Asia Incubators: From acorns to oaks

TradeGecko began as a calculated gamble. Three 20-something New Zealanders, Carl Thompson and brothers Cameron and Bradley Priest, moved to Singapore last year to develop a cloud-based inventory and sales management system for small- and medium-sized enterprises (SMEs) that is more sophisticated than Excel but cheaper than SAP.

The three entrepreneurs won a place on the 2012 intake of Singapore-based accelerator JFDI.Asia, receiving an initial investment of $20,000 as well as assistance that led to the commercial launch of TradeGecko in October of the same year. Two months later, with around 200 trial users in 26 countries, the company raised a seed round of $650,000 led by Wavemaker Labs. It is now targeting a Series A round of $3-5 million.

The JFDI-Innov8 Bootcamp program - run by JFDI.Asia in conjunction with corporate VC unit SingTel Innov8 - offered intensive mentoring intended to turn a business plan into an investible business in the space of 100 days. For TradeGecko, the game changer was the support network that came as part of the package.

"There were plenty of programs and talks but that is not really where the value is; it is more about having advisors to give us a kick up the backside and keep us focused," says Cameron Priest, the company's CEO. "Having dropped everything and used our life savings, we had to make it work so that was most valuable thing for us."

JFDI.Asia is just one of more than 100 incubators and accelerators now operating in Asia, primarily serving the internet and IT sector. According to AVCJ Research, seed and early-stage investments below $1 million - the typical ticket size for seed investments following an incubation period - totaled just over $62 million last year across 189 deals, more than the double the amount committed in 2010. This year looks set to match if not improve on that figure, with $44 million invested so far across nearly 100 deals.

The emergence of incubators is part of a broader Asian growth story whereby millions of emerging markets consumers are getting online - and via mobile devices such as smart phones and tablets rather than PCs. Start-ups contribute to the ever-expanding ecosystem of niche products and services targeting this fast-growing sector. At the helm of these businesses is a new generation of eager Asian entrepreneurs, full of energy but lacking direction.

Incubators and accelerators offer them capital and guidance, emulating the model established in Silicon Valley over the past decade but also adapting it to fit the unique demands of Asia's start-up community. It is a matter of finding the formula that fits - so what has worked best so far?

Birth of the incubator

To understand how Asian incubators and accelerators are evolving one must appreciate how they came about in the first place, as well as the fundamental differences between the two.

The business incubator model predates Silicon Valley. The first one was set up in 1959 at the Batavia Industrial Center in New York, mainly as real estate play, providing start-ups with shared office space at a fee. It wasn't until a couple of decades later that the concept of offering additional business advice and support was introduced. Under the traditional model, rents and client fees accounted for the majority of incubator revenues; few took equity stakes in companies.

Today around just under half of business incubators globally serve the technology sector. While many are commercial enterprises, a significant number are funded by regional or national governments or by other non-profit organizations.

Seed-stage accelerators are a more recent concept. It is widely accepted that this strictly for-profit model was pioneered at Y Combinator in Silicon Valley in 2005, which was quickly followed by Tech Stars and others the following year. Like incubators, the form a seed accelerator takes can vary greatly from program to program, but there are some common themes.

The standard accelerator features an open application process for entrepreneurs; the purchase of an equity stake - typically less than 10% with an initial investment of $35,000-50,000; a fixed incubation period - normally of around three to six months; and some form of mentoring. In many cases a co-working space is provided and at the end of the fixed period a demo day is held where "graduating" teams get to present their ideas to prospective investors.

The most important element of any program is the mentoring. Typically, mentors will come in the form of serial entrepreneurs and angel investors with relevant experience. The benefits of this are two-fold: entrepreneurs get access to expertise that might not otherwise be available to them, and they also get access to potential investors. For the mentors, it is a chance to see the team work together, which helps them decide whether they want to invest.

"Personally I like to get more involved," says Vinnie Lauria, co-founder of seed-stage VC Golden Gate Ventures in Singapore, who regularly takes time out to visit and mentor at other incubators around Asia. "It is trade of time and resources and while some investors may not see the value in it, I like to build up relationships and familiarity before demo day."

However, the voluntary mentor-cum-investor system is not for everyone. Beijing-based early stage investor Innovation Works runs it own incubator with paid professionals who guide start-ups to seed-stage investment. Around two-thirds of Innovation Works' 45-strong workforce comprises of operational professionals while the rest are responsible for the firm's investments. There is a full in-house financing and accounting team, a legal team, a 10-person recruitment team and a group of designers who work around the various portfolio companies.

Chris Evdemon, a partner with Innovation Works, explains part of the reason for this is that many Chinese entrepreneurs come from an engineering- or product-focused background, rather than exhibiting the entrepreneurial credentials many incubators in the West are used to seeing.

"The teams we invest in are very good at what they do but may not have as much experience in the day-to-day functioning of a company," he says. "In the first few months it is critical for them to get their initial product out in the market so they need to be a 100% focused on what they do best."
This is only temporary, though. These functions are gradually transitioned to the start-up team once the business gains more traction.

All under one roof

With the degree of hand holding that takes place within incubator programs in Asia comes the need for a co-working space. While the incubator was founded on the concept of a co-working space, it is not universal among accelerators - indeed, Y Combinator is among those who don't see it as necessary. The caveat is that Y Combinator is based in Silicon Valley, which is already like a giant incubator spread over two cities.

"It is the one place in world where you can wonder into a café and wave a term sheet around and say ‘Hey guys, I have been made an investment offer can someone give me some advice?' and people will just offer it,' says Hugh Mason, co-founder of JFDI.Asia.

Deprived of this luxury, co-working spaces have become an essential component to many, if not all, Asian Incubators. JFDI.Asia, for example has gone as far as modeling the look and layout of its café to mimic those seen in the Valley.

"There is a lot of merit in housing together a few bright young energetic people all developing their own thing in the mobile internet sector," agrees Evdemon."At the end of the day, in Beijing we do not have an ecosystem that is as mature, resourceful and open as the Silicon Valley system."

Another element that defines the difference between an incubator and accelerator is the time spent by companies within the program. The Tech Stars model, which has been widely adopted in Asia, dictates a three-month period - no more, no less. The idea is that the course of the acceleration is make-or-break period for the start-up; they either make a success of their company or force themselves to realize that it isn't working.

Either way, says JFDI.Asia's Mason, the outcome is good for all involved. "The problem with some incubators is that there is no fixed time limit. Teams come through the door and sit there for an undefined period and there is no urgency, whereas with an accelerator there is and that is incredibly healthy,' he says. "It forces people to focus and it limits the exposure of everybody."

However, this is does not paint the whole picture. While the benefits of fixed period are clear, not all investors are interested adopting this approach. Amit Anand is a co-founder and managing partner at Singapore-based Jungle Ventures, which runs its own incubator program. He is of the view that accelerators are ideal for teams that have already developed a product and identified their customer base, but still need to shape their business plan.In some cases, though, big ideas need more time to come to fruition.

"We try to work with the founder to incubate the big idea, help him with early-stage capital and give a runway to hatch these ideas into some sort of shape," says Anand. "We end up investing more money in the end."

In this sense, traditional incubation plays a more important role in situations where a complex idea requires long to meet its full potential. This means the incubator must put in more capital and it often comes from a larger affiliated venture capital fund.

Jungle Venture has a $15 million fund - which reached a first close of $10 million last October - that make seed stage investments of $100,000 to $1 million. Innovation Works, where the majority of companies are incubated for six to nine months, currently operates a much larger vehicle - its second - which reached a final close of $275 million last October.

"By the end of this period the decision to make follow on investment is pretty easy in comparison to getting know the product and the team for the first time because we have spent all these months working with them," says Evdemon.

The finish line

Essentially, whatever form the incubation takes, everything boils down to the demo day, and what kind of deal a team can expect when they make it to the finish line. Needless to say, the valuation a company commands depends on the incubator or accelerator in more ways than one.

While it is true a longer incubation period can offer higher valuations down the line, one possible flipside is that accelerators with brand caché among investors might be able to ask for a premium. A company may even end up overvalued if a particular accelerator is able create a buzz around its demo day and bring in a lot of investors wanting to cut checks.

"It is a mixed bag across the region," says Jungle Ventures' Anand. "Incubators that are starting to show success in follow-on funding are able to command higher valuations but I don't think there is enough data to say whether different incubators are creating more value than others."

Indeed, given the assortment of tailwinds and headwinds a company might face once it has emerged from incubation and is moving through institutional investment rounds, it might be impossible to identify a preeminent model. For the time being, most investors agree that there is no right or wrong solution; it is usually a matter of adjusting programs according to the particular circumstances and risk-appetite.

Furthermore, there appears to be little geographical differentiation in Asia: there is evidence of various models operating side-by-side in each country. As the ecosystem evolves, the expectation is that borders will become even less relevant - after all, most venture capital investors want to support companies with the potential to scale up across the region. Rather, the kinds of businesses being backed should come to the fore.

I would like to see more incubators getting aligned to sectors, such a mobile internet, and becoming specialists," says Anand. "I think there is a fair bit of hand holding to be done Asia and that can only happen when you are focusing on particular area rather than trying to be a generalist."

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• Topics
• Venture
• JFDI.Asia
• Innovation Works
• Jungle Ventures