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Tuesday, Nov. 10, 2009 | Some of the most innovative ideas that have sprung up in the barren landscape that is the current tech economy have not necessarily been about new technologies or products themselves, but how to fund tomorrow’s innovations.
The traditional funding models are badly bruised: Venture capitalists aren’t investing in anything that carries significant risk, and even angel investors are as likely to be licking their wounds as they are to be making big bets.
But the entrepreneurs keep coming. So ideas like virtual companies and prize-based funding have become much more popular than they were just a few years ago.
Now comes EvoNexus, a nonprofit incubator for start-ups that offers the equivalent of a full-ride scholarship to a select group of companies that seem to be on the verge of making it big. The lucky companies receive free rent, free utilities and most importantly mentoring from some of the top minds in their fields.
EvoNexus, the brainchild of CommNexus board members Rory Moore and retired Vice Admiral Walter Davis, was not conceived to entirely fill the gap left by retreated venture capitalists. But it is meant to ensure that the absolute best ideas get a chance, even in this economy.
“We looked around at the meltdown in the capital markets and the huge layoffs in the tech sector and decided we had to do something other than another networking event where unemployed people network with other unemployed people,” said Moore, CEO of CommNexus, the local communications industry trade group.
The nonprofit was officially unveiled last week, and three companies — Medipacs, IO Semiconductor and Pixon Imaging — are the first to make the cut. Supporters include Qualcomm and Cricket Communications, which is donating 25,000 square feet of office and lab space in its Sorrento Valley facility. The first year’s operating budget for EvoNexus is $300,000 in cash, and it expects another $300,000 in in-kind contributions, said Executive Director Cathy Pucher.
EvoNexus’ people hope that between 10 and 12 young companies will be operating in the incubator in a year’s time. The companies won’t be allowed to stay long — less than two years — and if it looks like they aren’t making it, the EvoNexus board will be quick to show them the door so others will have an opportunity, Moore said.
“It’s like an athletic scholarship,” he said. “As long as you make your blocks and tackles while in the incubator, you are on the team and you get your room and board and meals paid for. But if you’re not, then you are off the team.”
Long-term, the EvoNexus founders count on many successful companies emerging from the incubator and going on to create many jobs in San Diego. And hopefully, Pucher said, the successful EvoNexus companies will create a new culture of giving back in the local tech industry.
“In the Bay Area, the perception is that it is more common for entrepreneurs to help each other. We could do more reaching back in San Diego,” Pucher said.
Incubators have been around since the tech industry blossomed in the late 1960s and early 1970s, but they’ve historically been for-profit ventures. Their purpose is to free the entrepreneur of the minutiae — stuff like paying the rent, setting up the phones and finding an accountant — so he or she can concentrate on the idea during a company’s crucial early stage.
But the for-profit model hasn’t been very successful, especially in San Diego, said Moore and others. The idea is that incubators earn their money by taking an ownership stake in the companies they choose to incubate, a setup that has proven to be unreliable for both the incubator and the incubatees.
The incubator is relying on a revenue stream from start-ups that go out of business as often as they survive. The entrepreneurs, in turn, have to give up a piece of their company before it is really even a company. This makes it harder for them to attract angel and venture investors down the line. These realities have been exacerbated by the economic meltdown.
“I’ve never seen a for-profit model in San Diego that has worked,” said Joe Panetta, the CEO of Biocom, the local biotech industry trade association. “And these days companies are coming and going out of business fast — you don’t know who is going to be there from one month to the next. Rory’s incubator takes that element out of it.”
In June, Medipacs, a tiny medical device company dually based in San Diego and Tucson, had reached that scary juncture that all successful start-ups eventually face, the time when they have to move out of the proverbial garage and into the real world.
Company CEO Mark McWilliams was in the process of looking for space to lease and contemplating all the administrative tasks — like buying computers and setting up a phone system — that were in his immediate future. He wasn’t looking forward to it.
It meant that he wouldn’t be able to focus on the company’s product — a wireless medication pump that is roughly the size of an iPhone. The Medipacs product could end up, in many instances, taking the place of syringes and intravenous bags and cut down significantly on medication errors, McWilliams said.
But the company still has a ways to go before the product is ready to be marketed commercially. So when a friend gave him the heads up on EvoNexus just days before the application deadline, it was like a “lightning bolt from heaven,” McWilliams said.
“We’d already decided that we weren’t interested in a for-profit incubator,” he said. “It can be a disaster zone. The entrepreneur is looking for help. The incubator says they are giving help. But if the incubator doesn’t provide value, you are paying stock and getting nothing for it.”
The real value of the incubator to McWilliams is not so much the free rent — although he is glad to take it — but for the EvoNexus-provided mentors in the world of wireless technology. Through them he will learn now about the technology that will be available to the company when it is manufacturing the pumps in a couple years.
And the value of Medipacs to EvoNexus is that it takes full advantage of all the free expertise and remembers where it came from. “Our success will be measured by our graduates,” Moore said.
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