Overview: Oh what a tangled web we weave….

Www: to enunciate, this acronym takes longer than the World Wide Web for which it stands. Rather a pity, because without bearing the nature of a web firmly in mind, it is easy to miss one of the great ironies of the Internet. Namely, that the image of a slow patient spider building and rebuilding its snare – think Robert the Bruce here – is wildly inappropriate to the speed to market needed for a successful web-based venture.

With barriers to entry in e-commerce so low in comparison to conventional sectors, the initial land grab’ is all. The plethora of Internet incubators that now exist in Europe offer a diverse range of services and approaches but share a common goal – to accelerate the passage from concept to roll-out for e-based start-ups. It is not easy to draw a firm dividing line between incubators, which amass portfolios of equity holdings in the companies they nurture, and conventional venture capital funds, and the picture is further blurred by the number of venture funds that have invested in incubator companies.

So far, the bulk of European incubators have been focused on the UK market, but the phenomenon is now taking off in a big way on the continent, while some incubators are striving to achieve pan-European reach. The European incubator community is a broad church, and incubators take many forms – and indeed labels, with some operations preferring soubriquets like accelerator, generator, factory or e-colony – and implement a wide variety of operating models. With the need for speed such a dominant factor in the development of Internet-related business concepts, differentiating between the bewildering variety of incubator propositions on offer is already a significant hurdle for the would-be entrepreneur.

Some of the worst incubator models from the entrepreneurs’ point of view are those where providers of professional services take an equity stake in lieu of fees but bring little else to the party in terms of specialist strategic guidance and support. It would be invidious to name names here – but you know who you are. The obverse of this is the incubator’ that provides capital but – again – precious little in the way of value-added strategic input and thus contributes nothing to the acceleration part of the equation.

Most incubators, however, have more to offer, be they internal corporate hothouses anxious to tie promising e-ventures into their particular technology platforms at an early stage; independent, financier-run pools of capital with a strong focus on deal-doing and the skills to position a company for additional funding rounds or IPO; or entrepreneur-run hatcheries whose fledgeling companies can piggyback on their investors’ commercial experience as much as on their financial support.

One classic example of the latter category is GorillaPark, headquartered in Amsterdam and the brainchild of Jerome Mol, the entrepreneur behind Tornado-Insider and Prolins Software. GorillaPark’s initial funding round received strong support from leading venture capital groups including ABN AMRO Corporate Investments, Atlas Ventures, Crescendo Ventures and NeSBIC, alongside Deutsche Bank and Goldman Sachs. Reflecting these antecedents, GorillaPark, which is opening offices in London, Munich and Paris, aims to groom its infant companies to attract mainstream venture funding in six months or less. With this in mind, GorillaPark will take only minority holdings.

How much equity an entrepreneur should surrender to an incubator is a thorny question. Unless the game plan is to go straight from incubator to IPO without follow-on funding rounds involving third parties, it can be problematic if a company loses control of more than a moderate minority holding. Significant minority or, in extreme cases, majority holdings in the hands of the incubator can make structuring deals with mainstream venture funds difficult and time-consuming – something to be avoided at all costs in a commercial environment where delay can be fatal.

UK incubator IdeasHub, set up by the team that founded and sold Taxi Interactive, also stresses its entrepreneurial credentials and takes minority holdings – theoretically up to a rather chunky 40 per cent.

Among the longer-established European incubators with strong investment banking pedigrees is BrainsPark, established by Stewart Dodd and the Panmure technology team. Like GorillaPark, BrainsPark has raised venture backing from groups including Top Technology and the Cross Atlantic Technology Fund, as well as from a range of strategic partners including Inverness Capital, Diamond Technology Partners and Merrill Lynch. While willing to back external entrepreneurs with sufficiently attractive propositions, BrainsPark is equally keen to develop and incubate its own in-house ideas, a strategy that was pioneered in the US by IdeaLab.

Other incubator groups with financiers at the helm include Dawnay Day Lander and JellyWorks. JellyWorks has attracted extensive media coverage, not least because of the pedigree of founding chief executive Jonathan Rowland and the unexpected departure of chairman Ed Guinan shortly after JellyWork’s flotation on the Alternative Investment Market. Initially conceived as a quoted vehicle for Internet and media related investments, JellyWorks is now evolving a more hands-on strategy, thereby qualifying for the somewhat elastic definition of an incubator, JellyWorks recently acquired a 20 per cent holding in Germany’s Value Management and Research (VMR), a listed independent corporate finance house and formed a 50:50 joint venture investment vehicle, JellyWorks Deutschland. JellyWorks’ investees include EPO.com, beenz.com, Sportal.com and fellow incubator AntFactory.

AntFactory, which is barely a year old, has established bases in Denmark, France, Germany, Italy, Spain and the Netherlands as well as the UK. Backed by US private equity firm JH Whitney as lead investor, AntFactory allies an eighty-strong operating team with a network of partnerships with investment bankers and consultancies throughout Europe and – in contrast to shareholder JellyWorks – already has the ability to provide a comprehensive platform of support and acceleration services to investees.

Yet another quasi-incubator linked with JellyWorks is ci4net.com: JellyWorks Deutschland was one of the participants in a recent $60 million equity placement for the global Internet investment company; other backers included Michael Jordan of Luminant, Digital Century, IndiGo Capital, TIU Fund and Chris Blair Asset Management.

ci4net, a Delaware company, has a portfolio of 26 majority holdings in Internet companies in Europe, the US and Australia. Styling itself the Econet for Europe”, ci4net is developing an economic network focused on European business-to-business, business-to-consumer and Internet infrastructure and enabling technology companies. The critical mass of its portfolio and synergistic interaction between investees forms a crucial plank of ci4net’s strategy for adding value.

AIM-listed NewMedia Spark, which last autumn was the first UK Internet incubator fund to go public, has greatly reinforced its accelerator through the March acquisition of Cell Internet Commerce Development in an GBP85 million deal. Cell, launched in 1997, was one of the earliest implementers the e-commerce and Internet incubation model in Sweden. The acquisition of Cell adds substantially to NewMedia Spark’s portfolio but will also strengthen the UK group’s already formidable network of contacts throughout the European digital

economy. NewMedia plans to open offices in France, Germany and Italy during the course of this year.

Another Scandinavian accelerator unit, Halogen, also hit the headlines in March, featuring as one of the partners in European Digital Partners. Halogen merged with Arkwright Strategic Consultants at the end of last year and now combines an experienced system architecture group, an entrepreneurial strategic consultancy, corporate finance expertise and a venture funding capability, all on a pan-European basis; the launch of European Digital Partners represents a scaling up of its activities.

Yet another incubator variety is the in-house’ model. JP Morgan’s new e-finance unit, LabMorgan, and PricewaterhouseCoopers incubator service, Successful.com, are two of the most recent examples of the genre. JP Morgan plans to commit as much as $1 billion to e-business initiatives in the current year, the bulk of it invested as capital in promising ventures. The LabMorgan unit aims to combine the qualities of a classic incubator and early-stage merchant bank and will be open to entrepreneurs, potential partners, clients and JP Morgan staff. The PricewaterhouseCoopers incubator service is also open to staff, who will enjoy a three-month sabbatical to work on development of their concept after an initial evaluation, as well as to external entrepreneurs. As well as undertaking some projects on a fee-for-equity basis, the accountancy group intends to invest as much as $500 million in European incubator projects during Successful.com’s first year of operation. KPMG has also recently launched an incubation unit, while consultancies such as Bain, with BainLab and McKinsey with Accelerator@McKinsey have been playing the e-generation game for somewhat longer. Many cynics have suggested that these projects are motivated at least as much by the desire to stem the flow of senior staff to dot-coms as by purely financial criteria. While there may be more than a grain of truth in this assertion, major multidisciplinary advisory firms are – on paper at least – well qualified to provide the diverse range of support services and strategic advice needed by start-ups aiming for rapid development. And, given the insane valuations achieved recently by European Internet and e-commerce stocks, it is difficult to blame firms that have the appropriate resources for wanting to cut themselves a slice of the action.

In the present environment, where the volume of funds raised for Internet companies is so plentiful that capital is effectively a commodity, incubator groups with the widest range of high value-added services stand the best chance of prospering. This is likely to become increasingly the case as the market matures.

Meanwhile, some quoted incubators’, particularly those that have gone public to capitalise on the current valuation bubble rather than because they have developed a coherent portfolio, will have to work exceedingly hard to justify their valuations to investors going forward.