3rd
Venture backed incubators
I generally don’t respond to tweets on my blog, but in this case I don’t think a 140 character limit will work.
Last night, Chris Dixon tweeted:
@cdixon Yet another scheme for VCs to get free options. Apply to YC or Techstars instead. http://on.wsj.com/fPQw4S
The article referenced in Chris’s tweet describes the launch of a new FinTech incubator in NYC that is financially supported by six venture firms.
Notwithstanding my deep respect for Chris, I have a few issues with his characterization of this program as a ‘scheme’ for VCs to get free options. (One important qualification - I don’t know anything about the FinTech incubator beyond what is referenced in the article, so I might be totally off base in my assessment):
First, I can’t tell from the article how the new FinTech incubator is structurally different from last year’s NYC Seedstart or Techstars, both of which are venture financed. @davetisch, maybe you can provide some color here?
Second, the financial ‘option’ purchased in each company in exchange for funding the incubator is so de minimis that it is hardly worth anything to venture funds. The real option value obtained is gaining an early and inside look at developing companies. This ‘option’ is derived almost exclusively as a result of the commitment these firms make to work with and mentor entrepreneurs. The money component is so small and diffuse amongst the investor group that no fund has any inside track to control follow on financing.
But most importantly, I don’t understand why anyone would discourage or disparage these types of programs whose sole purpose is to promote and facilitate more entrepreneurial innovation. I don’t know the exact statistics, but I am pretty sure Techstars NY received well over 500 applications. It will accept 10 companies into the program. If you are doing the math, that’s an absurdly low acceptance rate of about 2%. I would imagine acceptance into Ycombinator (which, by the way, has no NY presence and would *never* accept a traditional fintech company) is similarly difficult. Now I don’t subscribe to the ‘every company deserves to be funded’ venture philosophy, but I do believe that more programs supporting budding companies is surely a good thing.
Finally, I know from first hand experience (IA was a participant in Seedstart last summer and is currently involved in Techstars NY) that the venture firms involved are committing their most valuable resource - their time and energy - to help build support infrastructure nurturing new companies in an area desperately in need of innovation. The cash, both in absolute and relative terms, is absolutely an afterthought.
