August 12, 2010

Betting on Incubators to Create Jobs

Lauren Hatch  /  Bloomberg Businessweek

The number of programs that nurture startups is at a record level

Back in 2008, when BizVeo was little more than a business plan in a home office, its two founders joined the Youngstown Business Incubator in northeastern Ohio. Today, two of the eight-person startup's clients each pay around $65,000 a year to use its software, a video communication tool linking doctors and patients. Chief Executive Tony DeAscentis says the business should be profitable by mid-2012, about four years sooner than he had expected. Incubators are "without a doubt the best thing someone could ask for," says DeAscentis, 49, who also used the Youngstown incubator to launch, with partners, his first venture, Turning Technologies, now a 200-employee, $40 million maker of software that conducts real-time polling of audiences while they're watching a presentation.

Business incubators, the bulk of which are independently operated nonprofits that provide startups with cheap office space and professional advice, took off in the 1980s only to stall after the dot-com bubble burst. They're now back to a record high, according to the National Business Incubation Assn. (NBIA), with some 41,000 startups using 1,200 incubators across the country. Participants' survival rate after five years is 87 percent, compared with 44 percent for companies that didn't use incubators, according to the group.

High unemployment and the need to replace jobs lost at dying industries have been driving forces behind incubators since the first one was created in Batavia, N.Y., in 1959. Increasingly, lawmakers in Washington are embracing incubators as a relatively easy and cheap way to fuel future job creation. "This is definitely the highest interest we've seen from Capitol Hill," says Linda Knopp, NBIA's spokesperson. NBIA Chief Operating Officer and Vice-President Tracy Kitts attributes the surge to the recession's impact on employment and a recent study by the Commerce Dept.'s Economic Development Administration that found that, when it comes to producing jobs, investments in incubators have a higher return on dollars spent than public-works projects such as road building. In 2009, EDA invested $80.7 million in incubators, which it says resulted in 8,746 jobs, and it plans to invest even more in 2010.

In April, Representative Tim Ryan (D-Ohio) introduced a bill that would allow EDA, which currently limits its incubator funding to construction and renovation projects, to include grants of up to $3 million for operations and support services. Ryan says the successes that the Youngstown Business Incubator and the nearby Akron Global Business Accelerator have had creating jobs in industrial ghost towns prompted the bill. (Both incubators are in his district.) "It's not 1960 where General Motors is going to come and drop in a plant with 15,000 jobs," Ryan says. "Those days are over. You're growing your own businesses now."

Another bill, the Early Stage Business Investment & Incubation Act of 2010, introduced by Representative Suzanne Kosmas (D-Fla.) in May, would use $250 million to establish the first funding program for business incubators targeting high-growth industries across the country.

Some doubt incubators' effectiveness. Alejandro Amezcua, a PhD candidate in the Public Administration Dept. at Syracuse University, is completing a study to see how successful business incubators are at creating lasting businesses and jobs. Amezcua examined 19,000 incubated companies and found that they failed at almost the same rate as companies that hadn't used incubators. "Based on the preliminary findings," Amezcua says, "the claim that business incubators are successful at generating employment growth is overstated."

Many new incubators are specializing to increase their potential. Historically, most programs accepted as a tenant any startup with the potential for growth and profitability. About 80 percent of the incubators created in the past few years are focused on one or two industries, says Carol Lauffer, a partner at Business Cluster Development, a Portola Valley (Calif.) consulting firm that plans and develops sector-focused incubators for local governments, universities, and large businesses. By limiting their focus, proponents say, facilities can invest in specialized equipment and tenants are more likely to share ideas.

Some single-sector incubators such as the Intervale Farms Program in Burlington, Vt., are designed to bolster fading industries. Intervale helps farmhands start their own farms by providing access to equipment, land, and infrastructure. On Intervale's 350 acres, 11 to 15 businesses operate at a time, with younger startups learning from older tenants. Mandy Davis, who manages recruitment and services for participants, says the incubator creates 60 jobs a season, with graduating tenants eventually creating jobs when they strike out on their own.

"The advantage with these types of incubators is that they are building upon their strengths and resources," said U.S. Commerce Secretary Gary Locke in an interview, referring to the companies and owners that collaborate while at single-sector incubators. "We really think they'll have tremendous payoffs for job creation and business across the country."

The bottom line: Policymakers are increasingly turning to business incubators, which aid startups, in hopes of spurring local job creation.

Directors Note: The City of Charleston + Charleston Digital Corridor Foundation operate the Flagship. To review the first year results, visit here