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:

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. 





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. 





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. 

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. 






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. 





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. 





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. 





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. 





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. 

Yograj Varma



in New Delhi