[naval]

I originally started my angel fund as an incubator (The Hit Forge). I quickly moved away because of Adverse Selection - the best entrepreneurs are insanely committed to themselves and their ideas, and rationally or irrationally, don't want to diversify. Since then, I've invested in a lot of companies, including Twitter and Disqus and Heyzap, and am glad that I did so. The Incubator model works as a "search" model (MRL Ventures, Obvious Labs, Ooga) where the Incubator "finds" a company that the principals join, but not as an "investment" model where the incubator survives and keeps spinning out companies. This is true because you can't create or replace entrepreneurs - you can only discover them or be them, but you can't create them.

The other problem with this proposal is that the Internet is extremely competitive. You can't do anything great part-time over the long term. A funded team working full-time has a huge advantage on you.

Of course, giving up control sucks. "Valuation is temporary, control is forever." And a business controlled by VCs too early can't innovate easily. So, either raise money from angels, or learn how to negotiate with Venture capitalists. Check out Nivi and my writings (sorry, shameless plug) at http://www.venturehacks.com.

If you do have a good product with traction and are out raising VC money, ping me and I'd be happy to help you keep control (free!)

[aditya]

So how do ramen profitable companies and "Italian restaurants on the web" (ie. Small self-funded companies that fit a hugely profitable niche) fit your world view?

They (37s, fogcreek, etc.) did start as consulting businesses and raised little or no outside capital to build immensely profitable products...

[naval]

They can work but generally they tend to be service companies for a long time before they become product companies. However, they're almost never done by part-timers. Even 37S and FogCreek are full-time labors of love. Also, there are always exceptions - I'm talking about mass statistics / average web startups - stuff similar to most YC companies.