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Fertile Ground

Providing access to investors is just one way an incubator can help your business take flight.
August 1, 1997
URL: http://www.entrepreneur.com/article/23114

When heavy-equipment manufacturer Massey Ferguson pulled out of Batavia, New York, in 1959, leaving behind a hulking 850,000-square-foot facility, it seemed like the end of the line for the town. But nearly 40 years later, it turns out it was only the beginning, not just for Batavia but for thousands of entrepreneurs struggling to fund their businesses and get them off the ground.

After Massey's exodus from Batavia, local resident Joe Mancuso bought the building the company left behind in hopes of using it to bring new businesses and jobs to the area. One of the first businesses he attracted, a hatchery, was prophetic: Thanks to the hatchery, the building came to be known as an incubator, and as the nation's first business services provider of its kind, started a revolution in how emerging companies are formed and financed.

Today, increased entrepreneurship, emergence of new technologies, corporate downsizing, universities seeking a greater return on technology transfer, and economic globalization are just a few of the trends that have boosted the popularity of business incubators, according to Dinah Adkins, executive director of the National Business Incubation Association (NBIA). "Business incubators typically offer comprehensive support to fledgling businesses in the form of reduced rents, flexible space, shared services, access to professional services and, perhaps most important, an environment of energy and entrepreneurial spirit," says Adkins.

But there's one 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 a recent survey of NBIA members, 83 percent of incubator owners and directors provide access to seed capital. Seventy-six percent provide assistance with obtaining federal grants, 74 percent assist with preparing financing proposals, 60 percent can help obtain royalty financing, and 57 percent can lend a hand in obtaining purchase-order financing.

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

Another reason 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.

Finally, the fledgling businesses an investor is likely to find inside 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," says Adkins, "investors can get a real sense of comfort that their investment will last longer and take the business further than might be true within a conventional business environment."

Case in Point

Consider Katherine Hammer of Evolutionary Technologies International in Austin, Texas. A linguistics professor in an earlier career, Hammer traded in the challenges of ancient Norse dialects for the contemporary brain teasers associated with computer programming. In 1991, she founded Evolutionary Technologies along with partner Robin Curle to help large companies handle data integration management and maintain consistency among related data on different systems.

After their stint as software technology researchers at research and development consortium Microelectronics and Computer Technology Corp. (MCC) in Austin, Hammer and Curle moved across town to the Austin Technology Incubator. The incubator's founder was George Kozmetsky, also co-founder of technology giant Teledyne Inc. "George provided us with unbelievably helpful counsel and guidance," recalls Hammer.

He also provided them with introductions to an informal network of angel investors affiliated with the incubator. One of the investors was Admiral Bobby Inman, who had been head of MCC while Hammer and Curle were there. Inman felt they were clearly onto something, and committed $250,000 to the venture, which in turn secured another $1.25 million from other investors-for total first-round financing of $1.5 million.

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

In a word, it was control. In the incubator's nurturing environment, Hammer and Curle were able to turn down prohibitively expensive financing proposals. "It's a huge problem when you lose control of the company in the first round of financing," says Hammer. "If the business goes through a false start or has some difficulties getting off the ground, then the investors feel like they have to take over."

By contrast, in her case, Hammer reports Evolutionary Technologies' 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 vision." Apparently, they built it right. Today, Evolutionary boasts some $22 million in sales and has more than 170 employees. The investors haven't fared too badly,
either. According to Hammer, for every $1 of capital invested, the company has generated more than $11 in sales.

A Perfect Fit?

The benefits of an incubator aren't restricted to technology companies. According to Adkins, that's 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 percent concentrate on service businesses, 23 percent on light manufacturing, 22 percent on technology and 7 percent on basic research, while the remaining 8 percent support diverse businesses and industries.

But that doesn't mean getting into an incubator is a slam dunk, cautions Adkins. "The best incubator programs have become adept at analyzing companies to see if their investment is worthwhile, so they evaluate the deal the same way a professional venture capitalist might," she says. "Just like everyone else, [incubators] are looking for companies that will be successful."

To find the incubator nearest you, send a self-addressed, stamped envelope to the National Business Incubation Association, 20 E. Circle Dr., #190, Athens, OH 45701, call (614) 593-4331, or visit http://www.nbia.org

David R. Evanson, a writer and consultant, is a principal of Financial Communications Associates in Ardmore, Pennsylvania.