Economics of a $100 Million Incubator

Reading about Expa Labs in the NY Times I couldn’t help but think about what the economics might look like for a $100 million incubator. From the article, there are five partners (I’ve met one of them through a mutual friend), eight startups per class, two classes per year, and $500,000 invested in each startup.

Let’s look at some hypothetical math:

• Five years of new startup investing/incubating and 10 year total fund life (the incubator is essentially a fund with an investing period and a harvesting period)
• 40% for new investments ($40 million), 10% for fund expenses ($10 million), and 50% for follow on investments ($50 million)
• 8 startups per class x $500,000 per startup x 2 classes per year = $8 million in investments per year
• $40 million for new investments at $8 million in investments per year makes for five years of new investing (80 total investments)
• Estimated initial target ownership stake of 40% (roughly 20% for the incubator’s value-add and 20% for the $500,000 investment)
• Assume 20% average ownership stake at time of exit based on a combination of dilution and pro-rata participation
• Required 3x cash on cash return to be a top tier fund necessitating $300 million in fund proceeds
• With 20% ownership to achieve $300 million in proceeds, the exits need to have a combined value of $1.5 billion

Put another way, if Expa Labs can make one unicorn and one half of one unicorn out of 80 incubated startups, they’ll be considered a successful incubator based on having top tier returns.

What else? What are some more thoughts on the economics of a $100 million incubator?