Capital Factory’s Joshua Baer on incubating startups in Austin

Silicon Valley may have the most established and well-known startup incubator in the form of Y Combinator, but other areas are joining in, with TechStars in Boulder, Colo., Launchbox Digital in Washington, D.C., and Start@Spark in Boston, Mass. — and Austin, Texas is getting into the game with Capital Factory.

Applications are now open for its first batch of startups; the firm says it will be selecting 10 finalists, then narrowing the list down to the winners in mid-April. Those winning startups will receive $20,000 in cash, $20,000 worth of “free stuff” such as IT infrastructure and hosting, and access to 20 mentors including serial entrepreneurs, investors, and attorneys. Since the application deadline is little more than a week away (11:59pm Pacific on April 3), I thought I’d email co-founder and co-managing director Joshua Baer a few questions about the program. (Baer is also the founder and chief executive at email organization startup OtherInbox).

VB: Can you talk about why you decided to create Capital Factory? What need is it serving?

JB: First-time entrepreneurs want to ask questions of successful entrepreneurs. Successful entrepreneurs like investing in young entrepreneurs. Entrepreneurs of all kinds thrive on each other’s passion. At its core, we’re doing this because we think it will be really fun and rewarding for everyone involved.

Gaps have formed in the traditional funding path for early-stage companies. Many venture capitalists are moving towards bigger funds that invest larger amounts of money in lower risk companies that have already proven their model. Angel investors are banding together into syndicates that look more and more like venture capitalists. We think we can help to fill some of those gaps and then introduce companies to angel investor groups or venture capitalists at the right time.

VB: What kinds of startups are you interested in backing?

JB: Most importantly we want to get involved with companies that we can have the biggest impact on. After all, it’s not really about the $20,000; it’s about the 20 mentors who are going to spend time with the companies and help them to focus on the right priorities and with key introductions to customers, partners, employees and investors. If someone submitted a great company idea but none of us had any real value add beyond the money, we’d probably pass on the deal and select another company that we thought could really benefit from our advice and relationships.

We like lean companies that can get to profitability quickly and can scale rapidly. Most of us have technology backgrounds, and while it is not a requirement, it is very likely that the companies we select will have technology components to them. We’re happy to start with just an idea on a napkin, but we’ll also work with companies that have some customers or angel investors and are now ready to scale their business.

VB: What can you learn from Y Combinator? How do you think you’re doing it better?

JB: We learn as much as we can from other startup programs and everyone we have talked to has been extremely helpful and supportive of each other. Paul Graham [of Y Combinator] set a great example by putting his documents and terms out for everyone to see and use if they want to, and we plan on doing the same.

We don’t think of the different startup programs as better or worse than each other. Some have been doing it for a few years, and others are brand new. If you are an entrepreneur starting a new company and want this kind of support, you probably should apply to a bunch of programs, see which ones you get accepted into, and select the one that has the mentors who you think can help your business the most.

VB: How do your think your strategy is influenced by being based in Austin?

JB: Austin is a great place to start a company, a great place to have fun, a great place to raise a family, and is extremely well positioned for the tough economic times facing our nation.

Austin has an incredible labor pool created by the University of Texas, the state government, and all of the technology companies that are based here. We have an amazing lifestyle with live music, film and tons of outdoor activities. People are moving here from California because they want to own a home and make each dollar go a lot farther. One of the youngest cities with one of the strongest economies, Austin is a place where great new things are starting up every day.

VB: And how has the broader economic climate affected your plans?

JB: Now is probably the best time in the past decade to be doing a startup and to be investing in startups. Most people look at the current economic condition and see the losses they have from last year. If you are starting from scratch then you haven’t lost anything, and there is nowhere to go but up. During times like these, labor and supplier costs are lower, there is less competition, and all budgets are being re-examined. People are open to new ways of doing things that will help them to reduce costs or find customers.

With the growth of cloud computing and open source software, the capital requirements of starting new technology companies is dropping rapidly and heading towards free. Traditional barriers to entry are being abolished and companies are being started on credit cards and then bootstrapped to profitability.

VB: Can you talk a little bit about choosing the mentors?

JB: There were a few criteria in selecting the mentors. To start with, we wanted to make sure it was an impressive list of successful entrepreneurs who had started and sold one or more businesses. We also wanted a diverse group that spanned multiple industries as well as all of the different critical functions of operating a company. Of course, everyone had to share a common spirit of giving back to the entrepreneurial community and enjoying the mentoring process.