A Government-Aided Incubator?

At AgendaCamp I facilitated a session about “What is the Government’s role in VC?” – Here’s a possibile answer to that as sparked by David Crow’s blog post yesterday

I imagine I’m not the only person that is amused by the irony embodied by the Canadian VC scene right now – desipite the wads of cash Canadian governments are throwing at VCs, the industry is still suffering from a drought. Part of the issue is that even though the government is commiting money, some of that money is simply being redirected from other programs that would have eventually funded the same efforts. In other cases the money can’t be accessed because the VC companies involved still have yet to raise a full fund. Side note – for those that don’t know, a typical investor (even the government) will tell a VC that they will invest only if other investors join in. So even if the government says they will give a VC $20 million, they will only pitch in for 20% of any specific investment, thus the VC stll needs to raise another $80 million from other sources in order to access the government’s full $20 million. So even though the government is willing to pony-up some cash, there’s no other cash out there to take advantage of the government’s money.

Although things are dire in the VC community, there is hope in the Angel community, right? Well, not so much. Even the Angel community is suffering, as we see some recognized angels investigate other opportunities that may take them outside of Canada, and other Angels are reducing their entrepreneurial investments to help recoup their losses in the general markets (many Angels have seen their other equity investments drop precipitously).

So what’s the solution?

An interesting idea that keeps poking it’s head up at almost every event I’ve attended in the last year, is the idea of running an incubator similar to y-combinator here in Ontario. Although many people have proposed running one in Toronto, and although I’d love to see it in Waterloo, I’ll leave the location out of the argument for now – my main focus is how the government could help make it happen. Disclaimer: I’m not suggesting the governernment run the incubator, rather I’m trying to highlight how they can help breathe life into the idea to let others run it.

What’s Necessary?

To make an incubator happen properly, here are the ingredients that I believe are necessary, including how governments can play a role.

  1. A small amount of money (Provincial Gov)
    Assuming we’re going with a y-combinator style approach, let’s assume we’re doing two batches of 10 startups / year, with a max investment of $20k for each startup – that’s $400k / year that needs to be raised. Assuming we do our initial round of funding for a 5-year window, that’s $2 million we need to raise. Add in facilities and overheads, and let’s double it to $4 million (note – others with more information may be able to generate a more accurate number). For the Ontario governement to get involved, let’s get the incubator recognized as a suitable investor, and use their new co-investment fund to match funds – that cuts the number in half now, and all we need to raise is $2 million. Considering the incredible amount of buzz that was surounding Jessica’s keynote at Mesh 09, we could probably run the program using a similar approach and get both existing Angels and would-be-Angels involved. In Kitchener-Waterloo there has been a lot of people interested in the idea of a Community investment fund – between that sentiment and the other similar social-conscience aspects to this project, we should be able to raise the money with nominal difficulty. This would allow the government to seed the project, allow Angels to mitigate their risk (by easily spreading their investment out) and not tie up VC funds (they come in later).
     
  2. The right physical location (Municipal Gov)
    Whether it’s Toronto or Waterloo or somewhere else, we need a facility that is open, dynamic, and allows for some creative chaos. For this reason I think we should be looking at converted industrial space an get the local arts community involved in adding some flavour. More specifically, I suggest identify some inexpensive space and recruit the talents in Toronto (e.g. We Kill You) to come and kill a weekend just having a blast. Hell, I’ll even pay for the pizza and beer to make it happen. For the space, wherever it is, let’s get a local municipality involved to get the space innexpensively, and have a property management company rent part of the building out to help offset costs, and get some service providers in closer to the action (e.g. what was done with the Accelerator Centre in Waterloo). A key element is that the space needs to have open common areas, and unlike the AC in Waterloo, the creative space needs to be separate from the public space (it’s going to get messy and chaotic, maybe not the right place for public events). Either way, the right kind of innovation would be really fueled by the right culture, involving the arts community local to the physical location would be critical to building the right atmosphere.
     
  3. Some good mentors/facilitators (Federal, Provincial and Municipal Gov)
    Here is where we use a bit of non-traditional approach – we don’t get the government to pitch in money, rather we get several programs involved (NRC/IRAP, OCE, Ministry of R&D, and Municipality) to incentivize their staff to help find mentors and facilitators. Although most of these mentors and facilitators are going to come from the private sector, it’s the employees of these government agenciest that can help spread the word to them. A basic incentive like $100 if a referred volunteer is accepted (yes, make it an application process) would help push things through the channel, and you only need a couple dozen mentors and facilitators to seed the program. Related to this, we would want the local VC scene to get involved as mentors, so that they would also be ready to invest after the participants graduate – this is why we want to avoid tyingup their money (and management time) in the incubator itself – we need it to be ready for the first round of real investments. 
     
  4. Buzz (Ontario Gov)
    To get this program to take off, we need to get people excited about it. One way is to use the same networks mentioned in point 3 above, but another may be to get the Ontario Ministry of R&D to allocate some of their marketing dollars to help pay for some media coverage. In all honesty though, I think the majority of this element is going to fall on the shoulders of the startup community to get the word out and to get people excited. In essence, we’d need to get the Mesh crew and their legions of followers to start Tweeting about it.
     
  5. A dynamic champion (Ontario Gov)
    This last one is where the Ontario Government can make a huge difference, but would need to take a huge risk. I propose that they provide the funding for a program lead, but they don’t do the hiring – they let the Startup Community and VC funds do the hiring. So, I challenge them to put forward $100k / year (yes – they need to cross that 6-figure mark to get someone worthwhile) and ask the VCs they already fund to select a hiring manager. Perhaps it’s already an employee of the fund (e.g. Suzanne over at Tech Capital) or perhaps it’s an outsider (e.g. bring someone in from the valley who has an affinity for Canada),but either way, this hiring manager would help hire a Dyamic Champion (yes, it’s so important it’s worthy of capitalization). The person selected for this needs to be someone that is already known in the tech startup community, who has credibility, and most importantly – has bucket-loads of raw enthusiasm. This person would be the face of the incubator, and would be the person that keeps startups energized.
     
  6. Entrepreneurs (Federal ad Ontario Gov)
    This final peice *should* be an easy one to fill, however, we can help grease the wheels by having the same programs I mentioned in point 3 above spread the word out to the companies they are already funding. Although these companies wouldn’t be eligible to participate, you can bet that they either *will* be in the future, or they know who else is considering starting a business. We also would want the Ontario government to help us get the message down to Ontario Universities, as I suspect most of the participants would be students and/or recent grads (programs like Impact and LaunchPad would help ensure that).

So, out the above, I can see the government playing a role in all of them. Others have suggested that one of the biggest challenges in launching an incubator is the funding aspect – but if we can address the facility and the champion as I have suggested above, the other costs of the program would be comparatively small and would be more managable. In fact, a lot of the other operating expenses may be available as in-kind sponsorship (e.g. approaching Atria for broadband access, Fibernetics and Christie for some equipment and services). All that’s necessary is to get the ball rolling. That’s easy, right?

Joseph

VP HCM Products at NetSuite and Founder of TribeHR and Lewis Media. Waterloo Region Enthusiast and active volunteer.

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