Business Incubators

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David R. Evanson

Where’s the Money?, Fall, 1999

RESUME: BUSINESS INCUBATORS
Definition or Explanation: Business incubators are a good path to capital from angel investors, state governments, economic development coalitions and other investors. Business incubators house several businesses under one roof, or in a campus setting, and offer resident companies, reduced rents, shared services, and in many instances, formal or informal access financing.

Appropriate For: Pre-revenue stage companies to early stage companies which are selling products or services.

Supply: There are more than 550 incubators in North America. which cater to high as well as low technology businesses. Of these, more than 80% report that they provide formal or informal access to capital.

Best Use: Many different kinds of financing may be found through incubators which may or may not be appropriate for your business. Generally speaking however, incubators, and the kinds of investors they lead a path to work best for companies at the earliest stages of their development.

Cost: There may be many kinds of financing found through incubators, from state assistance funds based on matching private sector investments, which could be cheap, to straight equity investments from angel investors, which could be very expensive.

Ease of Acquisition: Getting into an incubator can range from easy to challenging. Simply being in an incubator offers value to investors. Incubator managers know this, and as a result, many carefully screen would-be tenants to see that they are matching certain criteria. The good news however, is that once in an incubator, the path to angels or other investors might be more direct since, they tend to hover around easily identified centers of entrepreneurial activity.

Range of Funds Typically Available: $25,000 and up.

A CASE IN POINT
Technology giant Teledyne has created a burgeoning cluster of high technology businesses in and around Austin, Texas. The entrepreneurial culture there is so strong that it drew a one time english professor, May Dammer into the data management business. Dammer formed her company, Revolutionary Technologies in 1991, along with a partner to help large companies with data integration management and keep related data on different systems consistent.

After doing basic research at the technology research firm Micro Electronics and Computer Technology Corporation in Austin, Dammer and her partner moved across town to the Austin Technology Incubator. According to Hammer, the founder of the incubator was George Kozmatsky, founder of the regionzzs font of it all, Teledyne. “George provided us with unbelievably helpful counsel and guidance,” recalls Dammer.

But he also provided her with introductions to an informal network of angel investors that were affiliated with the incubator. One of these investors was retired admiral Bobby Inman. Inman, who had a real sense of the need to keep data consistent across a large enterprise, felt that Dammer, Curle, was onto something. Inman committed $250,000 to the venture, which in turn anchored another $1.25 million from other area investors, for a total first round financing of $1.5 million. “Our acceptance in the incubator carried weight,” she says, “by being accepted there, it offered due diligence value to investors.”

Looking back at the experience, Dammer reflects that being in an incubator is one of the reasons that Revolutionary Technologies is a successful business today. Sure, all the goodies inside of Austin Technology Incubator played their part. But in the case of Revolutionary Technologies, Hammer suggests there was a more subtle, though massively important, dynamic.

In a word it was control. In their nurturing environment, Dammer and her partner were actually able to turn down prohibitively expensive financing proposals in terms of the percentage of the company it would cost them. “Itzzs a huge problem when you lose control of the company in the first round of financing,” says Dammer. “If the business goes through a false start, or has some serious difficulties getting off the ground, which happens in start-up situations, then the investors feel like they have to take over and tend to push the company in one direction or another.”

By contrast, at Revolutionary Technologies, the founders held a majority position all the way until the third round of financing. “We were lucky,” she says, “we were able to build the foundation for the business according to our [italicize our] vision.” Apparently, they built it right. Today, Revolutionary is profitable on some $22 million sales and has more than 150 employees. The investors havenzzt fared too badly either. According to Dammer, for every $1 of capital invested, the company has generated more than $11 in sales.

DEEP ROOTS, LOTS OF SERVICES
The roots of business incubation go back about 40 years, at a time when, not surprisingly, the industrial landscape was changing in fundamental ways.

INFO BOX

Donzzt Forget: Lotzzs of entrepreneurs suffer badly because of the isolation and lonliness that comes with starting and growng a business. An incubator can help you overcome this challenge by providing you a support group of similarly situated individuals.

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It all started when heavy equipment manufacturer Massey Ferguson pulled out of Batavia New York in 1959, leaving behind a hulking 850,000-square-foot facility. This catastrophic economic event seemed like the end of line for the town. As it turns out it was only the beginning, not just for Batavia, but for an entire new generation of emerging companies which would change the composition of the American economy.

After the ax fell in Batavia, local resident Joe Manucuso bought the building the company left behind in hopes of using it to bring new businesses and new jobs to the area. His idea was right for the times and caught on rapidly as businesses, (including an actual incubator, hence the name) attracted by cheap rents, flexible space and shared services, filled up the building. “Today,” says Dinah Adkins, executive director of the National Business Incubation Association (NBIA) “business incubators offer comprehensive support to fledgling businesses.”

But the other vitally important benefit that business incubators often provide: access to the kind of early stage capital that emerging companies desperately need. For instance according to Adkins, a recent survey of NBIA members shows fully 83 percent of incubator owners and directors provide formal or informal access to seed capital. Seventy-six percent provide assistance with obtaining federal grants; 74% assist with preparing financing proposals; 60% can help obtain royalty financing while, 57% can lend a hand obtaining purchase order financing.

INFO BOX

A Good Deal: Incubators can do more than simply help blaze a trail to sources of capital. The also offer support in the form of reduced rents, flexible space, shared services, access to professional services and perhaps most importantly, an environment of energy and entrepreneurial spirit.

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WHY INCUBATORS ATTRACT INVESTORS
Adkins says that it should not come as any surprise that angel investors tend to hover over business incubators. First, she says, that in virtually all incubators client companies as they are called, are carefully pre-screened. “The fact that a business has been accepted into an incubator,” remarks Adkins, “offers due diligence value to potential investors. In a way, they have already passed an important litmus test by simply being there.”

INFO BOX

Shop Talk: The first business to move into Bataviazzs “business center” was a hatchery. This turned out to be prophetic since the building came to be known as an incubator [italicize incubator]. At that moment, the legend was born.

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Another reason that business incubators attract sources of capital has to do with the simple economics of convenience. Rather than searching high and low for potential deals, investors can easily find a multitude of investment opportunities under one roof.

Third and finally, the businesses which an investor is likely to find inside of an incubator can make whatever dollars he or she is prepared to invest go much further. “With low rents, shared services and access to professional services and training at low, and sometimes no cost, investors can get a real sense of comfort that their investment will last longer, and take the business farther than might be true within a conventional business environment.”

Only The Lonely
The benefits of an incubator arenzzt restricted to technology companies. According to the NBIAzzs Adkins, thatzzs one of the great misconceptions about business incubators. In fact, the statistics tell just the opposite story. Of the incubators in business, according to Adkins, 40% concentrate on service, 23% on light manufacturing, 22% on technology, 7% on basic research while the remaining 8% support diverse businesses and industries.

Getting into an incubator may not be a slam dunk, counsels Adkins. “The best incubator programs have become adept at analyzing the company to see if their investment is worthwhile, so they evaluate the deal the same way a professional venture capitalist might. Just like everyone else, they are looking for companies that will be successful.”

INFO BOX

Taking Action: If a business incubator sounds like it might be right for your business, and you want to find the one nearest you, send a self-addressed stamped envelope to: National Business Incubation Association, 20 East Circle Drive, Suite 190, Athens, OH 45701, 614-593-4331.

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