The number of tech incubators has skyrocketed. And that has investors and Silicon Valley entrepreneurs such as Max Levchin concerned.
Mr. Levchin, the PayPal co-founder who later sold start-up Slide Inc. to Google Inc. in 2010, is among a growing group worried that the proliferation of start-up “boot camps” is creating problems for the tech industry, such as a glut of similar companies and too much competition for talent.
In recent years, incubators such as Y Combinator and TechStars have sprung up in the Bay Area and elsewhere. Their number totals nearly 100, according to Y Combinator, up from about four in 2007.
Max Levchin, co-founder of PayPal
Now the 36-year-old Mr. Levchin, who left Google this year, said he is planning a new venture that works on ambitious ideas that he believes most incubators aren’t encouraging through their model, which involves spending relatively little on a lot of early-stage bets instead of investing more in a few bigger ones. Because incubators generally don’t keep investing in companies at later financing rounds, they can be biased toward selling the companies early, some investors argue.
Incubators are “designed to reduce risk, while I plan to actively increase risk,” he said, adding that the details of the new venture are still in flux.
Some graduates of incubators, sometimes referred to as “accelerators,” expressed similar views. Entrepreneur Scott Brown attended Y Combinator in 2008, finding it worthwhile for connections and mentoring. But he said what he incubated there—survey software company Frogmetrics Inc.—didn’t progress.
“We ended up with something small and useful and that wasn’t something that excited anyone,” he said. He later left to work on artificial intelligence company Vicarious Systems Inc. and didn’t apply to an incubator because he didn’t think it would add much value.
Such attitudes are a sign of caution amid a tech investing frenzy that some investors fear may head south. George Zachary, a partner at venture-capital firm Charles River Ventures, said the flood of incubators reminds him of the late 1990s before the tech bubble burst in 2000, when he saw business plans for companies that aimed to incubate other incubators.
Those who run incubators say their numbers are too small to make or break bubbles and, despite the fact that many of their investments fail, they add value by providing connections and capital to democratize what once was a clubby market.
Incubators are “no more a waste of resources than going to business school,” said Paul Graham, who founded Y Combinator in 2005. He said Y Combinator backs big ideas, citing Airbnb Inc., a service recently valued at more than $1 billion that lets users rent rooms in their homes.
Many entrepreneurs continue to flock to incubators. TechStars, with branches in several states, said it received more than 3,000 applications in 2011, up from 1,300 in 2010.
But that growth is sending some early-stage investors to the sidelines. Bill Lee, an investor in more than 30 technology companies—including software start-up Tweetdeck, which Twitter Inc. acquired—said he has stopped investing in very early “seed” financing rounds because incubators have produced ideas that are too “cookie cutter,” such as myriad group-buying sites.
“It’s the same idea in different flavors,” he said.
Write to Jessica E. Vascellaro at email@example.com
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