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Rutstein says there will be viable--and successful--exceptions, and points to the not-so-humbly named Divine InterVentures as an example. Since Divine focuses on business-to-business service companies, those companies could gain legitimate advantages from being under one roof. And while startup companies should do their homework in searching out best-of-breed technology partners, Rutstein says that may not be possible. "It's often difficult to do due diligence, so it's better just to partner with someone who's good enough," he says.

When Auditore was establishing his company, Sho-Research, Divine InterVentures solved a big headache for him: real estate. After 25 years in Silicon Valley, including founding the Internet market-research firm Zona Research, Auditore met Chicago office brokers who demanded five-year leases and were leery of a young company. Divine InterVentures' offer of office space helped seal their deal. Still, Auditore thinks real estate isn't a long-term competitive tool for incubators. Property owners will catch on to the potential of Internet startups, he says, and companies will grow big enough to manage their own buildings.

Divine owns 60% of Sho-Research, according to Divine's SEC filings. Auditore says incubators tend to take slightly more for their investment-plus-services model than traditional venture capitalists. Incubators need to constantly deliver value beyond the build-an-office startup phase, and that means creating an innovative environment. "You're giving away a bit more of yourself to get these services and this network," Auditore says. "You have to ask, am I taking money because I'm using their building, or is it more of an idea factory?"

Incubators are often an aid to young entrepreneurs with great ideas who lack the experience or the contacts necessary to get the nitty-gritty details of a business together. Auditore suggests an incubator relationship might be best-suited for business spin-offs, where the effort is led by an experienced executive used to having lots of support. "Maybe you don't want to deal with that kind of stuff coming out of a big corporation," he says.

Businesses may provide the next wave of incubators. Consulting firms such as Andersen Consulting and Bain & Co. have created incubators in part to let their consultants explore new business ideas without losing them entirely from the firm. Andersen Consulting has committed $1 billion to developing companies through its AC Ventures, and plans to link the fund to its compensation system, letting employees share in the startup-backing gains, designed to mirror the stock-options potential for people who stay with the firm. Bain's incubator group, Bainlabs, takes equity in lieu of cash fees.

Forrester's Rutstein says this business-incubation model has promise because it can deliver strategic returns to the parent company--such as new technology or business partnerships--even if the idea doesn't lead to a capital-gains payoff such as an IPO. "They're not merely in the business of financial returns," he says.

Where are the hotbeds of incubator activity? Surprisingly, not only in New York or Silicon Valley, but Pittsburgh, where about half-a-dozen fledgling, technology-driven incubators have sprung up. The energy and interest are based on the students and ideas coming out of Carnegie Mellon University, renowned for its computer technology studies.

Casey Smith, the 25-year-old CEO of the startup incubator Zlingshot.com, says the incubator idea takes root in communities such as Pittsburgh because there isn't enough support for entrepreneurs. "The middle-market cities--Pittsburgh, Cleveland, Columbus, Minneapolis--are traditionally overlooked by venture capitalists and incubators," Smith says. "There's a lot of opportunities there."

Another nascent Pittsburgh incubator is iventurelab.com, founded by two brothers in their mid-20s, Henry and Tommy Wang. Two years ago, the Wang brothers wanted to replicate the Idealab incubation model, but figured they needed to have a business around which to incubate companies. So they built a Web-design and strategy company, Pittsburgh Direct Technologies, which has been folded into iVentures and employs more than 45 people. Their goal is to help build technology-intensive companies, and make their money when those flourish.

In some ways, iVentures sounds like an Internet cliché: a couple of 20-year-old whiz kids with negligible business experience cooking up technology companies. They even borrowed an Idealab signature symbol, making their desks out of two sawhorses and a door. If iVentures sounds like another get-rich-quick scheme, consider this: the Wangs have yet to tap venture-capital funding themselves. They say their consulting business turns a profit, which lets them put money back into the business.

"There are two ways to build an incubator," Tommy Wang says. "You can raise a billion dollars and get a building and start buying companies. Or, you can be very operation-focused, and build a business from the ground up." If the incubator model is to remain viable and valuable, there needs to be less of the former and more of the latter.

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