerators and coworking spaces pop up and maybe not all of them will be sustainable in the market,” she warned.
The differences between these three models are really economic. Coworking spaces are collaborative workplaces for entrepreneurs that for a set price, provide a desk, phone and conference room as needed. The entrepreneur doesn’t have to worry about electricity, insurance or wireless Internet. The company can grow incrementally, adding more desks, and since founders don’t need their own dedicated space, they don’t have to worry about predicting growth. They can grow slowly, and when they can’t be housed in a coworking space any longer, the company can move.
“One of the great things about coworking is the kismet effect,” Gilchrist said. A company might not have a deep tech team, but the group across the hall might be able to answer its question. This ability to find help through serendipity can be tremendously valuable, she said.
Answering an audience member’s question about protecting intellectual property (IP), Gilchrist noted that in some cases a vertical coworking space catering to a particular industry can be helpful. However, she repeated a well-known warning to startups: if you are afraid someone can replicate what you are doing just by hearing about it, you might not be the team to implement it. Gilchrist suggested the idea of protecting IP was more of an East Coast concern and that on the West Coast ideas are shopped around.
Speaking about incubators, Gilchrist noted that they tend to be not-for-profit or foundation-based and are open programs without a deadline. Incubators provide companies with mentors, but they are not part of a prescribed system. There isn’t as much of an incentive for mentors to work with incubators, she said, because they don’t have a profit motive, though those who do get some access to early deal flow.
Adding his opinion about incubators, Mario Casabona of N.J.’s TechLaunch (Montclair) accelerator said while they do a terrific job, they end up being real estate plays because when they graduate a company they have to fill the physical space. Those who run incubators tend to be harassed by the organizations funding them when they have vacant space, affirmed VANJ president Jay Trien of Trien Rosenberg(Chattham), a division of Raich Ende Malter.
“It’s actually a conflict of interest. The incubator’s true goal should be to get the company to the point where it’s ready for industry and ready to commercialize,” Casabona added. He pointed out the idea that incubators should be penalized for having empty space didn’t always exist in N.J.; when the Commission on Science and Technology was active, “we actually created metrics for the incubators, and if they didn’t graduate a company in a reasonable time period, it was a negative for their operation.”
Accelerators, on the other hand, are for-profit ventures with a specific set of programs and a time limit, usually 12 weeks. Entrepreneurs typically receive capital, collaborative workspace and “rocket fuel in the form of mentorship,” Gilchrist said. The people who start accelerators tend to be either exited entrepreneurs or investors who have excellent connections with people who know funding and how to start a company, take it to the IPO stage and market it.
Said Gilchrist, “The mentors for my educational accelerator are people who have started companies that have been acquired, people who have made sales to the schools. We have education experts; we have technology people.”
At an accelerator, everyone’s incentives are aligned for a for-profit relationship or the promise of one. People are more focused on turning these companies into profitable entities. Entrepreneurs can build relationships with future investors, employees and service providers, Gilchrist said.
According to Gilchrist, the equity deals for accelerators vary. Investors receive 6 percent non-diluted (they own 6 percent of the company forever) or between 10 percent and 12 percent on a common-equity basis, whereas investors cash out with all the other common stockholders. Casabona said TechLaunch’s investor group provides $18,000 in cash in two tranches and takes 10 percent in common equity. Investors hope that by investing in 10 companies they will find one that will “hit a home run” and one or two that will give them their money back. The potential is to make three or four times their money.
Gilchrist said Socratic Labs will follow a slightly modified business model. It will run longer — 14 weeks — and the labs, because they are education-based, will have more of an educational component. There will be lessons provided by computer scientists, educational policy experts, UI/UX experts, brand management consultants and many others. Mentors will meet with participants to help them determine which elements they need to focus on. “There is no underestimating the relationship that can emerge between a great mentor and a great company when they are well matched,” she added.