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Our
model is dependent on our creating high value companies
Jonathan Gold,
Founder and MD, IncuVest
Jonathan
Gold is Founder and MD of IncuVest and a member of Amphion Capital
Management. His current responsibilities include portfolio analysis,
real estate modeling, valuation and strategic analysis for a $26
billion portfolio. Prior to the current assignment, Jonathan worked
with Wolfensohn Partners and Prudential Realty Group. Jonathan also
collaborated on developing and writing the strategy for Prudential’s
$6 billion equity real estate portfolio. Jonathan holds a BS and MBA
from New York University’s Stern School of Business. Excerpts of the
interview:
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What is IncuVest all
about?We are a premier incuvation company focused on
business incuvation and technology innovation. We are focused on
building a global network of what we call ‘incuvators’ and believe
that we can revolutionize the creation, development and operation of
an internet technology company through the incuvation process. Our
model is aimed at a short time to market process creating high value
companies with reduced development. As of now we have a fund of
about $100 million which we closed at the beginning of this
year.Â
How would you differentiate your company from
the venture capital (VC) companies?One of the key
differences is that we are a company unlike other VCs which are
primarily funds. Our future plan is to take the company public in
the US market. So we are different from other private funds which
raise funds, invest and distribute it back to their investors. VCs
have traditionally, the ‘Monte Carlo’ approach to investments. The
idea is to make many investments, bet on getting some multi-baggers,
some break evens and other loss making propositions. The multi-baggers will define the return on their investments. So, in a
sense, it is rationalized gambling. You are making intelligent bets
but you are still gambling. However, our model is to create, develop
and operate a company and take it to the market. Also, since we are
a company, we can offer stock options to our employees like any
other company and unlike VCs. We believe that this is a far more
dynamic model compared to the VCs.
Is your business model
unique or are there other players who have adopted the same
approach?I don’t know of any other company in this kind of
‘incuvation’ process. But in the US, there are a number of companies
that make venture capital type of investment and are publicly
traded. Capital group is one such example. How would
you describe your key strength compared to the incuvator or venture
capital funds? As of now, in our first incuvator in
Florida, in partnership with Safeguard Scientifics, we have a core
group of serial entrepreneurs. Also in the case of XL vision, a
company jointly owned by Safeguard and IncuVest, we have about 70
serial entrepreneurs. It is basically a virtual company, all
exclusively focused on the company creation process. So what these
guys are doing is taking ideas, wetting them and running through the
downsize process. Also, the model is expected to remain the same
across the globe.Â
How would your define your
business model?For each idea, the serial entrepreneurs will
look at whether there is a large market, will the customers really
buy it, what are the sales cycles, the prototypes, taking the
feedback from customers. The whole process is to make sure we can
build a high value sustainable business. So on an average we may
start out with 100 ideas. After the initial wetting and downsizing
processes, we may spend serious time and money working on 10 of them
and chances are, only three may turn into virtual companies inside
the incuvator.
Of these, one will be spun out
each year. However, it is at this stage, that we intend to bring in
the key differentiator.Â
Once the company is spun out
we bring in world class management and hope to take the company from
a few 100 thousands or millions to few 100 millions in sales. And
these are the guys who have done it before. At this stage, we
differentiate between the visionaries that are great for starting a
company, and managers–the people who have a fantastic ability to
manage and build large sustainable value
propositions.Â
What is the total cost involved in
terms of research, manpower and time spent for narrowing 100 ideas
to the one company at the IPO stage?For each incuvator,
there are fairly expensive operations and that is one of the key
reasons why we depend on a very high success rate. Past experiences
have shown that we need to invest close to $5-10 million annually
for each incubator. It is precisely for this reason that we are
depending on having a very high success rate. That is why having so
many people focussed on the idea is so important.Â
So
what happens to the visionaries who generated the idea?The
prime idea is to get them to move on to start the next company. They
have equity in this company and they have every incentive to see the
company succeeds and accept that the company needs help. So it is in
their best interest to hand the company to professionals. Besides
they also get to do what they like to do the best–starting more
companies.Â
Is this also a key differentiator between
IncuVest and other funds?Definitely. Since a significant
number of VC investments are not majority owned, chances of
breakages are higher in such a model. For example, a VC commits ‘X’
number of millions dollars for ‘Y’ percent of a company. The company
started having some success and soon reached the few million dollar
sales annually. Now it is in everybody’s interest to turn this into
a billion-dollar company. However, the CEO had no experience in
running a billion-dollar company and if the VC suggests bringing in
a world class CEO to run his company, he typically doesn’t react
very well. So in a venture capital model there is a lot of breakage
at that point of time because it is an ego clash. In the meantime,
in order to create most value for everybody and really make your
idea ubiquitous in the market, we really need to bring in the
seasoned management guys. This becomes a key for the success of the
company and in our model it is planned for and everyone has
incentives for the smooth rollover.Â
Are you looking
at IPOs as the exit route for your investments?Our companies
are always being positioned for the IPOs. However, we all realize
that we are living in special times. The IPOs market, in recent
times, has been very robust but they are not going to always last.
So one needs to create companies, which are not dependent on the
public markets for their exits. So we are looking at the value
creation model instead of an internal rate of return (IRR) model.
VCs follow the IRR approach while our wealth creation model looks at
building bigger companies over a longer period of time. So the IPO
is not so important for us. We perceive that it is just a financing
scheme for the company and another step in the life cycle of the
company.
What is the type of equity holding you make in
the company?As a rule, IncuVest generally will hold a
majority stake in its invested companies. In case of less than
majority stake, it would be dependant on the company’s life
cycle. How do you plan to leverage on the strengths
of existing companies in your network? Since we will
have a lot of companies in our network, the idea is synergy to bring
all these people, relationships and information together and
leveraging in a way to make the whole network much greater than the
sum of the parts. Since it will be our network, companies will have
a speedier and efficient flow of information and collaboration to
make the whole network work.Â
Can you give a gist of
your future business plans? Our prime motive is to
create, develop and operate about four to five technology incuvators. Of course, we think that there are opportunities
to have lot more than the mentioned
numbers.
But this is our focus for the
initial couple of years. We hope that each incuvator develops about
two-three virtual companies or incubees each year and will spin out
one independent company each year ready for an IPO. So in this kind
of a robust market, we are looking at a time frame of 2-3 years from
initial idea conception to taking it to the public. And once we
start rolling, we intend to have one IPO per
year.
What are the rates of return you expect from
your investment?Well, it is difficult to answer that
question. For the companies which are not of our own process but
where we are significant investors, we would like to have venture
capital like returns. However for companies coming out of our own
process and where we are investing a significant amount of time and
money, our experiences have been, consistently larger high value
companies. Our model is dependent on creating high value companies
which will have better market cap and hence the returns will be much
higher than the traditional venture capitalist.
What
are your plans for India?India is certainly very high on our
priorities. In fact of the 4-5 incuvators, we intend to build one in
India. Right now, we are looking at the best incuvator model in
India. I think there are two things working out in India. One is the
rocket fuel, which will use synergy of other companies in our
network. The rocket fuel piece is providing support services to
other companies in the network. We already have about eight
companies in the IncuVest network and the Indian incubees could be
the support providing companies for these and many others. Also the
other approach would be creating the incuvator itself, and
establishing it on the same model as the current US
one.