Inside an Internet Incubator

Incubators can be lifesavers for fledgling dot-coms, but Veritas Medicine may be regretting its decision to join one.

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To the founders of start-up dot-com Veritas Medicine, joining an incubator looked like a quick, simple, creative way to get seed money and get hatched. Who knew?

There are maybe a dozen white Chinese-takeout cartons arranged in a neat rectangle on a conference table on the fourth floor of 840 Memorial Drive, but Robert Adelman dips into only two and places a few spicy string beans and a slice of white-meat chicken on his plate. The dinner meeting he's attending in the offices of a biotechnology company in Cambridge, Mass., is an important one: it's a chance to introduce an angel investor to Adelman's Internet health-care start-up. Adelman can't risk the brain drain that comes with a loaded stomach. Besides, he wants to keep his hands free to gesticulate as he maps out how his company, Veritas Medicine, will be the first in the world to match patients who have serious illnesses with the clinical trials that pharmaceutical companies run, while it ensures complete confidentiality on both sides.

"We've been to Merck and Pfizer and go back to Merck on Friday," Adelman says excitedly to the angel as he ticks off some of the behemoths that Veritas plans to take on not just as partners who will provide the trial information but also as the eventual source of the company's revenues. "And we're seeing Spicehandler at the end of March."

"Spicehandler. I can't believe it," says the angel, his eyebrows rising appreciably pateward as he picks string beans out of the carton with his fingers. "Spicehandler won't talk to us."

Emboldened by the angel's admiration for his clout (after all, he did arrange to get in the door of the president of Schering-Plough's research-and-development arm), Adelman, 36, launches into the financing history of his barely four-month-old company: Stephen Knight, a pharmaceutical executive, came up with the idea for the business but wasn't prepared to leave his job. So he sought funding from two venture capitalists in hopes of putting enough money into the company's coffers to enable Adelman, a former orthopedic surgeon who was consulting in New York City, to run the show. When one of the VCs turned Knight down, he brought the idea to Cambridge Incubator. By early September, Knight had signed a deal to join the new incubator. The terms: for $834,000 in seed money and membership in the incubator, Knight handed over 51.22% of his company.

The room goes silent. The angel's long, full face gets less full and much longer, as if his cheeks have dropped into his jaw. "This is Cambridge Incubator that did this?" he asks. "This has to get fixed." He shakes his head, trying to fathom what anyone -- even the best-connected VC -- could give a company that would be worth such a huge equity stake. "How can you keep people excited if as you build value you hear a sucking sound?" he demands. He looks Adelman straight in the eye. "You understand that you guys are on a very clear path to going public owning only your shorts."

When it's time to market that matters most, the extra heat of an incubator can be a lifesaver.

Internet incubators -- a for-profit variant of the old-time government- or academic-supported not-for-profit entities -- are sprouting up like dandelions in summer. Bill Gross's Pasadena-based Idealab perhaps begat the trend in 1996. But it wasn't until late last year that the dot-com-incubator spores really began to fly. The number of Internet incubators in the United States jumped from 15 in October 1999 to more than 50 in February 2000, according to Edward Black, a senior vice-president at the Aberdeen Group, who recently prepared a report on the subject. "It's an emerging market in and of itself," he says.

The Internet-incubator concept is a simple one: typically, the incubators promise to take dot-com start-ups that are little more than an idea and give them a home (often a common one, where cross communication can flourish), business advice, connections to financing and high-level personnel, management and infrastructure services, and some capital. The last, the incubator founders say, is a primary reason for their being: to provide start-ups with seed capital. VCs, they say, can dole out only large chunks of money, because they don't have the people power to be represented on numerous companies' boards at once. Enter the incubators: purveyors of the $250,000 to $1 million or so that start-ups need to get going. In return for the incubators' contributions, member companies turn over a hunk of equity: anywhere from 5% to more than 70%, reports Black, depending on the services and the funding provided. It's hard to pinpoint a typical amount, but of the 11 incubators in Black's study that disclosed an equity-stake range, 10 had ranges that started between 5% and 30%.

The incubators like to speak of themselves as "accelerators" -- hot boxes where companies can rocket from idea to launch in just 90 to 180 days. In a space where time to market can mean the difference between being an eBay.com and an Auctionharbor.com (who?), the extra heat can be a lifesaver. "The metaphor is an Indy pit stop," says Mohanbir Sawhney, professor of electronic commerce at the Kellogg Graduate School of Management at Northwestern University, in Evanston, Ill. "The car comes in, and -- bang, bang, bang -- 20 guys work on it, and they're off in 30 seconds."

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