Back in the summer of 2000, a five-storey refurbished warehouse in newly trendy Clerkenwell was the fecund ground zero for London’s internet boom. Here as many as 16 would-be entrepreneurial outfits, or ‘cubs’ as they were dubbed, were being groomed for overnight riches by the building’s big cat, Brainspark. One of 50 so-called ‘incubators’ floating sky-high at the time on the AIM stock exchange, Brainspark emulated the nursery approach to business-rearing that had been popularised in and around San Francisco, weaning a litter of proto-companies in exchange for stakes in their futures.

The moment that bubble burst, just a few months later, it was the incubators themselves that ended up on life support. Among the few to be brought back from the brink, Brainspark was later revived as an Italian company through a reverse merger and is looking to break ground on the €220m Mediapolis entertainment and shopping village earmarked for the Piedmont region. Ten years on from being one of Europe’s most visible emblems of the e-commerce craze, it now deals in parks, not brains.

Brainspark’s salutary tale, and those of plenty of others like CMGI – a US dotcom hatchery once valued at close to $40bn – is the reason that business incubators have such tarnished reputations. Too many were simply opportunistic plays by real- estate owners and venture capitalists that squandered rather than catalysed all that innovative zeal gathered together in the hope of creating keiretsu-like communities of synergistic businesses. Despite raising billions of dollars in capital to fuel their ambitions, they were ill-suited to evaluating early-stage start-ups, much less provide tutelage to their ragtag collections of amateur entrepreneurs swivelling around in their Aeron chairs.

But if incubators became a dirty word, that doesn’t mean the concept also died an ignominious death. Far from it. Incubators are enjoying a growth spurt right now that far exceeds that of the original dotcom swoon – but they doing so with new business models and under new guises as ‘venture accelerators’.

In the US, according to the National Business Incubation Association, there are now 41,000 start-ups tapping into 1,200 incubators. Worldwide there are estimated to be at least 7,000 incubators and counting, spurred on by policy- makers looking to kick-start local job creation. And not just in the big urban centres.

“Interestingly, some of the better incubators are rooted in regional economies rather than major cities,” notes Tim Eldridge, a former top executive at several New York ad agencies who now steers entrepreneurs from his new base in Queensland, Australia. “All regional governments are striving for industry diversification, for more Third Millennium industries, for more knowledge worker career opportunities, a theme that crops up in all regional development strategies. The intent is good. The will is right.

But the reality is much harder than the rhetoric. Incubators have a key role to play in helping regional economies turn that into a reality.”

Like the Sunshine Coast Innovation Centre with which his company Eldridge Marketing is associated, the vast majority of incubators are housed in science parks and academic campuses. While their methods vary, the common aim is to help budding innovators traverse the infamous ‘valley of death’. This is the gap between basic research and proof-of-concept, a treacherous time in the business development cycle when new ideas are considered too risky to attract private investors.

Among the most successful at plugging that gap has been Y Combinator, a pioneering seed fund-cum-bootcamp now located in the heart of Silicon Valley, just down the road from both Google and Yahoo. Created by Paul Graham, himself a dotcom beneficiary, Y Combinator has helped 207 start-ups take off in just five years – and in the process acquired a cult-hero status across the entire innovation ecosystem. Hardly a month goes by now without news of another international hub boasting its own Y Combinator variant.

What distinguishes this new wave of for-profit springboards is that they don’t tend to provide office space to the businesses they aim to catapult into the marketplace. Instead they invite a dozen or so fledging entrepreneurs to participate in a three- month immersion programme. In the case of YC, the intensive mentoring sessions include weekly dinners where the likes of Facebook founder Mark Zuckerberg and other members of the Silicon Valley priesthood drop by to office advice. It all culminates in a demo day during which the now fully-baked ideas are paraded in front of potential investors. Each start-up is given a tiny sum of money – typically $15,000 (€11,000) for an idea involving two founders – to cover lodging and equipment during those months. In return, YC gets a small piece of the action – an equity stake of around 6%.

It’s a seductive format that has inspired copycats everywhere from Colorado, where Boulder-based TechStars is another fast emerging brand, to big-city hubs such as London, Montreal, Tokyo and Bangalore. Whether the YC blueprint translates so well to other countries inspired by his success is something that Graham himself questions – although he stops short of declaring another bubble in the making.

“I suppose a lot of the incubators that are getting created now will probably fail,” observes Graham, when contacted by email. “I wouldn’t call that a bubble, though; an investment bubble happens when people buy things at high prices on the assumption someone else will want them at even higher prices.”

Bubble or not, “The YC model might not work well in Europe, say, because YC doesn’t try to supply all the money start-ups need,” Graham adds cautiously. “It presupposes that there are later stage investors, particularly angels, waiting to fund the start-ups after they emerge. If those investors weren’t there, most of the start-ups would die. And frankly they aren’t there in most of the cities in the US, let alone in the rest of the world.”

For a while it seemed as if some of that finance might be provided by big business itself, rather than venture capitalists in their various incarnations. Google, Apple and Facebook have all created their in-house incubation engines and seed investment funds. So far, however, the track record of even the most advanced technology companies when it comes to stimulating innovation, as opposed to buying up ideas germinated outside their walls, has been decidedly poor. Facebook’s mini- financier fbFund, for example, appears to have been mothballed after two years of funding companies building on its developer platform. And News Corp eventually pulled the plug on Slingshot Labs, a social media incubator spun off from MySpace, earlier this summer. Perhaps this is not surprising given the inveterate nature of corporate group-think.

“The idea that big business needs to harness innovation has been much discussed. But has big business really changed?” asks Eldridge. “No one wants to listen to your idea. Or they listen but getting something going is like wading through treacle. Frankly innovator-entrepreneurs ought to find it easier, not harder, to innovate within the context of being employed. But I’m not sure big business has figured out how to make that happen. So the ideas go undiscovered or undeveloped – or the entrepreneur goes it alone, and has a really tough 24 months ahead pursuing their ideas independently.”

That early-stage financing vacuum is the reason why Graham believes start-ups, regardless of their location, might be better off decamping to the world’s innovation epicentre, at least during Paul Graham, founder, Y Combinator their formative stages. “This will sound controversial, but I usually advise start- ups that want funding to go where the investors are, which means the US and Silicon Valley in particular. This advice isn’t controversial when you tell it to someone in St Louis. But as soon as you cross a national border, the same advice starts to sound nationalistic. Actually it isn’t; actually it’s ‘metropolistic.’ Cities are competing here, not countries.”

And compete they are. In London alone according to UKBI, the British professional body for business incubators, there are now more than 300 communal networking centres supporting 12,000 young businesses across all sectors. The closest equivalent to Y Combinator is Seedcamp, a roving micro seed fund that provides mentoring to start-ups right across Europe and the Middle East. Among its successes has been Plink, the mobile visual search company that became Google’s first UK acquisition when it was snapped up this April for an undisclosed sum.

Fully acknowledging the visionary inspiration that YC has provided, Seedcamp’s founder and executive chairman Saul Klein does not see himself as being in opposition to Silicon Valley. “It’s not an either/or situation,” he insists. “We consider the US to be part out of network as we introduce our start-ups to capital partners and mentoring specialists.” A partner in the venture capital firm Index Ventures, Klein was also the co-founder and original CEO of what is now the British film rental operation known as Lovefilm International, as well as being part of the executive team at Skype. Loath like everyone else to use the incubator metaphor when explaining Seedcamp, Klein draws instead on the talent show analogy familiar to television viewers the world over. “While this might sound too populist to some, I describe what we do as Pop Idol for start-ups. As humiliating as some of the early auditions are, you can see that these talents are undeniably better at the end of the mentoring process, putting at least one of them in the position of being signed up by a record label.”

In Seedcamp’s case, that final talent show was a record-breaker this year. As many as 23 entrepreneurial teams, culled from more than 900 applications, pitched their latest brainwaves to judging panels of mentors at University College London in September. Reaching well beyond the UK to encompass start-ups from Vienna, Barcelona, Lithuania, Ljubljana, Bosnia and Herzegovina and Israel, Seedcamp Week more closely resembled the Eurovision Song Contest in terms of geographical spread.

This ‘distributed’ model is the key to Seedcamp succeeding in such a diverse arena as the European continent, says Klein. “Operating around the four main hubs of London, Paris, Berlin and Tel Aviv, Seedcamp’s spokes also reach into such hotspots as Zagreb, Prague, Warsaw, Kiev and Barcelona in the belief that this is the only way to filter out and unearth the next innovative gems.

“The challenge of providing a platform for young, early-stage companies is fundamentally different outside the US. You have to build a network and burrow into those markets as opposed to asking people to come to you. This provides investors with an amazing opportunity to access new ideas. And you also benefit from the networking effect as successful local entrepreneurs encourage the next generation of start-ups.”

Like his US counterparts, Klein invests in the winning propositions to emerge from the culling process in return for future participation. The fact that the investment sums can be so small is one of the big changes from the last time that incubators were all the rage. “As a result of revolutions such as open-source software, the costs of starting a new company have come down dramatically. And so too has the cost of customer acquisition because of social and viral platforms. Back in the 1990s, early-stage businesses simply didn’t have Google AdWords, for example, to promote themselves. The pieces of the jigsaw puzzle are now available to everyone and this has changed the economics of providing new services.”

The new catchphrase for these bootstrapped start-ups is LILO, meaning ‘a little in, a lot out’. For next to nothing, a company can now be created that has huge scaleable potential. But how this all plays out in terms of eventual success rates is still anyone’s guess. The early cost structure may have changed for the better, but the time it takes to commercialise an idea and then enjoy a successful exit through an acquisition or public flotation is considerable.

It could be a decade before we know whether Seedcamp or Y Combinator has financed the next Google. All we know for sure is that by then a whole new vocabulary of buzzwords and acronyms will have fallen in and out of currency.

THE WORLD OF START-UP ACCELERATORS

MONTREAL
YEAR ONE LABS
A hands-on incubator dedicated to the ‘lean start-up’ approach that advocates the creation of rapid prototypes to test market assump- tions. Accepted Cana- dian start-ups receive $50,000 (€36,500), issued in tranches based on milestones, and free space. In exchange, Year One takes a stake of 10%-20% of equity.

CALIFORNIA
Y COMBINATOR
The benchmark for business accelerators since its creation in 2005, this Silicon Valley hotbed attracts 1,000 applicants for each of its bootcamps. Boosted by $8.5m from the likes of Sequoia Capital, it would like to fund as many as 70 start-ups a year. Successes include DropBox, Posterous, Loopt, Scribd and Reddit.

COLORADO
TECHSTARS
A seed-stage investor that says: “The geeks shall inherit the earth.” Hundreds of companies apply to be among the 10 that benefit from a three-month intensive mentorship programme in Boston, Boulder, New York or Seattle. Companies get up to $18,000 (€13,000) and the chance to pitch to angel investors.

NEW YORK
BETAWORKS
Founded in 2007, the Manhattan-based tech investor and social media incubator has helped give birth to several applications and services that revolve around Twitter and the ‘real-time web’. It helped sell search engine Summize to Twitter in 2008 and just secured $20m (€15m) in a second round of funding.

BANGALORE
MORPHEUS
Morpheus holds four-month business accelerator programmes where it works with 20 very early-stage companies, taking a 4%-8% equity stake in exchange for advice, mentoring and business connections. Preferring to inject sweat equity rather than capital, it’s “like Y Combinator, but without the cash”.

BEIJING
INNOVATION WORKS
Kai-Fu Lee, former head of Google’s opera- tions in China, lifted the veil this September on the 12 start-ups his outfit has been incubat- ing in the past year. In that time, he claims to have received 100,000 resumes, reviewed 500 business plans and rounded up $115m (€84m) in backing.

LONDON
SEEDCAMP
Seedcamp connects next-generation devel- opers and entrepreneurs from across EMEA with over 400 mentors. Its micro seed fund invests in start-ups mainly through its annual Seedcamp Week and mini-programmes that run throughout several start-up hubs in Europe. Seedcamp’s standard investment is €30k-50k.

BELFAST
STARTVI
Pronounced “Start Six”, this virtual incuba- tor for early-stage Northern Ireland-based companies operates out of an old garment factory building in the city centre. Staying true to its name, it provides six months of free space to six potential start-ups in return for 6% of their equity and 6% of their income.

TOKYO
OPEN NETWORK LAB
Neoteny Labs was founded in 2009 by Japanese venture capitalist Joi Ito as a combination seed-stage venture fund and hands-on incubator for start-ups across Asia and the Middle East. Targeted segments include consumer internet, mobile apps and consumer hardware and electronics design.

SINGAPORE
NEOTENY LABS
Run by three Japanese technology companies – incubator Digital Garage and the e-commerce firms Kakaku and Netprice. The focus is on creating “globally competitive” compa- nies that can target markets outside Japan. Entrepreneurs have to prove they can deliver a prototype web service within three months.