Tell me why a room-and-board-and-bandwidth incubator for tech startups is a stupid idea

October 12, 2009 10:55 PM

So a little while back, I bought a big old brick house in Richmond, Indiana (for $8000). It's way more house than I need, and there are lots of other fantastic brick houses here, just no economic reason to buy them. Why shouldn't I give free room and board and bandwidth in return for equity in a tech startup? (See also HNN's comment threads.)

So remember the big old 1890's brick house I bought this year? (Previously on AskMeFi, or read the houseblog.) It's really a whole hell of a lot more room than I need, and - the kicker - it's not alone. There are a boatload of beautiful old brick buildings here, just no economic reason for anybody sane to buy them. There's even a 23-unit building of single-bedroom apartments two or three blocks away from me, standing empty. Lots of these houses are standing empty; there's just nobody left to live in them.

So I had this stupid idea, and I'm not even sure it's a stupid idea: why not sponsor young (or non-young) entrepreneurs by giving them rooms or small apartments, server space, good bandwidth, and home-cooked but free food? In return, perhaps a percentage take of whatever they came up with during a certain fellowship period, or whatever other venture capitalists take as their cut. Later in the game, actual capital would be available (it's not on the table, not from me, not right now). But the idea is to build an active and close-knit, quasi-academic, community. There was definitely an era in my life when I would have jumped at such an opportunity, and I'd still seriously consider it.

So tell me: in how many ways is it stupid? I love these old buildings; given just a little economic rationale, they're eminently salvageable (people built to last in the 1880's and 90's).

Also, Indiana has some pretty sexy-looking startup grants for sexy-looking startups. I dunno. I could save these houses, hire a cook, have a bunch of interesting people nearby. Have all the hassles of landlording without the actual rental income, plus all the hassles of screening for startups without any real startup experience of my own... It's probably stupid. So why do I keep thinking about it?

posted by Michael Roberts to work & money (19 comments total)

Doesn't sound stupid at all, as long as the houses can be easily wired for broadband.

(Also, and I'm thinking kind of selfishly here, but did you consider extending the idea to some kind of "artist's colony" thing where non-startup people who want to get away to work on a creative project could come?)
posted by drjimmy11 at 11:25 PM on October 12 [2 favorites has favorites]

I think it's a question of how much of your own capital you have lying around and how likely any of them are to return any money any time soon. Think seriously about what you're proposing on the food alone. Suppose you have three startups and fifteen people total. Having lived at a number of different places on the socioeconomic ladder, I don't believe you're going to feed adults for less than $100 a month each, and I don't believe you're going to get a full-time cook for less than $15,000. So between the 15 people in the startups and the cook, you're already out $33K a year. Suppose you have three houses and the mortgages and taxes are a combined $1K a month. Throw in gas, electric, broadband service (Can you get a T1 or T3 hookup in Richmond? IT startups won't make it on a regular residential connection.) and you're out at least another $1K a month, and that's before a furnace breaks, a water pipe freezes, etc. At those extremely low estimates, you're already out $60K a year, and no one has drawn a cent of salary. I know you're housing them and feeding them and all, but with no salary whatsoever, they can't even make a phone call or go to the laundromat. Dedicated people will work for nothing for a while, but they'll also have to take off if it becomes obvious that the business isn't going to work, so you'd either have to pay them some minimal salary or risk getting left holding the bag. Even if they made only a few thousand each, that budget just doubled.

And no startup is going to pay off at the end of that first year, so you're looking at two or three years minimum. You will also be lucky if one of those three businesses ever turns a profit at all. It would be very easy to sink a couple hundred thousand into the scenario I've described and get no money back at all. Tax breaks might ease the blow there, but unless you're sitting on a huge personal fortune, that's a hole it would take a lifetime to dig out of. Even if all parties are eager and work hard, most businesses don't become huge successes. If someone else were putting up the venture capital for a lot of this, it might be a more reasonable risk to take on, but they're then going to take more of the rewards and put you in a position more like being a landlord or resident manager. That may still appeal, of course. But it's worth remembering that venture capital firms work by making many bets in search of big payoffs. They can absorb that risk. Can you?
posted by el_lupino at 11:32 PM on October 12

Some start-ups, like the ones I work for, are based on people who work from home. However, also need a common space to have a weekly meeting/discussion for one day a week to sync-up. And willing to pay a nominal amount. A room with a table and chairs, whiteboard, access to kitchen and washroom, all good.
posted by hungrysquirrels at 11:44 PM on October 12

el_lupino has wisdom. How about a nice start-up friendly low rent?
posted by titanium_geek at 11:46 PM on October 12 [1 favorite has favorites]

I read the HNN thread. And I have some experience with various Atlanta business incubators of the pre-Internet bubble crash of 2000. What I say here is probably more negative than you hoped early comments would be, but cold water is the first bath any good idea has to survive:

In the first place, the value of face-to-face interaction may be much less than you think, for many kinds of entrepreneurial activities, in the 21st Century Information Age. Some would say that a major failing of the Industrial Age was that its driving engines became corporations which necessarily concentrated labor, capital, raw material and transport resources around, first, natural sources of hydropower, and later, around sources of coal for steam engine power. That very concentration of resources proved inimical to the long term sustainability of the Industrial Age model. It's what you've got the remnants of, all around you.

And now, you want to set up shop again, concentrating resources, in the abandoned bones of the Industrial Age. You might want to listen more carefully, to any creaks and squeaks in your house, as the warning voices of ghosts of earlier eras.

As to the particulars of doing this, the big issue is that collecting a gaggle of hackers has never, itself, proved the way to the leprechaun's pot of gold. Good ideas and hackers rapidly need capital and management, to make real money. You don't need to recruit out of work hackers, you need to be recruiting rich VCs to your cause.

Have you floated this concept to anyone on Sand Hill Road? Danced it around on Route 128? Measured your bucolic surroundings against the dynamism of Sandy Springs, GA?

If you do decide to go ahead and try running a business incubator in semi-urban Illinois, I think you need good legal advice, from the outset. Many of the most successful incubators in Atlanta in the late go-go 1990s were actually projects of Atlanta law firms and VC firms. They carved up some old mid-town warehouse lofts into low rent office space, reviewed a jillion hacker/entrepeneur biz plans, put a few in their loft space, arranged angel financing, then helped with advanced business planning and market research, arranged first round VC financing, installed competent management, and took the few concerns that survived the process public, to the benefit of mostly themselves, but a little bit, to the originating entrepreneurs. It's a ruthless process, and one you need to mechanize, from the outset, as much as possible, to see any real reward.
posted by paulsc at 11:52 PM on October 12 [6 favorites has favorites]

Consider charging under-market rent, rather than giving it for free.

Firstly, if you want this thing to last you will need it to be sustainable, not to rely on continual extra funding from you. You should have a written plan describing how this will happen. Funding something just long enough for it to get established and then having to drop it? Very very common and also IMO a great waste of everybody's time and money.

Secondly, people getting things for free don't always appreciate the value of those things (or treat them well) in the same way as people who have to find the rent every month. Charging rent gives people an incentive not to treat your property like a squat, and also to concentrate on making something marketable that can pay the bills. If you're footing ALL their bills, that's a very one-sided contribution. Charging rent will make people take the project seriously.
posted by emilyw at 1:17 AM on October 13 [2 favorites has favorites]

You've got a paying job, right? How much of that money do you want to invest in paying plumbers, electricians and other contractors? Looking at your current house, you've got plenty on your hands and you won't have time to fix everything at the other buildings. Everybody may think it's cool and funky at first, but pretty soon the problems inherent in 100 year old buildings will start to wear on everybody concerned.

1) Talk to an attorney.
2) Make your tenants sign a lease. I'd make them pay nominal ($100) rent, just to avoid amateurs. I'd make it very clear who is cleaning up, who is responsible for what.
3) Skip the cook. People have their own tastes. If you want to have a commune-like feel, share the cooking.

Richmond? Really? Richmond's not exactly what I'd call an economic fireball. If you want to be surrounded by interesting people, rent to Earlham students or new/visiting faculty or ESR students. You're on the North side of town, right? That's a bit of a hike for them, but for cheap rent they'll do about anything.

Go Red Devils/Hustling Quakers.
posted by donpardo at 2:47 AM on October 13

I want to love this idea. My mother grew up in Richmond, and I know a handful of people who went to Earlham.

Some thoughts:

- You might not really need to provide server space; at least not for web startups. They are better hosting somewhere (perhaps virtually) at a colo with better connectivity. Dev and test servers, you could host.

- Actually, good residential-class broadband may be enough for many startups. See above; you don't want to run your production web site out of there anyway.

- Talk to the regional business communities: tech startups in Indy including Cha-cha (and, um, I don't know who else) and the other vaguely tech-related firms there (Interactive Intelligence and Klipsch are the ones I see driving from the airport to my mother's). Talk to folks in Dayton and Columbus and Cincinnati.

- Face it, it's Richmond, Indiana. You're not going to have a biotech startup or some social media phenomenon. Think about the simple ideas that can make money: something that web-enables and simplifies a business process, for example.

- Think about "on-shoring" possibilities: companies that want to move something (usually development or QA) for overseas back to the US, for timezone or language or compliance reasons. Farmer's wives and RV welders can do UAT for bank websites as well as anyone else.

- What else lends itself to a rural environment? West of Indy there are lots of wind farms. Your problem is going to be the lack of engineering grads, Earlham is not Purdue or Rose-Hullman. On the other hand, you might be able to tap into something at Wright-Patterson.

- Think about the history of Richmond? I know it used to have big record pressing plants back when vinyl ruled. Why was Tom Raper RVs so big? Do some research as to what enabled past regional business successes and try to apply them to this project.

- There's good advice above. Do charge rent; do consider if you're renting office space, living space, or both, do talk to a lawyer.

Best of luck.
posted by These Premises Are Alarmed at 5:19 AM on October 13

Well, I think it's a bad idea because most people who want to start a company probably already have places to live. With things like YCombinator the real value is in the connections that people will make, the fact that the people who invest are rich and well connected, not their cash. If someone has an idea that will work out if they just get their hands on a place to work, then they can probably just work from home.

I mean it sounds like it could be fun, I guess.
posted by delmoi at 5:23 AM on October 13

Coupla things.

Do charge some rent. It's a psychological thing, but people honor what they pay for. For the same reason a communal job should be part of the deal, something as simple as sweeping out the hallway or taking out garbage.

You will be running this as a non-profit? Look into setting up a 501c(3). get local community people to be on the board along with outsiders with the technical know-how.

I think it's worth looking into. Love your blog!
posted by readery at 5:58 AM on October 13

How are you going to vet who gets to move in? What happens when group there wants to take on an additional person? How will you gauge whether the people there are actually productive?

Also, I hate to say it, but I think you're going to have a hard time attracting bright startup talent to Richmond, Indiana.
posted by mkultra at 8:07 AM on October 13

Maybe you should start as an open source commune. Get some notoriety and fame. An environment like that could be pretty productive.
posted by delmoi at 10:06 AM on October 13 [1 favorite has favorites]

And now, you want to set up shop again, concentrating resources, in the abandoned bones of the Industrial Age.

Florid prose notwithstanding (btw, that was some pretty good floridity there) I don't think this is a good parallel. It's like telling a hermit crab he's wrong to use an abandoned mollusk shell -- after all, it didn't save the mollusk. The point is, we have these abandoned bones here and I'm looking for a way to reuse/recycle them before they decay too much further. Not to mention I'm not even sure what concentration of resources could possibly mean in the Internet Age.

In point of fact, though, after reading over the various comments here and at HNN, and especially after hitting Phil Greenspun's account of the demise of ArsDigita linked from the HNN comment thread (I always wondered about what happened to Greenspun; I was preoccupied with other matters at the time), I realize that this venture would combine all the bad points of landlording and management of a technical business, and both of those things are things I have tried - and failed at. So while I suspect the idea could be made to work, I also strongly suspect that it could only be made to work by some hypothetical person who isn't me.

There is a beauty and an inherent stability in these abandoned bones; it's hard to write about it without breaking into my own florid prose. I'm not sure apprehension of this is something that would resonate with the typical net startup character, but it's hard for me to believe that the American economy couldn't benefit from a little more appreciation for stability. I do know that living here has eliminated a stress I wasn't even fully conscious of; these buildings are solid, they're not going anywhere soon, and I own them outright. I could just sit on my ass for a few months and - honestly - nothing would happen; that's more stability than I've had since I left home lo these many years ago.

At any rate, Greenspun's account has perturbed me sufficiently that I've resolved not to think about this for the rest of the week. I have a wall to finish and about 20,000 words to translate, and none of it's getting done while I obsess about tech metastartups or saving more than one grand old house from destruction.

Richmond's not exactly what I'd call an economic fireball.

That's kind of my point, yes. It wouldn't have to be an economic fireball to not knock down hundred-year old houses. Just ... a little warmer.
posted by Michael Roberts at 10:08 AM on October 13

An environment like that could be pretty productive.

It could be pretty fantastic, if one were lucky enough to get it past the startup stage. Ironic.
posted by Michael Roberts at 10:12 AM on October 13

It wouldn't have to be an economic fireball to not knock down hundred-year old houses. Just ... a little warmer.

This is probably true. There are a lot of those up there, so people probably don't value them much. One memorable summer, I lived in one in the same neighborhood as yours.

I'm cynical about Richmond. I'm coming in for homecoming next weekend. Maybe I'll have a different view this time.

I've sent this post to a friend of mine who's been involved in couple of startups based in Richmond. I'll let you know if he wants to get in touch.

Good luck.
posted by donpardo at 10:39 AM on October 13

There's plenty here to be cynical about, sure. There's a lot to be soft-heartedly romantic about, too. I lean towards romanticism when it comes to brick houses; just a quirk, I guess.
posted by Michael Roberts at 10:49 AM on October 13

I think the question to ask is why there isn't a startup scene in Richmond, Indiana now, and then ask what you bring to the table that is going to change that. Then ask if what you are bringing to the table is going to be enough to bring people to Richmond AND be reason enough for them to give you equity in their startup.

I don't see that this has a good chance of working.

There are lots of places with cheap rent and attractive old buildings. Anyone anywhere can rent server space inexpensively. What sets you apart, ever so slightly, is that you are willing to front them some basics in exchange for a piece of their companies. What's you contribution worth, maybe $500/month or $6000/year per person? That's really not much. Anyone with a decent chance of creating their own small tech startup could probably put away that much working a real job for a few months. That is the source of a couple of complications for this scheme, first, it's hard to make the case that it is even worth the time of an entrepreneur to talk to you, and if they were to make it so far as to do a deal with you, your contribution isn't going to merit much equity in the company.

But, assume you've got a small stable of startups and a few of them start getting traction. They'll want to hire new people. Are there many of them in Richmond? If they can be found elsewhere, are they going to be willing to move to Richmond?

What about capital, or potential acquirers? Are their investors who can put a $500K-$2M into a company to help it get to the next level? How about the next level, anyone who can put $2-20M together? Are there big companies sniffing around Richmond looking for companies to buy?

A smart, informed entrepreneur is going to want reasonable answers to all these questions before signing on, so that leaves you with the insane lunatic dreamers. I'm guessing that the later actually have a better chance of a huge success, but the risk is higher, so you'll need to fund more of them.

I point these things out less to discourage you than to point out the problems you'll need to solve or work around to get a working model. One of the things that is fundamental to developing a startup community is valuing the learning that comes with failure, so lets start justifying your own "investment" in this project on that basis: Even if this whole enterprise never comes to anything, you have the opportunity to learn an incredible amount about business, community, economics, finance, marketing, etc along the way.

So, how to start? I'd start by focusing on how you are going to plant your first couple seasons of startups. Once you have a bit of a community going, you can work on using that community as a selling point to draw in more people.

Taking stock of what else Richmond has to offer besides cheap housing. Wikipedia says that that you have a small liberal arts college, and it looks like an IT focused branch campus of Purdue. Alumni of these schools would seem to be a strong source for founders of the first crop of startups you work with. You might try getting some new grads, but I think what you really want is people who have left and have some experience, but by targeting grads of local colleges, you'll be getting people who already know something about Richmond, and, hopefully a little sense of connection to the place.

The schools are resources in other ways. There may be professors or students who can help you with creating business plans, line up grants, etc for both you and the startups you are hoping to attract. Earlham looks like it has a reasonably healthy endowment, which suggests they have a competent fundraising staff. They could help you making connections to wealthy and influential alumni if you can help make the case that it will, over the long run, help grow the pool of people and money they can dip into.

You'll also want to find people in the community who can provide capital and connections. A lot of small towns still have some very rich people. This is likely to be the best source of capital for any startups you bring to the area, because existing VCs tend to invest close to where they have offices.

You'll also want to cultivate some attorneys and finance types.

The goal here is to put together a story that pioneering entrepreneurs are going to find attractive enough to consider Richmond over a place that seems to have more to offer.

That's enough for now. Feel free to contact me if you want to kick ideas around.
posted by Good Brain at 11:03 AM on October 13

people probably don't value them much

It's not that they're not valued in an abstract sense, it's just that there are flat-out no people to live in them given the actual and current state of the local economy. And that means the owners have no way to fix things, and so they slide into an uninhabitable state.

Hell, there isn't even a minimum population density of meth lab operators to move in. Just that one day you see that the door of one is hanging open, and you walk the dog in and marvel at a hundred years of time and usually a couple of items of ragged furniture or a suitcase, sometimes some paint cans from the last time somebody tried to make a go of it.

Eventually the city declares the building unsafe and tries to contact the owner, who is either incommunicado or, say, DeutscheBank in New Jersey, then invisible people come in and strip out anything remotely useful, like marble fireplaces and any trim that will come off the walls without breaking (or a perfectly good deadbolt and knob currently in my basement for installation on a carriage house door, not that I saw anybody taking it and the dog will back me up, just ask her, and if you work for DeutscheBank, it wasn't me who took it), and presently a demolition company knocks it all down and carts it off to the landfill, and Richmond loses one more dollop of its character.
posted by Michael Roberts at 8:46 PM on October 13

Just in case anybody's following this thread, the brainworm has gone so far as to cause me to set up a devoted site for further discussion. We'll see if occasional nudges will cause anything to snowball.
posted by Michael Roberts at 9:53 PM on October 16