Incubators, Super Angels and An Overheated Market

by Wayne Willis on December 3, 2010

I admit that much of  the inspiration for the Nodal Partners business model comes from Paul Graham's Y Combinator, and their close cousins.   I've also been following TechStars, and Founders' Institute ... which have slightly different models.   And on Monday, I'm visiting with a company in the I/O Ventures startup space in San Francisco's Mission district.

If you blink, you miss something, though -- in this case, a group of ex-Googlers forming another seed/incubation factory.  Behold:

A new incubator created by ex-Googlers is jumping into the busy seed-stage investing scene.

San Francisco-based AngelPad, which like incubator Y Combinator takes a small stake of 3% to 6% in start-ups in exchange for mentoring, networking and advising, is preparing to present its first group of companies to investors Wednesday. Eight companies have participated in AngelPad’s first 10-week program.

AngelPad is seeking to distinguish itself among the many incubators - including Y Combinator, TechStars, Kicklabs, I/O Ventures, Capital Factory, Dogpatch Labs and Founders Institute - that have cropped up in recent years. For one, the firm, drawing on its own network of contacts, has looked for entrepreneurs that are relatively experienced and who have, for example, already worked for several years at Facebook Inc. or Google Inc. That stands in contrast to many incubators, which often work with entrepreneurs right out of college.

The firm is also targeting technical founders who are engineers or product managers.

It's interesting that the selection criteria for ALL these incubators is the same:  a couple of founders (who are primarily technical), a VERY BIG idea, and a business model that has a clue.  The incubator will provide some survival funds ($30k plus or minus) for a 10 week blitzkrieg where product / prototype are built and test-marketed,  all while the founders learn the basics of starting a business.    The "graduates" then parade in front of a cast of angels, and a reasonable number of the startups get the next leg of funding.  Rinse.  Repeat.

We have a slight variation on that.  One -- I'm less impressed with a VERY BIG IDEA.   I don't think we are the right advisors and investment group for that, especially one that is early and technical and, by definition, very competitive and/or  capital-intensive.   Secondly, our investment thesis requires an early customer and a path to an acquistion within 3 years.   That's almost the opposite of a BIG IDEA.

The cycle times of tech startups are getting faster.  Early exits are creating young, wealthy angels who are re-investing in next-gen products.    It's terribly frothy and dangerous.

Flashback:  the opening scene of every episode of Hill Street Blues, when Sergeant Esterhaus closed every briefing with "Hey, ... let's be careful out there!"

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