Previous versions of this article misstated the number of Web companies in which technology incubator YCombinator has invested. It has funded 60 such companies, not 25. This version has been corrected.
Seed Money to Launch Area's Tech Innovations
Thursday, November 15, 2007
Several leaders of Washington's technology community are creating an investment firm to back local entrepreneurs as they start up companies, the latest in a series of local organizations helping to turn promising innovations into businesses.
LaunchBox Digital will provide up to $30,000 in seed money to Web and wireless start-ups and offer advice and guidance from a roster of prominent advisers. More-mature companies could receive investments of up to $1 million.
The advisers include top former executives from AOL and local technology and media companies, such as Ted Leonsis, AOL vice chairman emeritus; Proxicom founder and ObjectVideo chief executive Raul Fernandez; and Motley Fool founders Tom and David Gardner; as well as other notables such as former Federal Communications Commission chairmen Reed Hundt and Michael K. Powell.
"As a group we can serve as an accelerant," Fernandez said.
In recent months, a dozen or more small firms have launched in the region hoping to capitalize on social media sites such as Facebook and YouTube. LaunchBox's founders say Apple's iPhone and Google's new wireless phone software, dubbed Android, will likely open other opportunities.
"There's a capital gap for early-stage companies at a time of great opportunity. Costs are coming down and platforms are proliferating," said LaunchBox co-founder Julius Genachowski, formerly a top executive at Barry Diller's IAC. "We came to the conclusion that there was real talent in this region, but beyond that, they didn't have access to the first step."
LaunchBox joins a host of other organizations seeking to incubate new ideas. Some have focused on providing common office space, rather than money or guidance, to start-ups. Others are working to convert technical research that is being done in universities and government labs into products.
This spring, for instance, the state-run Maryland Technology Development Corp. rolled out TechStart, which gives university teams $15,000 to determine whether a technology developed in the lab could be turned into a commercial product. Initial grants have gone to teams working on new diagnostic tests for melanoma and the development of "microbeads" for protracted release of drugs, among other projects.
"There's just a ton of untapped research," said Gerard Eldering, formerly head of tech transfer at Mitre, one of the area's largest private government research companies. Eldering recently launched InnovateTech Ventures in Herndon to help assess a technology's possible commercial applications and find seed funding and a management team. He's working to sign up a few universities but couldn't name them yet.
Success is hardly assured. Brian Darmody, the University of Maryland's associate vice president for research and economic development, said universities often lose money on commercialization efforts because of the high cost of patents and infrastructure needed to incubate a new company.
"You get a couple big hits, a few singles and a lot of strikeouts," he said.
Several venture capitalists said they remain wary of start-ups in social media and interactive content because they may not generate profit -- or even revenue -- for years.
"There's a lot of institutional memory of getting burned in the last bubble," said John May, managing partner of New Vantage Group, a Vienna network of angel investors who back start-ups.
Jack Biddle, a general partner at the venture capital firm Novak Biddle Venture Partners, was more blunt.
"Incubators have been flopping for 30 years. The problem is the star start-ups don't go that route," Biddle said. "Without the stars, median returns don't stack up."
In LaunchBox's case, the founders followed a model of technology incubation called YCombinator, based in California's Silicon Valley and Cambridge, Mass. YCombinator rarely invests more than $20,000 in start-ups but provides guidance. It has funded 60 Web companies already; the average start-up founder is 25.
Between now and next summer, LaunchBox plans to solicit applications for investments. Then between six and 10 groups will receive up to $30,000 each and take part in a three-month program to create prototypes for their ideas. At the end of the summer, the teams will get a chance to demonstrate their products to top venture capitalists on both coasts. LaunchBox Digital will receive a 4 to 8 percent stake in each company.
Founders Genachowski, online entrepreneur Sean Greene and John McKinley, a former chief technology officer at AOL, have each invested in the venture but would not say how much. Some of the advisers said they, too, will put money and guidance behind companies that are selected by LaunchBox.
"I view it as a great perch to see what is new, hot and interesting," Leonsis said .