New Business Incubators are Fueling the Internet Economy.

In the business world, one of the hottest trends has been the emergence of the new business incubator. We,ve seen them before, particularly in helping build the biotech industry. While certainly not a new concept, most of the new incubators are focused on fueling the Internet economy, and helping entrepreneurs with great ideas get off the ground and running.

Over the past two years, there has been an explosion of new Internet companies, and behind many of the successful ones are new business incubators. In Southern California, companies such as Idealab! and e-Companies automatically come to mind when the word "incubator" is mentioned. The incubator concept seeks to encourage entrepreneurs, and facilitate the growth of new enterprises by providing both the tools and the guidance to assist portfolio companies in their development efforts.

Recognizing that small business is considered to be an engine of economic growth, a business incubator is designed to provide the infrastructure in which to nurture and promote the development of early-stage companies. At Venture Catalyst, we typically do this through strategic investments, and also through offering every business service imaginable to portfolio companies -- from public relations and marketing, to Web development and strategy, to investor relations, IPO consulting and financing. Like many other incubators, we also have an outside "resource pool" of professionals that the portfolio companies can call on for specific counsel, including legal questions.

High growth incubation typically requires three key elements, which frame the value-added equation. These are: selective facilitating infrastructure, expert mentorship and capital. All three factors are necessary in order to encourage growth and success.

With significant mentoring and oversight, we are helping take these e-companies past the embryonic stage, which is exactly what they need in order to be competitive in the ever-changing Internet space. But because of our business model, we are able to become involved at a much earlier stage in these entrepreneurial companies than most venture capitalists.

According to a recent study by the National Business Incubation Association, business incubators produce companies with high survival rates, with 70 to 80 percent of all graduates (examined over a ten-year period) still in business. This is extremely impressive, especially when considering that approximately 75 percent of all new businesses fail within the first five years. According to the same study, fully 84 percent of all graduating firms remained in their original local communities.

We have all witnessed the tremendous growth in the San Diego area in the telecommunications and wireless industries, fueled by Qualcomm, as well as some breakout Internet technology companies, including MP3.com. Typically when a region has a great deal of success in the tech business sector, what often follows is a run of start-up businesses. It appears that San Diego is ripe for this kind of growth, especially considering the success of incubators in other areas of Southern California.

One of the main reasons the incubation model has been so successful is that it encourages synergies and collaborations between the small portfolio companies under a company's "incubation umbrella." Consistent with today's business management models, when building their investment portfolios, Internet incubators typically try to help a range of companies who also have tools and resources to assist and do business with each other. For instance, at Venture Catalyst we have already invested in a software applications company, a Web marketing company and an e-commerce company, all three of which can provide businesses and services to each other, in addition to their other clients.

In addition to providing strategic counsel, many incubators also provide the office space necessary to help get these new e-commerce companies off the ground. Having access to an incubator's meeting spaces, management consultants, and phone, fax and T-1 lines, helps to accelerate these e-businesses and gives them a head-start on the competition.

Incubators provide an organized system of mentoring to provide management assistance and support through resource pools -- giving these companies the facilities, resources and relationships they need to be successful in the Internet space. And with the Internet growing at such a rapid pace, e-commerce companies don't have much time to get established before the heavy competition begins. With an incubator on their side, these companies have the chance to get a tremendous head start, and guidance throughout their life spans.

About the author: Sanjay Sabnani is Chief Investment Officer/or Venture Catalyst Incorporated (Nasdaq: VGAT), a venture services incubator headquartered in San Diego.