In the wake of the death of venture capital: Finding a balance between the incubator and VC models


There has been a lot of talk lately that the VC model is broken – here is a small selection of what has been being said recently on the topic:

Forbes: Venture Capital’s Coming Collapse

EarlyStageVC: Traditional Venture Capital Sure Seems Broken – It’s About Time

VentureBeat: The VC model is broken

Fred Wilson: Is The “Traditional Venture Capital Model” Broken?

Mathew Ingram on GigaOm: Is the VC Model Broken? Far From it

New York Times/ Bits: Do Web Entrepreneurs Still Need Venture Capitalists?

HuffingtonPost: The Death of Venture Capital as We Know It

There are manifold reasons for the VC sector’s challenges, not least the vastly lower capital requirements of the typical web start-up of today.

One of the poster-children of the new wave of seed capital has been Y Combinator, which provides very small amounts of capital to kick-start new ventures.

Another approach has been to develop ideas internally, with one of the most prominent current examples being Betaworks, which has launched among others Summize, which was acquired by Twitter, and top Twitter client Tweetdeck. CEO John Borthwick says that while Betaworks has been likened to an incubator, they are different:

Incubators share the peripheral services things that I believe entrepreneurs can and should get from the market (legal, hr, accounting, office space) — betaworks is designed to share core capabilities – software / IP, knowledge, data, standards, analytics, leadership, tools etc

A key concept is that the ideas are generated internally. Idealab drove this approach in the 1990s, and despite many challenges earlier this decade has successfully reinvented itself.

Now Y Combinator has announced a new “Request for Startup” concept that is somewhere between the traditional VC model – where people come up with ideas and seek funding – and variations on the incubator model – in which ideas are generated internally and then sometimes spun out to have a life of their own. Techcrunch writes about this in more detail.

This approach allows a market need or key investment theme to be identified, bringing together ideas under one umbrella that both tap the competences and relationships of the funder, and create synergies between them. Y Combinator’s first theme for startups is the future of journalism – a topic dear to my heart.

Clearly there is a continuing role for people to get return on capital by discovering existing ideas, as well as building internal ecosystems that generate a series of related new ventures.

Y Combinator’s ‘Request for Startup’ is an early step into the middle ground. I’m sure there will be a lot more happening in this space.