Are Incubators the Answer for Companies Looking for Funding?

When Rod Underhill co-founded music sharing site, he had venture capital calling him up before he even had office furniture. The company, which Underhill notes did not have a business model, raised $65 million in venture capital, had a record-setting IPO in 1999, and was eventually acquired by Vivendi and dismantled. (CNet now owns the domain.)

But that was two bubbles ago. No VCs are calling up startups in empty offices these days. And entrepreneurs often can’t even get their business plans in front of venture investors if they don’t have a referral from an insider. Underhill, who spoke at an event this morning for New York Entrepreneur Week, likens venture firms to record labels: “The only way you can reach a record label is through someone else who has a connection with a record label.”

He’s got another answer for entrepreneurs: business incubators. Incubators offer low-cost office space and other shared resources for startups. They’re often plugged in to local angel networks, and entrepreneurs without connections will have an easier time getting a meeting with angel investors than VCs. Startups can submit a business plan on an angel group Web site with a reasonable expectation that it will actually get read. Underhill even found a handful of what he calls “super angels,” wealthy individuals who fund businesses to the tune of millions. “These people are funding at VC levels out of their own pockets,” he says.

Of course, angel investment is down too –- but what’s interesting is that the number of companies angels funded in 2008 is down only slightly (3%), even though the amount of money they put in dropped steeply (26%). (Here’s the report from the Center for Venture Research at University of New Hampshire. VC funding dropped 8.5% in dollars from 2007 to 2008 and 2% in number of companies funded. There were steeper VC drop-offs in Q1 2009, but no angel data yet to compare it to. VC data in this spreadsheet.)

So if companies want to follow Underhill’s advice and use business incubators as a gateway to angel groups, where do they start? The National Business Incubation Association has an incubator finder and the Angel Capital Association offers a directory of angel groups. Because startups raising capital now clearly can’t wait for the phone to ring.

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