William J. Holstein

White Paper: 4. Mini-Profiles of Three Incubators

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Here
are mini-profiles of three incubators, in Georgia, Pennsylvania, Florida, and
recommendations for three others that should be examined further in Texas, Colorado
and Oregon. I do not recommend incubators in Irvine, Ca., and Albany, N.Y., for
reasons that will be cited.

4a. The Advanced Technology
Development Center (ATDC) at Georgia Tech
, headed by Nina Sawczuk. www.atdc.org. This program seems to be quite
effective even though it has lost some state funding, particularly for its Seed
Fund, which it used to invest in start-ups. There are three stages of
incubation under Sawczuk’s purview. One is an entity called Venture Lab,
overseen by Keith McGregor, which concentrates on forming companies based on
ideas emerging from Georgia Tech and incorporating them. Once they reach that
stage, they graduate to become members of ATDC for a fee of $50 a quarter. At
this stage, they broaden the net to include companies that are from outside the
Georgia Tech community. If these companies want more specialized care, they can
join ATDC Select, which costs $500 a quarter. Sawczuk holds the title of
director of startup services, so she oversees all this activity, along with an
office headed by Julie Collins that coordinates funding from SBIR. “What we’ve
done is put the key pieces under one director because there is so much synergy,”
says Sawczuk.

Venture
Lab has five full-time Georgia Tech employees who have private sector
experience and strong technical backgrounds in pharmaceuticals,
telecommunications, health care and clean energy technology. They are able to
establish credibility with Georgia Tech faculty members. They review invention
disclosures and connect informally with faculty members who are interested in
commercializing a technology as well as faculty members who have a great idea
that should be commercialized. They work with faculty to get proof of concept
funding from the Georgia Research Alliance, which provides funding for this
purpose to all major Georgia research universities.

Once
a company incorporates, it can become a member of ATDC. They currently have 350
members. At this stage, they cast a much wider net beyond Georgia Tech. Only
about 20 percent of members come directly from Georgia Tech.

The
third stage of incubation is joining ATDC Select. Clients get more customized
one-on-coaching. Whether a company is in ATDC or ATDC Select, the criteria for
graduation are $1 million in annual revenue and/or Round A funding from outside
capital sources.

Sawczuk
acknowledges confusion in the profession between “incubation” and
“acceleration.” “We refer to ourselves as an accelerator, but the nomenclature
in the incubator world is always evolving,” says Sawczuk, who ran a biotech
company for 10 years. “When you say incubator, people think of a physical
space. You help a handful of companies. But an accelerator is more of a program
that can be offered virtually. Sometimes it comes with funding dollars.
Sometimes, the terms incubator and accelerator are interchangeable.”

Vocabulary
aside, the more important point seems to be that start-up companies need
different type of help at different stages of development, and they need help
from both staff and non-staff, she says.

            ATDC
exposes its clients to two types of experts. First, it has entrepreneurs and
executives in residence, who may be passing time between other start-up
activities. These people are trying to “give back” something to the community,
but they also clearly gain in terms of learning about new waves of technology.
They work six to 12 months at ATDC and are paid half time. Mentors also
volunteer their time from the local business community.

Secondly,
community catalysts are full-time ATDC employees. They also possess technological
expertise and have experience with startups, but have made personal career
decisions to concentrate on helping others and are being paid full-time for
that. Altogether, ATDC has three community catalysts, three entrepreneurs in
residence, one executive in residence, one membership administrator, one
administrative support person and Sawczuk. Other functions are outsourced to
Georgia Tech. It is a very lean operation.

The
way that ATDC managers vendors is noteworthy. On its advisory board are
university representatives, technology entrepreneurs (most of them ATDC
graduates) and key investors, particularly those that invest at the seed stage
or are angel investors. But then ATDC has a separate sponsorship program.
Service providers, such as lawyers and accountants that have a track record of
being helpful pay an annual fee of $5,000 to be involved in all ATDC
activities. The program has eight to 15 of these sponsors a year. “Sponsors
naturally come to the table because they’re looking for deal flow,” Sawczuk
says. Service providers and large companies are not on the advisory board.

The
ATDC does believe in allowing major companies to interact with the start-ups as
part of its overall ecosystem. “It’s a mistake to keep them protected from big
companies,”’ Sawczuk says. “You’re limiting their options severely.”

The
ATDC has multiple sources of income, a model that has served it well. It makes
money from clients of both the regular ATDC program and ATDC Select; it earns
money from vendors; and the rest is state funding that is managed through
Georgia Tech. The university itself provides physical space and other in-kind
services such as accounting and human resources. The state has provided varying
levels of funding for ATDC for 30 years. The fact that the state funding flows
into an economic development organization within Georgia Tech and then to ATDC
means that the incubator director does not need to go to the legislature to
defend that funding every year. ATDC funding is embedded within the university
system.

One
entrepreneur who has used ATDC twice is Andy Monin[i]. His first company was
BroadSource, a telecom expense management system, developed in ATDC over a
four-year period. He sold his stake in the company in 2003 and the company was
acquired last year by Movero, Inc. His new company, Vendormate, Inc., registers
companies that want to sell goods and services to hospitals. It provides
credentials to them after conducting due diligence on them and insuring that
they will meet hospital requirements and comply with hospital policies.   

Vendormate
graduated from ATDC in 2008 after about two years in incubation. It’s
interesting that Monin says he needed certain sets of inputs with the first
company while it was in ATDC, but he needed very different ones the second time
around. The first time, he needed help forming a company, writing a business
plan and getting the basics right. Brown bag lunches, speakers’ series and CEO
roundtables were key at that time because they allowed Monin to talk to others
about such pragmatic issues as human resources and the cost of patent filing.

This
time, with Vendormate, he felt he understood how to incorporate and create a
company. The affordable space, access to services and access to talent were
more important. “We were able to get cheap space and work in an environment
where there were 35 other companies in a similar stage of business,” Monin
says. “When there are six guys in your company, it’s hard to build a culture.
But when there are 35 other companies living nearby, you can do that.”

Aside
from space, Vendormate got a small unrestricted, unsecured line of credit from Silicon
Valley Bank, which is registered as an ATDC vendor. Other service providers provided
free Internet-based web hosting. The company also used ATDC’s access to
industry-specific sources of research information.

As
the company grew, Vendormate had access to key talent. For its vice president
of operations, it hired a Georgia Tech graduate who was working as manager of
the Starbucks where Monin and colleagues bought coffee every day. They were
able to observe him over a period of time and establish a relationship. “Access
to people was a big thing,” says Monin.

The
overall cost structure that ATDC offered meant that “we didn’t have to raise as
much cash and didn’t have to give up as much equity.” ATDC allowed them to grow
in a modular way, scaling up the amount of space the company needed as it grew.
When it outgrew ATDC, the incubator helped them find a sublease on space that
came with $140,000 of furniture. “We didn’t have to spend a dime on furniture,”
Monin says. The formula has worked. The company has $22 million in annual sales
and was ranked No. 25 on Inc. magazine’s list of the 500 fastest growing 500
companies.

 

4b. The University Science
Center in Philadelphia
. http://sciencecenter.org/about-us/philadelphia-area-community. This not-for-profit 501 (c)(3) organization
started out primarily as an urban development agency in an economically
challenged part of Philadelphia. “It had to do more with reclaiming urban
blight than it did what ultimately became our mission,” says President Tang.[ii] But over time, it has
emerged as a research park that includes some incubating functions as well. It
has annual revenues of $22 million. Of those, 76 percent comes from real-estate
related activity, 15 percent comes from government and corporate grants, and 7
percent comes from incubators. (2 percent is other.)

    
       Even
though some experts say science parks concentrate too much on real estate
activity, Tang argues that those revenues have made it a more successful
incubator than other programs which struggle to obtain funding. Science Center
says 350 organizations have graduated since the incubator was created in the
early 1980s and that 15,000 people are employed by the 93 graduate companies that
remain located in Greater Philadelphia.

            “We’re very fortunate,” says Tang. “We
have the best of all worlds. We are a largely self-sufficient business
incubator because we manage our real estate assets to make that happen. We do
seek funding on a one-off basis from cities, states, foundations and other
sources but we don’t wholly rely on them. Any dollar we receive from outside
agencies and organizations goes directly into that incubator operation. They
don’t pay for overhead. It’s a very efficient use of taxpayer dollars.”

            One
criticism of some science parks is that they don’t push clients hard enough to
make tough choices to create viable commercial enterprises and thereby leave.[iii] Tang acknowledges the
potential for conflict. “The challenge that most incubators face is that they
haven’t been able to distinguish between being landlords on one hand and on the
other, being nurturers and investors, someone who has a parental relationship.
These roles have very different motivations.”

Science
Center, however, can make balanced judgments because such a small percentage of
its total revenue comes from incubator companies.  “We don’t rely on the income from incubator
companies so we can help them make the best decisions,” Tang says. The park’s
funding model also has created more stability than other incubators are
experiencing, he adds. “Most of them are funded by funding sources that are
drying up,” he says. “We’re one of the few organizations that can do more
during this austere period.”

Many
of the companies founded at the Science Center end up establishing themselves
in Delaware or Maryland or in Pennsylvania outside of Philadelphia, but Science
Park’s funding structure means that it is not vulnerable to local politicians arguing
that it is not serving the city’s interests. “Our charter is to be a regional
economic organization,” Tang says. “What’s good for the region is good for us.”

Tang
says Science Center offers three levels of incubation that are all part of the
same “continuum”:

--The
QED, or proof of concept stage, for the life sciences, which is the dominant
technology at Science Center. Academics from 19 universities can test their raw
technological ideas as part of this process. Overall, 30 companies and venture
companies assess the ideas and decide which ones have potential in the
commercial marketplace. This is a “pre-incubation” stage and Tang says doing
this early work is increasingly important. 
“In this very risk averse investment environment, people want to see
that you have retired the risk of successful commercialization up front,” he
says. “You’ve taken off the table any possibility that the idea won’t work.”
The presence of market-like functions and market disciplines even at early
stages is important, Tang says.

--Quorum
is a physical space within the Science Center that offers some entrepreneur-focused
programming. This is seen as the stage at which technologists learn about angel
investors, meet other entrepreneurs, and continue to gain sophistication.

--The
“Port” is the actual incubator. Clients still have access to Quorum, but they
receive more support in grant-writing and marketing and public relations
assistance. They have access to both wet and dry labs. Several investment
organizations are present, so the access to capital is strong. Currently, there
are 60 companies in his incubator and half of those are “virtual tenants,”
meaning they have the right to use common areas such as the clubhouse,
conference rooms and lab space but are not considered full-time clients. They
are tracking toward becoming clients while awaiting SBIR funding.

Tang
says large companies have been an important part of the mix at Science Center.
“We’ve had great experience getting the input from large companies in early
stage technology,” he says. “It’s easy to be distrustful of large companies for
a lot of reasons. If they are coming to the table, for a transaction, that’s good.
But what they do with that technology is another thing.”

He
notes that pharmaceutical and life science companies are now doing more of
their research and development work outside their own laboratories and are
seeking to “harvest” ideas from smaller companies.  Although some large companies buy start-ups
and move them to other geographies, sometimes the bigger companies choose to
leave them in place. One example of that is Avid Radio Pharmaceuticals, which
currently employs 60 people and is located within Science Center. The company
makes imaging agents for the plaques that are early indicators of Alzheimer’s
disease. (www.avidrp.com)

 The company was founded by Dan Skodronski in 2004
with technology from the University of Pennsylvania. He expanded to a staff of
40 people. In 2008, Science Park built custom facilities for the company and
they now occupy a whole floor in one building.  In the fall of 2010, Eli Lilly acquired the
company for $300 million and offered an additional $500 million in progress
payments, if the company continued to achieve certain milestones. Rather than
relocating the firm, Eli Lilly has maintained them as a wholly owned subsidiary
in their current location. “A lot of good things can happen when a large
company takes an interest in a technology they could not have conceived of or
developed on their own,” Tang says.

The
most famous graduate from Science Center is Centocor Biotech, which was bought
by Johnson & Johnson and whose compound became J&J’s biggest selling
drug. Another graduate is Vascular Magnetics which works with products for peripheral
artery disease. (www.vascularmagnetics.com.)

A
more recent graduate is Integral Molecular, run by Benjamin Doranz who has a
Ph.d. in cello-molecular biology. His firm licensed technology from the Penn
that had been invented by colleagues of Doranz while he was at the university. The
technology involves specialized proteins that other companies use for drug
discovery process. (www.integralmolecular.com.)

He
incorporated the company in 2001 and began laboratory operations in 2002.
Integral Molecular was in the incubator for an unusually long 10-year period
because Doranz wanted to work slowly toward profitability so that he could
retain as much equity in the company as possible. Many entrepreneurs who are
eager to make early “exits” from their companies find their equity is diluted
as they trade blocs of shares for either cash or services.

Doranz
took advantage of different types of incubator services at different points in
developing the company. “In the beginning, the mentoring and the infrastructure
were extremely important,” he says.[iv] “We started basically
with two people so having access to advisors and the lab infrastructure was
critical. Starting out with a $100,000 budget, you can’t go out and buy a $100,00
centrifuge.”

In
the next stage, “other things became more important like the location, being so
close to universities and other available infrastructure within the region,” he
adds. “Within a few blocks, there is $500 million in annual biotech research
going on. All the facilities, the community, a library, advisers and employees were
all easily accessible to us as we needed them.

In
a third stage, Doranz said he needed to learn about manufacturing, marketing
and sales. This occurred as the company was preparing to bring products to
market.

Throughout
the incubation process, Doranz said informal contacts were essential. Incubator
staff had experience in business, commercialization and fundraising, but their
broader mission “was to facilitate and make sure that the right connections
were made. They hosted seminars and talks and mentoring sessions with other
outside advisers and made sure we had the opportunity to connect to the right
people. We got great advice from other people coming in, including people from
the pharmaceutical industry. Other successful entrepreneurs offered to act as
consultants, when they were in between projects, looking for their own next
projects. Other times, it would be just walking down the hall or having lunch
with the company next door to answer questions like, Where did you find your
insurance broker? How did you deal with this employee issue? How did you
finance the purchase of this piece of equipment? The community is a vital part
of insuring that a small company succeeds. If you’re isolated in a building in
the suburbs, you can theoretically do it all. But in practice, no one has
enough knowledge to do it all. Having the informal advisers can really make a
big difference.” This speaks to the need for any incubator to be “embedded in
the community,” as Lewis argues. Others say incubators must be part of larger
“ecosystems.” The terms appear to be interchangeable.

Integral
Molecular now has 32 employees. It is privately held so it does not disclose
annual sales. Doranz says it is selling to all the top pharmaceutical companies
at this point.

 

4c. The University of
Central Florida
, Orlando,
Florida. Since its founding in 1999, the UCF Business Incubation Program has
helped more than 200 emerging companies (including more than 125 current
clients) create over $200 million in annual total economic output  and
more than 1,600 new jobs with an average salary of $59,000. It has nine
facilities around the Orlando area and is opening a 10th. It works
in a range of technologies: computer simulation and modeling, lasers, clean
tech, life science and engineering. http://www.incubator.ucf.edu/

All
the projects for entrepreneurship, including Grow FL, as mentioned above, had a
budget of about  $5 million last year.
The incubator gets money from the university, but also from the counties and
cities where it manages satellite incubator facilities. That appears to be an
important diversification of funding because the counties and cities pay money
for UCF to manage incubators in their geographies.

The
UCF program appears to be more inclusive of non-university projects at earlier
stages than ATDC in Atlanta. O’Neal estimates that only 20 to 25 percent of
clients are from the university. He says 75 to 80 percent of clients are
involved in technology, but not all are. One current client, Brewmaster, makes
beer. He considers the incubator to be a mixed-use facility.

The
main, original incubator is located within the Central Florida Research Park, which
has a focus on real estate development. Several large companies such as
Northrop and Lockheed Martin have offices or labs in the research park, but not
in the incubator, so that they may interact with university researchers.

As
with other incubators, O’Neal says there are at least three stages of
incubation. He has a Venture Lab with 12 employees who work with ideas before
they become companies. Interestingly, the UCF incubator consciously screens
entrepreneurs for cultural and personality fit. Entrants are required to take a
24-hour class (over eight nights, once a week). Their final exam is that they
must defend their business plan in front of an advisory board. Some flunk out
in a conscious triage process. But another key test is whether the would-be
entrepreneurs are “coach-able,” O’Neal says. “The last thing you want to do is
try to coach someone who doesn’t want to be coached,” he says.

Then
the third stage is economic gardening, as discussed above. Some participants
call this “acceleration,” but O’Neal makes a distinction. “You’ve got to be
careful about the words,” he says. “A lot of accelerators like to say they have
a seed fund associated with them (and therefore profit if a venture is
successful.) But the for-profit incubators pretty much went away when the dot.com
bust happened.”

The
board includes financiers, venture capitalists, law firms and accounting firms.
There are 21 people working full-time at the incubator, including two full-time
entrepreneurs in residence. O’Neal manages the incubating functions as part of
a much larger department that includes the university’s technology transfer
function. Altogether, he manages 200 people and a budget of $180 million.

O’Neal
agrees with other incubator managers that different companies need different
forms of assistance at various times. He might convince some to hire
professional CEOs or he might team them up with university faculty who have
specific expertise. “here are a lots of little things that happen,” O’Neal
says. “It’s not linear. You have to do a triage function and map a successful
function and stand up a real company if there is a real business opportunity.”

O’Neal
says the incubator staff act as “triage nurses,” figuring out what a company
needs and then tapping a community 40 to 50 people, including lawyers and
accountants, who work on a volunteer basis. Serial entrepreneurs and angel
investors are welcomed to share experience while looking for their next
opportunity. The incubator also has a full-time coach who meets with all the
companies. He is a seasoned entrepreneurial advisor who has been doing this
work for 20 years. “An incubator has to be integrated in all these things,”
O’Neal says. “It has a very specific role for companies at a very specific time
in their evolution. You need all these other things going on, coexisting with
each other, like a true ecosystem. It’s a messy business.”

            Stand-alone
incubators will not be successful. “Some people say ‘We are going to open up
cheap space and put people in there’ but that will fail,” O’Neal continues. “It
needs to be integrated with universities, students, intellectual property
lawyers and others to make sure the community helps the entrepreneurs. It takes
a village to raise these companies.”

            An example of an entrepreneur who
benefitted from O’Neal’s incubator is Mansooreh Mollaghasemi[v], who was a professor of
simulation modeling within the UCF Industrial Engineering Department. She
created her company, Productivity Apex, in 2001 and was able to win a contract
from NASA. Her company was immediately profitable, but had no idea how to build
it. “She knew how to answer questions like, ‘What is a variance?’, but we had
to translate the technology into a business opportunity,” O’Neal says.

            That meant she had to learn how to
manage a company and how many people to hire for what positions. O’Neal helped
her to hire a chief operating officer and a chief financial officer, even
sitting in on some of the interviews. He also introduced her to CEOs of
companies of similar size. Her company has succeeded with 20 to 30 employees,
but she has opted not to raise capital and grow to a much larger size. She is
content with a firm of what she regards as manageable size.


[i] Based on telephone conversation with
Andy Monin, Feb. 21, 2012

[ii] Conversation on Feb. 22, 2012, op cit

[iii]
Holstein, op cit, pages 28-29

[iv] Conversation with Benjamin Doranz on
Feb. 23, 2012

[v]
Holstein, op cit. pages 39-41

(c) 2011 William J. Holstein. All rights reserved.
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