Taking the Temperature of "Cultural Incubators"
Last week on Twitter my adrenaline level spiked when I encountered a link to SF-based Gray Area (no relation) and their Cultural Incubator. I’ve long wondered about whether there’s an opportunity for an artistic equivalent to venture-backed tech incubator/accelerator programs like Y Combinator and Techstars, so I was immediately intrigued by the notion that someone had pursued the model in the arts and culture realm–and if possible, I wanted to be a part of it.
Before we go on, a little background for the uninitiated. "Incubator" and “accelerator” are often used as synonyms in discussions of a certain class of tech program designed to cultivate startup concepts into viable companies. The basic idea is to provide seed funding and guidance at square one so that each project can grow strong and pay off for its early stage investors.
However, if you want to investigate the scene with a blacklight, treating incubators and accelerators as twins is technically inaccurate. An incubator (like, say, IdeaLab) exists as a kind of startup think thank. Its members tend to concoct most of the ideas for new tech ventures internally, then recruit outside parties to develop and execute those ideas on their behalf. (Incubators sometimes consider concepts and business plans from outside sources, but usually with strong preferences for those coming from people with whom they’ve already worked.)
An incubator injects substantial capital in each venture and helps shepherd it from concept to market in exchange for a meaty equity stake–20% or more, according to Paul Bricault of the accelerator Amplify (as quoted in the Inc piece linked above). And the timeline for the entire process can extend as long as the incubator sees fit to support it.
Accelerators work somewhat differently. In this model, embryonic entrepreneurs apply by offering their own ideas to the accelerator gods. If accepted, the enrollees enter something like the tech equivalent of a study abroad program, where they live and work nearby the accelerator’s campus to develop their startup in a concentrated way.
Aside from the inside/outside difference, accelerators compress the resources offered by incubators. On one hand, accelerators provide significantly less seed funding than incubators, but also claim a significantly lower equity stake in their enrollees’ projects. Y Combinator's standard deal, for instance, trades $120,000 to each startup in exchange for 7% equity; TechStars invests $118,000 for a 7-10% stake.
As the name would suggest, the accelerators’ timeline is compressed, too. The programs normally last only about 3-4 months. After that point, their participants usually must either have their startups ready to present to other investors for the next funding round, or else they lose any further financial support from the accelerator. (Most entities will continue to offer guidance after the clock runs out, just no hard assets.)
Now, a strict incubator structure seems like a nonstarter in the arts. The only people hiring out to enable the execution of their own ideas are artists themselves, and they’re not handing their assistants serious capital in exchange for partial equity in the final product. Instead, the artists generally pay their staff a relatively low wage and then take full credit (and profit) for the creative result because, hey, that’s the way it’s been done for hundreds of years. (For a contemporary example, consider Jeff Koons.) I don’t see that status quo changing anytime soon.
Meanwhile, the prospect of venture capitalists’ dreaming up, say, a painting series or a novel and then soliciting a set of emerging arts pros to manifest it is frankly too cringe-worthy for me to consider as a serious business proposition. I’m not saying it never happens, especially regarding books. But I don’t think such an alliance arises nearly often enough to build into a self-sustaining sub-industry of the arts.
However, it’s much easier (and more invigorating) for me to imagine how an accelerator model might function. Investors would financially back promising young artists of their choosing in any medium–visual arts, writing, music, et al–to release them from the Hannibal Lecter restraints of the day jobs or freelance work that pay their bills. Instead, the artists would be free to focus on developing their creative concepts full time.
Upon completion, the “accelerated” projects could then be sold, released, or presented for consumption, and a set percentage of the proceeds would accrue to the investor to reward her up-front capital infusion. It would be an innovative workaround–a kind of private sector answer to non-profit grants, with investors standing to financially benefit on the back end.
This was the type of program I hoped Gray Area’s Cultural Incubator would be. So I was thrilled to see that they were accepting applications for their first round of participants–and that writers were among the creative classes welcomed. The topics I’ve been blogging about for the past three or four months felt like a great fit, especially for a Bay area venture with a tech-friendly slant, and I would have loved to see what would come out of my own work from embedding in this kind of of environment. So I prepped myself for the always excruciating task of responding to essay prompts and dive-bombed onto the site to try my luck.
Unfortunately, my velocity backfired. Because as I swooped my way toward the application, I slammed into the following section like an overconfident sparrow into a spotless window:
Founding Membership Levels
These are special prices for those that apply and are accepted on the first round! These are the most affordable rates in town and rates will have to increase.
Open Desk ($200/Month)
○ First come first serve open space desk
○ Access: 10am to 6pm, 7 days a week
○ 2 month minimum
Private Desk ($420/month)
○ Dedicated desk in secured area
○ 24 / 7 Access to space and facilities
○ 3 month minimum
Studio ($1000 to $2000/month)
○ Accommodates 2 – 6 desks
○ 24/7 access to space and facilities
○ 6 month minimum
Now, the incubator/accelerator ecosystem is rich in minor variations between programs. But to my understanding, the same ballast keeps both models upright: the quid pro quo of mentorship and early funding for part ownership of the resulting project. As their monthly rates clarify, Gray Area’s Cultural Incubator rejects that exchange, and to me that means that they qualify as neither an incubator nor an accelerator in the classic tech sector sense of the words.
True, there are parallels to the Y Combinators of the world: the application phase, the sense of fellowship, and the opportunity for collaboration with mentors and other members once inside the gates. But extracting the “capital for equity” swap from the DNA sequence mutates Gray Area’s program into another life form entirely.
In addition, the programming advertised on their site all seems to be optional rather than part of any kind of structured “launch sequence.” And many (if not all) of the classes and events offered seem to require a la carte payment. Add it all up, and Gray Area sounds less like a cultural incubator than a co-working space with a velvet rope.
To be clear, the flaw here is in my expectations, not necessarily their business plan. Gray Area’s programming options sound intriguing. The application process suggests that the members should be legitimately smart, savvy, and creative–people worth getting to know and possibly working with. And considering that the space is in the middle of SF, I don’t even think the rates are particularly unreasonable for anyone seeking a new metropolitan home base for her practice. (Especially since at this point in the gentrification cycle, most emerging artists of any stripe probably can’t afford to live in SF proper anyway.)
So Gray Area is not the type of cultural incubator that I had in mind. But rather than sink into a semantic debate about whether their use of the term is problematic for people other than myself, I want to use the experience to pursue a different question: Is anyone running an arts and culture incubator more closely modeled on the for-profit Silicon Valley paradigm? And if not, why not?
Full disclosure: I have not embarked on a high-octane, face-punching, Liam-Neeson-in-Taken hunt for what’s out there. But from the poking and prodding I have done, it appears that most, if not all, of the existing arts and culture entities that speed closest to the accelerator model still sputter out before cracking the sound barrier. Overall, those entities seem to take one of three forms:
- Application-free, for-profit, pay-per-access co-working complexes like Maker City LA
- Application-dependent, non-profit, pay-per-access co-working spaces like Gray Area or the New Museum's New Inc
- Application-dependent, non-profit, grant-funded umbrella programs like Virginia's Arlington Arts
All of these are valuable, but none of them does what I envisioned in an arts-based ‘startup’ incubator. So if what I’m envisioning doesn’t exist, it suggests I should move on to the second question: Why doesn’t it exist?
I can only think of two potential answers. The first is that no investors with the necessary level of capital have considered the possibility yet, or at least haven’t yet carried the concept through to completion.
This seems unlikely to me, if only because my default motivation as a writer is the assumption that I’m perpetually behind the curve and can only cross the finish line first by outworking whomever lit on an idea before me. (As for whether or not this worldview is actually true, that’s a position I should probably be paying a therapist to play offense against. But that’s not something we need to work out here.)
That leads us to the second potential answer: arts incubators/accelerators do not exist because analysis suggests they wouldn’t be financially self-sustaining.
I’m not certain if this is true, but it strikes me as a much more muscular argument. The startup sector, as probably everyone other than children raised in cult compounds knows, generally works on something resembling the ratios in The Hunger Games: Many must die so that a few may flourish.
Different sources will give you different numbers about the casualty rate’s steepness. For instance, the National Venture Capital Association estimates in their FAQ that about 40% of venture-backed startups fail, another 40% “return modest amounts of capital,” and the remaining 20% or less “produce high returns.” Far from welcoming odds, but not horrific, right?
Well, there may be some heavy top spin on those numbers. For instance, Shikhar Ghosh of the Harvard Business School alleges in a 2012 paper that, depending on how you want to define 'failure,’ up to 95% of venture-backed startups wither and die. He attributes a 30-40% failure rate when 'failure’ means “liquidation of all assets,” a 75% failure rate if the definition switches to “failure to return investors’ capital,” and a vomit-inducing 95% if the metric becomes “failure to return the expected investment.”
Regardless of whether 20% or 5% of startups flourish, the underlying point is the same: The VC industry keeps churning only because the few success stories provide a rich enough return to compensate for all the dead money shoveled to zombie ventures.
If we want to explore the idea of venture-backed culture, there is no comparable failure rate data to consider for artists in any media. But common sense and lived experience both suggest to me that they face odds at least as long as those of the average startup. The question then becomes whether the most successful cultural 'startups,’ i.e. emerging artists, can scale their businesses similarly enough to justify a seed-funded model.
For that we need some numerical context. Since the NVCA doesn’t quantify their definitions for “modest amounts” or “high returns,” I’m looking to angel investor and former fund manager J. Basil Peters for a flashlight beam in the darkness. On Angel Blog, a domain that some Bible-banger with a cherub fetish is undoubtedly still livid at having lost out on, Peters implicitly agrees with the NVCA’s success estimates by contending that "in a typical [VC] fund, the returns are from 20% of investments.“ But he expands by explaining that the minimum respectable return for a VC fund is 6X investment in their entire portfolio of startups.
How does a VC fund normally capture that multiple? Peters claims that the math dictates the successful 20% of startups need to return 30X their individual investments in the aggregate to make up for the doomed 80%. Further, he argues that to hit this minimum benchmark in a portfolio of ten startups, it’s unlikely that the two successful ones will both return 30X each. It’s much more typical for one venture to return something like 10X and another to soar to 100X.
If we transpose those multiples onto the arts, we can at least get a whiff of how appealing (or unappealing) an accelerator-style venture capital investment may be.
Imagine that a funding arm feeds the same $120,000 into a promising young artist as Y Combinator feeds into a promising startup. For that capital infusion to pay off by Peters’s standards, the artist would have to net 10X that amount ($1.25M) to qualify as a lower-tier success, 30X ($3.75M) to qualify as an average success, and 100X ($12.5M) to qualify as the type of world-beater that keeps the VC dream alive.
Except, not really. Because VCs don’t normally order in escorts and eightballs to celebrate $12.5M in the tech sector. The reality is that 'successful’ artists stand to gain nowhere near as great a return as 'successful’ startups, nor do they stand to do so nearly as quickly.
To crystallize the magnitude of the disparity, let’s look at TechCrunch’s December 2013 reckoning of startups that successfully exited (i.e. IPO’d or were acquired) since 2007. Three factors here are worth our attention: the dollar value of the exits, the sheer number of exits, and the age of the startups at the time of exit.
The most lucrative event on the chart, not surprisingly, is Facebook’s $18.4B IPO in 2012. And while that gargantuan figure skews the average numbers for the rest of the field, even if we exclude it by focusing only on startups who were acquired rather than IPO’d, the average acquisition price was still $155.5M–about 1,295X the $120,000 in seed funding Y Combinator would have invested.
Nor are we talking about just a few examples, either. I couldn’t find the exact number of data points listed anywhere either on the chart or in the piece surrounding it, but having started to count the circles individually (yes, I’m a maniac), I can confirm that we’re looking at a few hundred unique startup exits.
And the time frame matters, too. If we again focus exclusively on the more modest category of acquired startups, TechCrunch’s data shows that on average they had only been going concerns for 7 years prior to their exits. (If you’re curious, the average age of an IPO’d firm was 8.25 years.) Break that life span down by average exit price, and it means that the acquired ventures effectively earned $22.2M annually.
Is it impossible for an artist to magnetize revenue at that level in the first seven years of her career? Technically speaking, I suppose not. But it’s about as likely as my odds of being featured on a Kanye single the next time he gets in the booth.
As usual, there is no apples-to-apples data set available for artists on any of these metrics. The best we can do is to review these 2013 charts by the National Endowment for the Arts which cover the U.S. artistic population from 2006-2010. Of the estimated 2.5M Americans who list 'artist’ as their primary occupation, only about 96,000 qualify as top-earners.
There’s no more granular data about earnings within that tier, i.e. no way to parse out an equivalent subset of ultra-high earners who could more comfortably parallel TechCrunch’s startup exits. But we can perhaps read into the fact that the base annual earnings needed to climb to the apex of the NEA pyramid is $125,000–almost the same number as Y Combinator’s initial investment for a mere 7% stake. That fact implies to me that very few of those artists are compiling returns at multiples able to justify a six figure capital infusion for a single digit equity stake.
And even the conquering champions of the arts normally need decades of work to build up their net worth so dramatically. There are multi-millionaire visual artists, musicians, authors, and other breeds, of course. But scroll through those lists, and you’re not going to see a lot of naturally taut facial features. In some cases, the high and ultra-high net worth cultural heroes aren’t even breathing anymore.
So does this mean that the notion of a for-profit, venture-backed cultural incubator/accelerator is a black hole? Not necessarily. But it does mean that it would have to be structured differently than the standard tech sector models.
What seems potentially viable to me is a blend of incubator and accelerator: seed funding for promising artists in exchange for a longer-term percentage of profits. This is back of the envelope math at its dirtiest, but reasonable terms might be something like an $80,000.00 investment to cover two years of production with the artist agreeing to funnel back 12% of their earnings for those same two years, plus five after. This kind of arrangement would give emerging artists the capital they needed to concentrate on creating at a critical stage, while attaching investors as partners for a long enough time period to at least have a shot at recouping their money or earning a modest profit.
Incidentally, this is not far off Leo Castelli’s pioneering practice of placing some of his young artists on a monthly stipend so they could cover their expenses between exhibitions without the time-suck of a morose day job. But in my experience, few galleries indulge this arrangement anymore–and the work itself suffers for it. Venture capital could not only theoretically fill this vacuum in the industry, but counterintuitively, improve the quality of the artwork produced.
However, given the relatively paltry earnings potential, the model would need to be established by investors more interested in the creative results than the financial returns. An arts incubator like the one I just described would essentially be a boutique investment. The greater appeal (if there is any) lies in its status as an innovative way to promote the arts in industries being reshaped by technology and capital. It may not be a lucrative experiment, but if properly executed, it may be a culturally worthwhile one.
Still, until some ultra-high net worth arts enthusiast decides to break out the test tubes and Bunsen burners, we may never know.