Keiretsubator

An interesting new business model is emerging here in Austin: the keiretsubator, a combination of an incubator and a keiretsu.

Keiretsu is the Japanese word for a set of companies with interlocking business relationships and shareholdings, usually headed by a bank which finances the group’s companies. Examples include Mitsubishi, Mitsui (Toyota), and Fuyo (Canon, Hitachi, Nissan, Yamaha).

An incubator is an organization – usually not-for-profit – which provides start-up companies with shared infrastructure, basic business services and equipment, technology support services, and assistance in obtaining outside financing from angel groups and VCs. Examples include the Austin Technology Incubator, Georgia’s Advanced Technology Development Center, and Washington State’s William M. Factory Small Business Incubator.

In the keiretsubator model, investors invest directly in the keiretsubator, which then invests in a small number of firms which share the same technology & industry focus (e.g., electronic music technology). In addition to the usual incubator services, the keiretsubator hires senior start-up veterans to fill the senior management roles – CFO, CTO, COO, VP Marketing, etc. – of its member companies on a shared basis. For example, one top-flight Chief Financial Officer will be hired by the keiretsubator, whose services are then shared by the member firms, none of whom attract or afford such a top-flight CFO on their own.

It's a pretty good deal from the CxOs' perspective, because they get to work on a number of interesting projects while being compensated with cash and equity in the keiretsubator – and thus indirectly with equity in the keiretsubator's member companies.

The keiretsubator model thus combines the hands-on management and financial services of a keiretsu with the early-stage focus of an incubator.

The keiretsubator model appears to be ideal for tiny start-up companies with great ideas, no money, and no management other than their founder. Such tiny firms can rarely attract the top-flight management needed to steer the company to success. By banding together, they can pool their opportunities.

Generally speaking, only one in six start-ups ever goes public, and only one in three is acquired by another firm, so incubation – in any model – needs to spread its risk among a number of different member firms to minimize its overall risk. On the other hand, venture capital firms that focus on early-stage companies have earned more than 20% per year over the last twenty years – so if well-managed, a keiretsubator could be a very good investment.

Will the keiretsubator model work? If it attracts great people, great ideas, and sufficient capital, then the odds are in its favor.