All companies face similar problems in their early days, trying to turn a good idea into a marketable product. To learn from experience and keep start-up costs to a minimum, IT companies often find their feet in a shared environment such as a cluster or incubator.
One example is The Icehouse, an incubator housing about 15 start-ups in a former warehouse in Parnell, Auckland. The Icehouse was formed after eight founding partners, including technology companies like Microsoft and Telecom and professional firms such as Chapman Tripp and Deloitte Ross Tohmatsu, contributed $2.5 million to foster local start-ups.
Incubators are about much more than simply sharing costs. Paul Newfield of The Icehouse says the favourable rentals should provide less than half of the total value that members get from belonging to The Icehouse.
Incubator members go through a rigid selection process and, once admitted, join in a comprehensive examination of the company’s plans and prospects. Newfield says new arrivals can expect to spend the first 30 to 60 days taking part in a needs analysis process and meeting The Icehouse partners. Growth milestones are agreed for the duration of the company’s stay.
One senior executive from a partner firm is appointed as an external advisory chair to each Icehouse company. Newfield says the chair will spend 10 to 15 hours work each month into assisting the incubator company; at first, the incubator bears all but $200 of the $1200 monthly fee, but, as with all expenses, over time the incubator lessens its contribution.
The Icehouse’s fee structure is in fact designed to get more expensive over time. Companies are invited to join the incubator for up to two years, and by the time their term is up they should be well-prepared to prosper in the marketplace.
“Our goal is to turn out companies that by the time they leave they’re turning over half a million dollars, they have doubled their employment, they have raised about half a million, and by the time they’ve been out there [outside The Icehouse] three years they will have earned $5 million,” says Newfield.
Not all companies will meet those ambitious milestones, but if a company achieves two of the four targets The Icehouse considers it a success, he says.
In return for its services The Icehouse takes a small equity stake of less than 5%, and a commission on any capital a company raises while in residence. The incubator is run as a charitable trust but, like the companies it nurtures, The Icehouse want to support itself.
“The model is over the next three years moving to self-sustainability,” Newfield says.
The founding partners are still heavily involved in The Icehouse, taking an active interest in the fortunes of its interests and often contributing professional expertise for little or no charge.
For some members, however, the biggest advantage of The Icehouse is the opportunity to mix with other entrepreneurs facing similar issues. In an effort to foster co-operation, Newfield says The Icehouse requires its members to sign confidentiality agreements and doesn’t accept companies that compete with an existing member.
Marcus Whittington, marketing executive of antivirus and antispam company SentryBay, says all Icehouse companies have an international focus and willingly share their resources and experience.
“You cannot come in The Icehouse unless you are focused on international high-speed development. We share programmers, help each other out on projects and mentor each other,” he says.
SentryBay has benefited from regular meetings with companies that have already “made it big”, Whittington says. Incubator contacts were also instrumental in helping the fledgling company get funding, and in fostering introductions to movers and shakers.
“But the key thing was the inhouse people, who kept looking at our strategy,” he says.
SentryBay now has six local staff and four abroad, and expects to leave The Icehouse next month for new offices in Newmarket. Whittington is quick to recommend the incubator system to young companies trying to get established.
“I’ve been running companies for eight or nine years, yet the amount of help I got trying to do this venture was unparalleled.”It’s a sentiment echoed by Alex James (pictured), director of Maxtiviti Solutions. Maxtiviti joined The Icehouse in May last year to work on its relational file system software but James says the company has had to rethink its strategy.
“I was very market-unaware when I came in here,” James says. “I thought, ‘My word, this is great and everybody’s going to love it’. I didn’t understand about the marketing.”
Maxtiviti’s plans hit a snag when James realised how much education would be needed for customer to understand the product. Microsoft’s professional developer conference last year provided a further complication with details of its WinFS file system, which offers similar features.
“The thing that’s become apparent to me, and a lot of it is through the process of sitting around here and talking to smarter people, is that Microsoft is three years away from [releasing WinFS] and they’ll educate the market,” James says.
Maxtiviti has decided instead to use its technology to quickly build vertical applications that harness the features a relational file system offers, James says. He’ll let Microsoft worry how to bring a relational file system to an unappreciative market.
Input from Icehouse companies and partners was crucial in helping Maxtiviti settle on its new strategy, James says. “They key thing is that you do get exposure to other people facing similar problems,” he says.
The Icehouse brings minds to bear on a problem that a small company by itself would struggle to attract, James says. “You get to talk to people like Paul Newfield, and Paul if he wasn’t here would be a very highly paid consultant. Plus there are other things like how to protect yourself from an IT perspective.”
The Icehouse partners also offer other valuable advice.
“Maybe even better than that is access to other people who have already gone through the process of getting funding. It was only a couple of days' [work] and then I got a grant, and it’s not insignificant.”