Y Combinator Recombined: Talking with Philadelphia Startup Incubator DreamIt Ventures

10/6/08Follow @wroush

Everything is moving faster in the Internet age, it seems—including startup incubators. At incubators that follow the traditional model, like Idealab or Biogen Idec’s Innovation Incubator, young companies get to spend a leisurely year or two getting their first product out the door, while benefiting from the financial and administrative support of a larger parent organization.

But at newer incubators like Y Combinator, that time scale is compressed to a few months. The teams of entrepreneurs who participate in entrepreneur-investor Paul Graham’s startup school in Mountain View, CA, come in with an idea in January and had better have a product by March—because that’s when the funding runs out. (Y Combinator also runs a summer session here in Cambridge, MA, from June to August.)

The micro-incubator model—in which a dozen or so competitively selected teams per session get living expenses, work space, and mentoring in return for a small amount of their companies’ founding equity (usually around 6 percent)—is catching on around the country. Graham’s three-year-old venture now has at least two imitators: a Boulder, CO, organization called TechStars, which got underway in 2007, and an even newer Philadelphia incubator, DreamIt Ventures, that just graduated its first class of startups in August.

One of those was DreamIt graduates was SCVNGR, a Boston-based company I profiled last week. The company’s 19-year-old CEO Seth Priebatsch, a Princeton undergraduate, gushed about his summer with at DreamIt in our interview, saying it offered more support—monetary, administrative, and advisory—than he would have gotten from the other incubators he considered applying to. (DreamIt provides $30,000 in seed funding to each team, compared to Y Combinator’s $5,000 plus $5,000 per founder.)

A summer 2008 team from DreamIt VenturesCurious to learn more about how DreamIt’s model compares to the incubators I’m more familiar with—especially Y Combinator—I contacted one of DreamIt’s founders, Philadelphia-based angel investor Michael Levinson. A graduate of the University of Pennsylvania’s Wharton School, Levinson founded a corporate computer training company called PTS Learning in 1986, grew it to 250 employees and $30 million in annual revenues, and sold it to Global Knowledge Network in 1999. He explained how he and his co-founders at DreamIt wanted to create new reasons for young innovators from Philadelphia to stay in Philadelphia—and for those outside the region to consider relocating. Indeed, while SCVNGR has moved back to Priebatsch’s hometown of Boston, most of the other companies that exited DreamIt in August are staying in the City of Brotherly Love. And judging from Levinson’s description, DreamIt’s regional focus is one of the major factors differentiating it from Y Combinator. Our interview follows.

Xconomy: How did DreamIt Ventures come together?

Michael Levinson: The three partners at Dreamit—myself, David Bookspan, and Steve Welch—all had companies, and we each sold them. We were continually coming up with ideas for new enterprises. But we didn’t necessarily want to dedicate ourselves to running a specific company full time. So we talked about the more traditional incubator models a number of times, then we started to become a little more attuned to the new paradigm—you know, the fact that it is so much less expensive to start new companies now, and you can really make a lot of progress in a short amount of time. We found that Y Combinator and TechStars had already done that, and as we looked at that model further we came to the conclusion that not only would it work in Philadelphia, but there were probably three or four things we could do to improve it.

X: What sorts of things?

ML: First of all, we felt strongly that we wanted to give back to the local community. We wanted to help other startup businesses be successful. Also, there’s been a lot of conversation around the Philly area for a number of years about the fact that we’ve got a tremendous amount of talent coming out of Penn and Drexel and even Princeton, but there was really no champion, if you will, for kids coming out of local colleges or folks who have good technical ideas. And while the cost of getting a technology business off the ground has gone down, a lot of the venture funding in the Philadelphia area has moved upstream [to larger companies] in the last five to seven years. So there was a gap that we felt we could fill.

We wanted to make sure that the local tech community was going to be behind us and support us. So another thing we did that is a little different from what Y Combinator does is that instead of planning on having the teams rely on us, the founders, we reached out and identified mentors for each team. We found folks in the community who had been there and done it, and who were willing to mentor teams through the summer.

We also got 13 local law and accounting firms to agree to donate services to the teams. And we knew of some pretty bright MBA types in the area who wouldn’t necessarily start their own companies but who might fit in well with companies coming out of the incubator, in a strategist role. That is what happened with Seth [Priebatsch] and Mike Hagan, who is one of those strategists. I think it added a lot of value, because Seth was able to really focus on the technology and Mike really went out and focused on the revenues.

So, with the help of the strategists and the professional firms we were able to throw a few more resources at the teams. We got a local marketing firm to donate some strategizing help. We wanted to set up an infrastructure for each team that they could potentially build around. And it worked out really, really well. I know that some of the DreamIt companies ended up getting … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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