The product development firm, Insight, has launched a new funding model to help start-ups get through a critical stage of development
Incubators are a fairly recent trend in the start-up world. They provide critical tools to a start-up; companies typically get office space that they share with other start-ups as well as access to valuable mentorship and potential investor relationships. But some fledgling businesses need more than tangential support to grow their businesses. They need critical partnerships in key areas to get their business to the next level.
We recently learned of an interesting new model led by Steve McPhillamy at Insight Product Development. Insight is a product development firm that has traditionally worked with big, well-funded corporations. They've always wanted to help startups but struggled with the best model to do so. Product development is a costly endeavor, and most startups couldn't afford it.
Here's the problem.
Start-ups need product development, especially in industries such as biotechnology.
The best product development resources have only been available to big companies with large budgets
Corporations are great at commercializing proven technologies, but relatively poor at creating new innovation. In contrast, startups excel at innovation.
The best product development firms, such as Insight, have been missing out on the most exciting innovations, because startups were unable to afford their services.
But Insight finally found an incubator niche, within medical devices, that it may be able to leverage to serve startups in a better way. Insight provides product development services to the start-ups at a discounted rate and, in return, receives an equity stake in the business. It's an 18-month process and, for many startups, it's the critical item that takes the company from technology concept to a product that can be commercialized.
Insight has launched this model with a few initial partners, but if they can make this work on a larger scale, it could be very attractive to startups looking to turn a technology into a product. The benefits accrue to various members of the startup ecosystem:
Start-ups get world-class product development at a discount and better position themselves for sale to a strategic acquirer
Insight gets a stake in the best technology
Companies who are potential acquirers get the assurance that the startups have gone through a rigorous product development process.
We think this model works especially well in the medical device space because of its unique characteristics. The interesting thing about this space is that it's possible to sell your start-up to a number of medical firms, without a significant track record of revenue. Plus, venture capital firms are willing to fund pre-revenue technologies, which provides funding for product development. Product development, in this case, is the key gating item to get the technology to the next stage and make the company viable for sale.
We will be watching this space to see if anyone else develops a value-added incubator model for startups outside of biotech. If so, these incubators can be critical partners to fuel startup growth.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark