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 quite a few people from these partners companies to be on their boards.

The other piece of it was that while we did put up some money ourselves, as part of our focus on making this a privately run, entrepreneurial activity, but we also managed to get three or four economic development groups in the area to pitch in, to get the community really involved.

X: You also provided work space for the teams, right?

ML: Yes, a local economic development group was getting ready to move into a new building, so some space opened up in the University City Science Center. We were able to take over a floor of one of their buildings and supply everybody with working areas. What’s interesting is that that wasn’t a focal point of our original plan; we wrote into the application that teams could work anywhere they wanted. But it turned into one of the highlights. The companies spent a lot of time working out of the space and helping each other out. It actually surprised me how much of a community developed.

X: When you were deciding how to structure the DreamIt program and you were examining other incubators, what did you like and dislike about the Y Combinator model?

ML: What we liked was the core idea that you get a bunch of bright young folks in, give them some money, give them some help, and in a fairly short amount of time they either sink or they swim. They manage to pull it off, or they don’t. It was a much more appealing model than the traditional incubator, where a company could languish for a year or more. It was very black and white—giving them everything in a very focused amount of time. What Y Combinator does and what TechStars does in Colorado works very well. We just tried to enhance it by giving the teams access to some other people and resources that could help them in different ways.

There was one team, for example, that was very strong on the business side, but not as strong on the development side, so we hooked them up with a mentor who was very strong technically. We tried to leverage the strengths and weaknesses of each group and match them up with resources to balance their team out.

Lecture at DreamIt VenturesX: What are your selection criteria for teams applying to take part in the incubator program?

ML: We look for a combination of four things. There’s nothing incredibly unique or proprietary about this—it’s all on our website. We’re looking for a good idea, something that has the capacity to scale up, a good team with at least two people where there is a reason why these are the people who can be successful with it, and something where they can achieve a milestone by the end of the four-month program—whether it is having a prototype done or having their product to market. We got a couple of interesting healthcare applications, but they had to go through certain approvals to get their products out there, and it just wasn’t something that could happen in the window of our program.

But in the end, I believe, as almost any VC will tell you, that it is really all about the people. We met with each group of entrepreneurs in person or over video conferencing. We tried to get to know them and hear what they had to say and ask questions.

X: Is there any sort of expectation that the companies you fund will stay in Philadelphia? Some of them from the first class, like SCVNGR, obviously, have already relocated. But if you’re getting funds from regional economic development groups, there must be some pressure to make sure the startups stay in town.

ML: There is no hard and fast requirement. The only requirement is that in order to go through the program the teams have to spend the summer in Philly.

But our thinking is that by teaming the companies up with local people, accountants and lawyers and mentors, and other experts—that everything else being equal, if they don’t have a compelling reason to relocate, there is a higher chance that they will stay if we help them create the infrastructure here. From the economic development groups’ point of view, the goal is, number one, to provide a reason for people not to leave the area to begin with, and number two, to attract people into the area. I think we accomplished number one really well. Of all the companies that had been founded here, I don’t think any of them plan on leaving anytime soon. And of the ones we brought in, I think there are one or two who will relocate here. Then there were others, like SCVNGR, that had other reasons and incentives to go back home.

The big picture is, what can we do to help elevate or transition the entrepreneurial community in Philadelphia? We want to provide an outlet in this region for young innovators and entrepreneurs with great ideas to get a head start. It’s really the same motivation that a Y Combinator has, but we want to do it in this region and, over the course of some number of years, make Philadelphia a hub of entrepreneurial activity. If we stick with this for a few years and have 80 or 100 companies that have come out of DreamIt, we will really start to have an impact.

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

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