New Models for Grooming Startups

This post originally appeared on the January Advisors blog.

Incubators are everywhere. Private investors, inspired by the early success of YCombinator, have taken the incubator model to nearly every city in the US. It’s easy to see why. As an investment vehicle, the incubator is a hedge against the high risk of startup failure by providing a community of entrepreneurs, mentors, and investors who have a stake in the startup’s success. And through this community, the incubator creates a shared sense of responsibility and openness, where incremental failures come early, and learning comes quickly.

Big companies are very familiar with incubating ideas. They’ve set up innovation groups, corporate development teams, and even investment funds. But the incubator model presents new opportunities to work directly with entrepreneurs in the field. As a result, big companies have taken the incubator model, sharpened the focus, and developed specialized programs that engage startups working in specific areas of interest. Companies like Dell and Microsoft want an active role in the development of their product ecosystems, and they see startups as an important part of their innovation plan — without the pressure to acquire and integrate these startups right away (if at all).

So there are a lot of new programs designed to groom startups for growth. In exchange for a small equity stake and clear acquisition terms, a startup may receive funding, financing, infrastructure, office space, mentors, staff, and (in one case) access to unique APIs and intellectual property. So if you’re a startup working on an idea that a big company finds relevant, take a look at some of these new programs:

• Rackspace Startup Program. Created about a year ago to provide technology startups with infrastructure, marketing, and mentoring. Rackspace provides lots of free services to startups that depend on a scalable hosting environment (think big data or media delivery). The Rackspace team works alongside the startup, helping them design and launch a customized hosting environment. They do not take an equity stake.
• Dell Innovators Credit Fund. Last month, Dell pledged $100 million in financing for startups over the next ten years. They also provide infrastructure (computers, servers, monitors, etc.) and access to the resources of their entrepreneur-in-residence program (which was recently used as a model for legislation to create an EIR program for the federal government).
• Microsoft Bing Fund. Microsoft is no stranger to the startup world, with its mature BizSpark program, the Kinect accelerator (launched in February), and the Azure accelerator (inaugural class starting in September). Last week, they announced the Bing Fund, an angel investment program for web and mobile startups who can benefit from Microsoft’s technology and Bing’s unique APIs. They provide a bunch of resources, including funding through a convertible note, access to people at Microsoft and partner companies, help with development from people on the Bing team, and coworking space in Seattle.

There are also new (but slightly less accessible) programs like AT&T’s interdisciplinary innovation foundry and IDEO’s startup-in-residence. And there seems to be an announcement of something new every week.

Big companies realize that entrepreneurs are a catalyst for innovation. As a result, these programs become a hedge against the risk of being left behind.

What do you think?

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