In recent years, our economy has felt a bit like a Chinese Finger Trap. The tighter we pull, the tighter the trap gets. The more austere we become, the more austere we have to be.
Today, despite record highs at the closing bell, we still see hesitant lenders, and a molasses-slow crawl back to investor confidence. So how will our economy recover when the next great idea can’t find a dime?
In March, the Ohio State Entrepreneurial Business Law Journal explored one possible solution to the capital conundrum during their annual symposium entitled Incubators: Function and Future.
Business incubators have been around since Joe Mancusoinadvertently developed the first of its kind in 1959. A grassroots effort to build small businesses locally, the model took off. Now, there are more than 7,000 business incubators across the globe. In our country’s most fertile start-up cultures– from San Francisco and San Jose to Boston to Chicago and New York – entrepreneurs look for incubators to help them ford the river, if you will; to float their business from an idea, through prototypes, proof of concept, and seed funding, to a revenue-generating reality.
Incubators come in many forms, and wear many hats. The most successful serve as an engine in an entrepreneurial culture – cycling new businesses in and out of their doors, and in front of their most friendly connections in the Angel and Venture Capital (VC) funding worlds. They serve as mentors, match-makers, guardians, support groups, sponsors, accountability partners, advisors, long-range planners…
Serving so many important functions, it’s understandable that “INCUBATOR” may seem a nebulous concept. One popular idea of an incubator is that of a generous landlord. While many incubators do provide physical workspace for the start-ups under their watch, that is often just the tip of the iceberg of incubator services. Tenants, as they’re called, may also be matched with industry mentors, introduced to potential investors and customers, or given tools to track and measure their progress.
But, as Chris Anderson, Director of Venture Acceleration at TechColumbus and symposium panelist, pointed out: “It takes a lot more than below-market rent to make a company succeed.”
The model intends to grow business, create wealth, and generate jobs. In Tracy Kitts’ keynote speech, the National Business Incubation Association COO noted that once businesses get off the ground, they tend to stay in the communities in which they started. Incubators, in his words, create “more jobs, better jobs, [and] jobs that stay in the community.” According to Anderson, TechColumbus start-ups were responsible for creating 1,600 jobs with and average annual pay of over $57,000 between 2007 and 2012.
Results like these come from hard work and careful planning. The men and women behind a business incubator are many things… meta-entrepreneurial, Jacks and Janes of all trades, seed capitalization experts, nimble, social-minded. Incubator founders and managers are crucial to the successes of an incubator – and, subsequently, its tenants – but often operate behind the scenes.
The speakers at Incubators: Function and Future shed some light on the decisions and considerations that help incubator management get across the river themselves.
1. Incubator funding
The incubator is a business itself. It needs money to get off the ground, just like tenants do. Determining the incubator’s financing structure – both initial capital and future cash flows – will inform the best choice of entity structure and strategic model. For example…
- Grants and charitable funds. If the incubator plans to rely heavily on government grants or charitable funds to finance start-up costs and operational expenses, management should consider forming the incubator as a not-for-profit 501(c)(3) entity with measurable and specific social impact goals.
- Private wealth. On the other hand, an incubator founded by a wealthy individual and her pocketbook may choose a tax-beneficial corporate form and implement a tenant fee structure that retains equity after ‘graduation’ from the incubator.
At the OSEBLJ symposium, Kitts emphasized that the incubator model is adaptive. Depending on the business environment and management’s goals, funding and structure can – and should – vary widely from incubator to incubator.
2. Incubator focus
In complement to their adaptive quality, business incubators have the ability to set, achieve, and pursue a mission. The mission, or focus, of an incubator may dictate the optimal organizational structure, marketing techniques, and strategic goals. For example…
- Community focus. An incubator with a mission to grow long-term, well-paid jobs in a particular community will likely benefit from having physical space, many diverse tenants, and strong relationships with local government.
- Industry focus. An incubator seeking to develop businesses in a particular industry or sector, however, may consider maintaining a virtual model, with global participants, and contacts with industry innovators.
Though examples of how an incubator’s mission may drive its unique characteristics, the foci above are neither exhaustive nor mutually exclusive. TechColumbus, for instance, draws from both. They offer both physical and intangible support to their tenants, who are varied but draw generally from the high sciences. TechColumbus is a not-for-profit entity with major ties to the Ohio Third Frontier, a state-backed economic development initiative focused on driving growth in Ohio’s technology industry.
3. Tenants’ needs
Most importantly, an incubator manager should have foresight into the needs of the operation’s tenants. In the words of Tracy Kitts, a good incubator provides “any damn thing that [tenant] business needs.” Forming the structure of the incubator with future tenants’ material, intellectual, and capital needs in mind will optimize the relationship in terms of efficiency and value-add.
- Efficiency. Anticipating a tenant’s needs will help decrease the time to graduation. Consulting an existing rolodex or armamentarium take less time and effort on the part of the incubator than establishing a new mentoring relationship, or securing new lab equipment, for example.
- Value Add. One crucial function of a business incubator is to teach budding entrepreneurs how to succeed in the start-up world. The incubator houses a level of expertise that can make the pivotal difference between revenues, and a flop – and is in a position to share that expertise. Through that lens, an incubator can anticipate the needs that tenants do not even realize they have – and deliver true value adding solutions. The OSEBLJ symposium focused in part on the intersection of legal services with the incubator model. Patricia Campbell, director of the Maryland Intellectual Property Legal resource Center and Incubators: Function and Future panelist, noted the incredible disparity between need for and access to legal services for start-up businesses. These are entities with great intellectual assets that need protection, and almost no tangible assets to pay for it. Ms Campbell’s fellow panelist, Eric Williams of Wayne State University Law School advised that incubator managers can fill this need by sourcing free or low-fee legal services from area law schools, or private practitioners.
This piece was contributed by Michalea Delaveris, a second year law student at The OSU Moritz College of Law. Michalea is also a graduate of NYU Stern School of Business.