The Old Economy wins some new friends

Like any incubator, his job is helping those £100,000 investments become big businesses, but his attention isn’t focused on grabbing talent off the street. The BLC, like many other incubators this season, is concentrating on bringing up the offspring of traditional businesses.

Unlike many newbie incubators, his advice to traditional bricks-and-mortar companies is founded on experience: last year the BLC, part of Andersen Consulting, helped incubate 170 new business ideas. Three out of five of those were spun out of the corporate world. This year, that proportion is up to 70 per cent; next year, he says, it will be 80 per cent.

Why the interest from traditional companies in working with incubators? Old Economy companies need incubators to help them rediscover risk-taking, says Toland. ‘From our research, 90 per cent of directors say that ecommerce is their number one or two priority. But the further you go in transforming yourself, the riskier the process gets,’ he explains.

Scary times
‘Look at the leading venture capital firms, and you see that four per cent of the portfolio is responsible for 86 per cent of the profits. That level of risk is incredibly scary for a corporate. The last thing a traditional company wants to do is base its future on something that has a one-in-20 chance of success.’

Worse, any successful company has got to where it is today by being successful while rivals have failed. Having achieved success against the odds, it’s only natural that risk-taking becomes less of a priority. ‘Once you become that one-in-20, you want to consolidate,’ Toland observes.

But ecommerce isn’t about consolidation. Part of Toland’s job is to ask questions of a company that wouldn’t normally be asked. When he sees a new idea, the questions he asks include:

  • Is the company prepared to use venture capital to back it?
  • When can it start making money?
  • What is the exit strategy – for example, could the business go all the way to an initial public offering?

Those are questions that help to evaluate a fast-developing entrepreneurial idea, but they are questions that a corporate often can’t answer without help, says Toland.

‘They want to use their existing ways of working, then suddenly they are dealing with an innovative market. They simply cannot use their existing models to predict what will happen,’ he adds.

Either on its own, or in partnership with venture capitalists and existing incubators, the BLC has worked with traditional companies such as Mothercare and BP Amoco to spin out new ideas.

The BLC, linked to Andersen Consulting’s old-school expertise, may seem a safe bet. But other newcomer incubators want corporate business too. Many more of the UK’s incubators (165 companies were claiming that title this summer) are turning away from startup culture and looking to work their magic with the same companies that their incubatees recently aimed to destroy.

Tough task
You don’t have to look hard to discover why the incubators are suddenly so keen. As funding has become harder for dotcoms to find, and publicly quoted startups have seen share prices droop, incubation has become a harder task both to instigate and to exit.

An example is US-based incubator Ci4net, which had a Nasdaq share price of $95 in March – and $3 in October. So its fund for investment has shrivelled, as investors lose confidence that it can make a profit from startups that it is developing.

In this climate, a traditional company offers incubators a second chance. Funding already exists from the parent, and one viable exit strategy may be simply to pull the offspring back into the organisation.

Even successful incubators have found that a corporate client list helps to encourage investment from outside. ‘We’ve had a history of working this way for the last 12 months,’ says Luke Ryland, investment advisor at incubator Ladybird Technology. Ladybird is on the verge of landing a £3.75m round of funding on the back of these projects.

‘Spinoffs aren’t different from any other startup – we have a six-phase way of working [from the concept to an exit], and that’s the same whether we are working with a startup or an established company. The type of company we build is universal.’ Ladybird terms these engagements ‘dotbams’, where ‘bam’ stands for ‘bricks and mortar’.

Ladybird’s latest dotbam, in which it has an equity stake, is Farmec, a business-to-business exchange that spun out of a Turkish tractor manufacturer. ‘It wanted a business-to-business application, and it didn’t have the skills. An incubator is necessary in situations like that,’ says Ryland.

Internal politics
Part of the incubator’s job, he adds, is to help manage the company’s internal politics – for example, if a valued member of staff wants to turn entrepreneur. ‘The company’s perception is that it is losing good people to the spinoff, although whether those people would have stayed anyway is doubtful.’

Incubators also work at New Economy speed. It takes external expertise to help corporates be agile, says Michael Pearson. He’s now managing director of Valuefactory, a joint venture between incubator Antfactory and Lloyds TSB.

Two months ago he was a mergers and acquisitions specialist at Lloyds TSB. He’s on the lookout for business ideas to incubate which will help the bank relearn innovation.

‘In this environment it’s very fast-paced. We don’t think we could have achieved what we want inside the [Lloyds TSB] organisation as it is. Antfactory has a high-quality team with a lot of experience in investing in early-stage ecommerce. It provides me with access to a flexible set of resources that I need,’ he says.

With a fund of £10m from each partner, Valuefactory isn’t short of applicants. It will pick ‘four or five’ ideas from around 100, and try to build them into the next generation of Lloyds TSB.

‘Any business we deal with has to add something to what we do, or we add value to them. There has to be a link to our core business,’ Pearson says.

Jumping on the bandwagon?
Not everyone in the incubation business is happy about this trend. Chris Molloy, a director of Credo, a ‘venture development consultancy’, has been working with companies such as Prudential and Hewlett Packard (HP) for a couple of years to incubate spinoff businesses – for example, an HP project called Mobile Bazaar that brokers links between phone companies and application developers.

He thinks that most incubators are merely jumping on a bandwagon.

‘They are straying on to my turf,’ he says. ‘Incubators have the wrong model for a corporate client. What do they offer? Money, support, a Rolodex of contacts and evaluation skills.’

Exactly the wrong skills, in his opinion. Traditional businesses can borrow cheaper than an incubator, have an established support system and better contacts as well. ‘Look at the track record of the European incubator community. These guys do not have the evaluation skills. Who are they to tell companies what will work?’

Instead of incubators, he says, traditional businesses should look towards a relationship that is more akin to consultancy, but with shared risk – for example, payment ‘based on success’. That success doesn’t necessarily mean a company that goes all the way to an initial public offering, either.

Says Molloy: ‘They should be doing it to experiment with new business models and learn from them. It doesn’t matter if the project fails or not. It doesn’t matter what happens to Egg, for example; I haven’t been to a meeting with the Prudential where someone doesn’t draw a lesson that they learnt from Egg.’

For a company that barely changed for a century, he adds, that’s already a victory.

Using IT suppliers
Some traditional businesses consider that incubators aren’t the only source of this knowledge, though. A few are bypassing the eager incubators, and using IT suppliers they know already to grow their offspring business. In Cork, 25 staff run what storage specialist EMC calls its ‘Internet Solutions Group’.

Marketing director for the UK and Ireland, Nigel Ghent, says: ‘It’s a bit like a club – but one where membership isn’t open at the moment.’

One of the biggest members of this 20-strong private members club is US-based stationer Viking Direct, which chose to work with EMC to launch its European internet service. EMC charges what it would pay for a standard hosting service, but offers a higher service level and joint development in technology.

‘Learning to scale an internet business is complex. You need specialised procedures to do it – that’s a set of skills that a bricks-and-mortar company simply doesn’t have. A traditional company can scale up its operations, but the timeframe for doing that is more like decades than minutes,’ Ghent says.

And EMC has another advantage: it doesn’t want to make a profit from its incubation activity. ‘If you combine all the revenues we make from this, it’s minute. But the value to us in what we learn outweighs the revenues it could possibly generate,’ he says.

Whatever type of incubator traditional businesses choose, and however they make a success of the process, the justification is usually the same: incubators offer the opportunity to try projects that are unthinkable internally, either because the skill, or the will, is missing.

‘We say: take more risks,’ says Toland. ‘Go on! Live a little.’

Incubators are specialist consultancy firms that advise new ventures on everything from investigating market opportunities to finding sources of finance, office space and staff.During the dotcom boom, many new incubators set up in the UK. Now many of them are turning their back on Attachments-style startups, and are turning instead to advising established bricks and mortar companies.

Incubator links
Andersen Consulting Business Launch Centre

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