Resource Rich, Cooperative Centers Cultivate Technologies' Newcomers

June 1999
By Maryann Lawlor
E-mail About the Author

Creative thinkers learn from experts and each other to bring winning goods, services to virtual market.

Entrepreneurs aiming to take advantage of the opportunities the Internet offers are benefiting from a proven approach to fostering successful businesses. Affordable office space, venture capital and experienced mentors are helping the first wave of computer-comfortable visionaries realize their dreams while opening up a whole new world of alternatives to traditional marketing.

Business incubators have been facilitating the entrance of companies into the mainstream marketplace since the 1980s. Local governments, universities and even individual investors, recognizing the beneficial impact new businesses could have on the surrounding area and their own portfolios, organized these nurturing centers. People with good ideas but not much cash or commercial experience rented space at reasonable rates, obtained professional advice and shared lessons learned. They also gained valuable insights on how to acquire the venture capital to sustain a business during the early stages.

However, the introduction of the Internet as both a new marketing tool for conventional companies and an avenue for unique business types has expanded this supportive environment and has created a new incubation model. Established incubators are taking on more entrepreneurs with ideas on how to exploit virtual possibilities, and incubators opened during the last several years are focusing solely on individuals who plan to make the World Wide Web their storefront address.

Early incubators focused on two areas: general purpose business and high technology. But as the concept has grown, the business world is seeing more customized types of incubators, including those designed to meet the needs of minority and low-income entrepreneurs as well as businesses aimed at developing kitchen and technology products. The technology sector has broken into several subgroups and consists of incubators of businesses that aim to introduce new medical, software and environmental products and services.

According to National Business Incubation Association (NBIA) estimates, there were approximately 15 incubators in North America in 1980. A study conducted by the association concluded that today 600 incubators reside in North America alone, and Dinah Adkins, executive director, NBIA, believes that approximately 2,500 exist worldwide.

The international organization, which itself has experienced growth from 40 members in 1985 to nearly 1,000 in 1999, supports networking efforts, provides training, conducts research and facilitates information sharing about incubator management and enhancement.

Although some groups identify themselves as business incubators, Adkins says there are basic criteria that define a true incubator. The centers must offer flexible space and flexible leases, access to shared support services, a comprehensive business assistance program that includes financing acquisition assistance, a graduate program, on-site management and an environment in which entrepreneurs can network.

In general, entrepreneurs are considered for acceptance into an incubator after presenting a business plan and undergoing an interview with the group’s board. One critical component is the business owner’s commitment and capabilities. Applicants must show not only that their ideas are solid, but also that a viable market exists for their proposed product or service and that they possess the drive to make it a success. Companies are generally allowed to stay in the incubator for two years.

Because one purpose of incubators is to provide an important seed for economic growth in communities, the number of incubators will continue to increase, Adkins says. “There will come a time when incubators are as common as public libraries,” she offers.

Statistics gathered by the group demonstrate that by far the majority of the centers were established to benefit local communities financially. Universities or regional economic development authorities contribute some funding to 90 percent of today’s incubators, but Adkins warns that for-profit incubators, which many times rely on their client companies’ success, also have some stake in a region’s economic climate. “A company can’t grow unless the community grows,” she states.

The Communications Technology Cluster (CTC), Oakland, California, is one regional incubator that was designed to support and improve the local market. Founding partners of the organization include the city of Oakland Redevelopment Agency, Pacific Gas & Electric Company and the Oakland Business Development Corporation. Supporting sponsors include companies with expertise in law, finance and technology.

CTC, which is currently the home base for more than 20 start-ups, is housed in a 20,000-square-foot facility. This large space is necessary because the cluster specializes in high-growth businesses—companies that can grow quickly by doubling, tripling or even quadrupling their business in a short period of time, Joseph J. Gross, director, CTC, explains. The fast pace of technology makes it a good match for entrepreneurs who are interested in developing information and Internet technology businesses.

The cluster opened in 1996 with three businesses and six people. It now receives an average of two to three calls from entrepreneurs each week and is able to accommodate about one out of 10 of these inquiries, Gross says. To nurture the idea-sharing environment, companies with competing ideas are not allowed into the group at the same time. Unlike participants in some incubators, business owners in CTC are highly educated and highly experienced, he adds.

“The job of the incubator is to help companies grow and to get there faster, cheaper and without making mistakes. To do this, incubators provide resources like venture capital acquisition assistance, human resource support and advisory board consultations,” Gross explains.

CTC’s success has been in large part because of the people and types of businesses that have been chosen to join the group. “Success breeds success, so we are all better than we were at the beginning. The main thing that happens here and happens at any incubator is the collection of bright people. There’s a high energy around here and an immersion in a rich pack of resources,” Gross offers.

Steve Organek, chief executive officer,, is one entrepreneur who recently joined the cluster. His service exists only on the Internet and provides customers with a one-stop shop to find products that have been judged by respected third-party sources to be some of the best on the market. On the web site, visitors find evaluations of products and services ranging from books to long-distance services. Items can also be ordered directly from the site.

Organek believes that access to information and knowledge is the most valuable benefit an incubator setting offers. The previous owner of a clothing company, he submits that the availability and affordability of feedback and specialized expertise allow entrepreneurs to learn from others. Individuals who start a business and must pay large fees to acquire this type of information tend to seek it out less often.

On the more tangible side, he cites the flexibility incubators offer their members to open an office in an expandable space. Start-ups that lease a designated amount of space may find that they have outgrown the location but are locked into it, he says.

Companies like Organek’s are an example of the new business paradigm emerging from expanded use of the Internet. The demands on Internet start-up companies are much more stringent, according to Norman Smith, executive director, Contra Costa Software Business Incubator, Concord, California.

“The old financial models get thrown out. New financial models go into place. More money is spent before an Internet company gets started, and entrepreneurs need intellectual property information, technical support and an introduction to venture capitalists,” Smith offers.

The Internet also changes the old paradigm for time-to-market. Smith believes it can take longer for an entrepreneur to move a concept from conception to marketplace success. With this in mind, one incubator benefit that has helped traditional companies succeed can be particularly useful to virtual world entrepreneurs. “Incubators help keep you from taking shortcuts that would hurt you down the road,” he says.

The burgeoning product and service opportunities that the Internet has spawned have caused some established business incubators to expand their own shops. Earlier this year, Intelligent Systems Incorporated, Norcross, Georgia, a company that privately funds small businesses, launched an Internet incubator through its Shared Resource Technology Center. The Internet incubator will be housed within the 140,000-square-foot existing incubator, which features an infrastructure that is particularly supportive of Internet enterprises.

Facility attributes include on-site telecommunications switches and multiple fiber optic full T-1 lines, web hosting and electronic mail. Existing Internet connections and workstations as well as technological flexibility make the location a turnkey facility, according to Bonnie Herron, director of the incubator. These tangible benefits are complemented with standard incubator offerings such as access to information from subject-matter experts, conference rooms and training. This allows entrepreneurs to concentrate on their businesses rather than logistical necessities, she says.

“The key to the success stories of businesses that start in an incubator is that the owner uses all the resources that the incubator offers … from the infrastructure to the expertise to the facilities,” Herron states.

Another privately sponsored Internet incubator is Phase 1, Laurel, Maryland. Space limitations prevent the organization from taking on more than five entrepreneurs at one time, and the owners are interested in nurturing companies that would eventually be acquired or whose shares would be offered for sale publicly. Resident companies do not pay rental fees; instead, Phase 1 owns 3 to 5 percent of the start-up companies.

Lisa Losito, Phase 1’s director, believes the organization’s management team understands what it takes to put a new company on track and prepare it to be acquired or offered publicly. Phase 1 is most interested in assisting entrepreneurs who are seeking this kind of future for their companies and can accept an arrangement where partners will have some say in running the enterprise.

Phase 1 is looking for dedication to a concept. “When the entrepreneurs know [the idea] is good enough to quit their day jobs—that’s the people we want to see. If they get several friends to quit their day jobs too—that’s what we really want to see,” Losito says. And the company has had no trouble finding these go-getters. The incubator is full and currently is not taking names for a waiting list.

The Sync is one company Phase 1 is supporting and mentoring. The Internet video broadcasting company creates and streams original video content for the web. Before being accepted into Phase 1, a living room served as the business’s production headquarters, Thomas Edwards, president, The Sync, explains.

Edwards conceived his business idea while working for an Internet service provider. When he started to see customers requesting video capabilities, he felt that a company could flourish by providing this specialized service. Currently, the company displays its capabilities on its own web site, which features video channels that cater to specific interests.

Although the company only consists of two full-time people now, Edwards wants to expand to a staff of 10 to 14 people. “I wouldn’t be able to pursue this without the incubator. I didn’t have the capital,” he says.

According to Esther Smith, principal, The Poretz Group, McLean, Virginia, start-up companies that begin in private sector incubators such as Phase 1 have a better success rate than those that start in centers founded with the goal of increasing a region’s economic stability.

Smith conducted a study of the incubation trend for the Morino Institute, Reston, Virginia. She found that one impetus behind the growth of business incubators since the 1980s was the pressure on publicly funded institutions to justify their expenditure of government funds. Research facilities created incubation settings so they could continue to receive revenue, she explains.

Regarding companies based on the Internet, Smith believes that in many cases entrepreneurs have ideas that would add interesting features to existing services, but those ideas alone will not sustain a business.

After in-depth research of the incubator concept and reviewing statistics offered by the government and associations, Smith concluded that the level of growth of companies within a company is “criminally low,” and adds, “If the incubator staffs were all that hot, they would be out there making money themselves.”

Mary MacPherson, vice president of the Netpreneur Program, agrees that all incubators are not equal. The program is a segment of the Potomac KnowledgeWay, a project of the Morino Institute. It has been called one of the first virtual incubators, offering entrepreneurs an online and offline community to share information and resources. Discussion group participants determine the format for the forums. Some groups are closed, while some are open. Certain groups feature a moderator to direct discussions or monitor requests. Offline events include monthly morning meetings where entrepreneurs can listen to presentations from experts.

“People hear the word incubator and you get the impression that it’s this really cool place with people walking around in jeans and joking around and sharing ideas. The reality is that it comes in a hundred different flavors. If you’re thinking about going into an incubator, investigate it… . The same goes for people who start up incubators. Are you starting up this incubator because you’re going to create a place to help entrepreneurs or are you looking for the next home run?” MacPherson offers.

The Netpreneur Program currently is designed only as a virtual incubator. The Internet provides many of the same results as facilities in terms of connecting people, MacPherson says.