A Guide to Business Incubation For Elected Officials in NYS

For Elected Officials in NYS UB Technology Incubator. Used by permission. Prepared independently by Dr. David A. Lewis Assistant Professor Department of Geography and Planning University at Albany dalewis@albany.edu Published by Business Incubator Association of New York State, Inc. David Hochman, Executive Director http://bianys.com

Woodrow (Woody) Maggard, Chair, UB Technology Incubator David Hochman, Executive Director, dh@tbed.org Spring 2008 Dear NYS Policymaker: I am pleased to present you with this Guide to Business Incubation for Elected Officials in New York State, which was prepared by Prof. David A. Lewis at the University at Albany. Prof. Lewis is a nationally known academic expert on business incubation and has accepted no compensation for this assignment. We gratefully acknowledge the support of our sponsors. This funding allows us to distribute a paper copy of this guide to principals and key staff in both the executive and legislative branches of state government, as well as among the Congressional delegation. Our members will also make copies available to elected officials at the county and city levels of local government. We have asked Prof. Lewis to provide an unbiased introduction to business incubation for policymakers at the state and local level. We want you to know about incubation s important historical ties to New York State, and also what is known widely among scholars about the efficacy of incubation and what business incubators can and should be expected to accomplish and demonstrate when they receive public support. Everything that appears between the cover sheets was written by Prof. Lewis without interference from our association. This document is not a lobbying agenda. We believe that once the facts about business incubation are known more widely by policymakers, we will be able to make our own case for those initiatives we believe are warranted and well advised. The inside back cover includes a roster of our member incubators and further information is available on our website http://bianys.com or from myself or our executive director. We thank you for the few minutes we expect this document will take to read, and invite your feedback and comments at any time. Sincerely, Woodrow Maggard Chair, Business Incubator Association of New York State, Inc. Director, UB Technology Incubator (for identification purposes only) 991 Broadway Suite 207 Albany, New York 12204 http://bianys.com

Defining Business Incubation Business incubation programs are designed to support entrepreneurship. They accelerate the successful development of start-up firms by providing entrepreneurs with an array of targeted resources and services. The incubator manager develops and orchestrates the delivery of the support services to client firms. To leverage the assisting assets in the community, these business services are often provided by a network of local business services firms, a university, a Small Business Development Center, or a combination of these and other organizations. A business incubator is defined as multi-tenant facility, occupied by entrepreneurial client firms, with onsite management that delivers an array of support services. Some incubation programs both operate within the walls and also deliver entrepreneurial support services to offsite client firms. Offsite firms may be referred to as affiliate or virtual clients. Other incubation programs have only a virtual presence, without any physical space for tenants. This is typically referred as incubation without walls or virtual incubation. The goal of business incubation is to produce successful firms that will leave the incubation program viable and freestanding. The goal of business incubation is to produce successful firms that will leave the incubation program financially viable and freestanding. In theory, these incubator graduates have the potential to create jobs, revitalize neighborhoods, commercialize new technologies, and stimulate an entrepreneurial culture in the host community. 1

A Short History of Business Incubation In 1959, the Batavia (NY) Industrial Center opened as the first business incubator in the United States. From these humble beginnings, the incubator industry has matured into an international economic-development tool, boasting nearly 5,000 programs in more than 100 different countries. Deindustrialization inspired the first handful of incubators, which were located in Northeast communities that had lost a major employer. Once incubators demonstrated potential for community revitalization, they spread to the Midwest, before jumping to the West Coast Today, incubators come in all shapes and sizes, some specializing in a single industrial niche... and eventually populating every state in the nation. Internationally, industrialized countries adopted variations of incubation, before it spread to to newly industrialized and less-developed nations. The United States remains the leader in the industry, with approximately 1,115 incubators as of 2006 up from merely 12 in 1980 and approximately 400 in 1992. This exponential increase in the number of programs is the result of strong government support. In the tech-bubble era of the late 1990s, there was also a rapid rise in the proportion of for-profit incubators funded by private sources. However, many of these programs have ceased operations, leaving an estimated 85% of incubators with public-sector leadership. Through trial and error, coupled with innovative thinking, practitioners of business incubation have discovered some of the key features of more successful programs. These best practices are primarily related to the management of the program and the effective delivery of entrepreneurial support services (see table on p. 7). Initially, the majority of incubators served clients ranging over many different industries, prompting the term mixed use incubators. Over time, the type of entrepreneurial firms receiving the benefits of business incubation has expanded. Today, incubators come in all shapes and sizes, some specializing in a single industrial niche such as biomedical, software development, agriculture and specialty foods, or even retail. Today the incubator industry is composed of 54% mixed use, 39% technology, 3% manufacturing, 1% services, and 4% other types of client base. National Trends in Business Incubation In the new millennium, business incubation in the U.S. is flourishing, and the number of incubators continues to increase rapidly. This is particularly true of the technology business incubation (TBI) segment, although all segments, including micro-enterprise, have seen steady growth. From 1995 to 2005, there was a greater than 250% increase in the number of TBIs in North America. In the U.S., there are currently more than 400 TBI programs. This explosive growth in TBIs is attributable to a growing understanding that economic growth is highly correlated to industrial innovation. However, TBIs do not come cheap, and communities need a specific set of assets to achieve success. Flying below most people s radar has been the dramatic increase in food-related business incubators. These kitchen incubators have helped both rural and urban places successfully launch new businesses that fill particular market niches. To take just one example from outside New York State, in 2007, the Rutgers Food Innovation Center won the incubator of the year award at the 20th International Conference on Business Incubation. Virtual business incubation programs are on the rise both in the U.S. and abroad. While virtual business incubation has some advantages, there are also drawbacks. Virtual-incubation programs tend to be less expensive to operate. In rural areas, where the client base is often spread out over large areas, virtual incubation may a good alternative to commuting. Also, some entrepreneurs simply prefer not to locate in an incubator facility. However, one significant challenge for virtual incubation is delivering entrepreneurial support services efficiently, and building the relationships among clients that support peer-to-peer learning and facilitate collaborative business development. 2

Recently, a new model of business incubation has emerged. The international business incubator provides the same set of entrepreneurial services as a typical incubator, but has a special focus on providing a soft-landing for international firms seeking to locate in the U.S. in order to address our domestic markets, partner with U.S. firms, or to access other resources. Some of the specialized services that are above and beyond typical business incubation include: translation services; language training; help meeting government regulations; help with import/export laws; patent assistance; help obtaining business and driver s licenses; cultural training; immigration and visa assistance; and housing assistance. Immigration services are often extended to the trailing spouses and children. The business incubation industry has also inspired the development of the business accelerator. While there is no fully accepted definition, it may be broadly defined either as: (1) a late stage incubation program, assisting entrepreneurial firms that are more mature and ready for external financing with the provision of a similar set of support services; and/or (2) a facility that continues the incubation process for graduates, as they ease into the commercial real-estate market. A third more expansive and less measurable definition resembles the virtual incubator model. Some argue this third model can be effective when a three-way collaboration (among a technology entrepreneur, a university entrepreneurial center, and regional advisors and funders) provides counseling and mentoring to take the business to the level where it can be financed in the capital markets. Most observers of the incubator industry have documented its maturation and growing sophistication. The growth demonstrates the ability of programs to adapt to a changing economic landscape, while continuing to provide services valued by entrepreneurs. Much of the success can be directly linked to public support that enables programs to develop new services, enhance entrepreneurial training programs, and increase their visibility in the host communities. Business Incubation in New York State New York State has a rich history of business incubation, from the first incubator in Batavia to the recent surge in its population. In 2002, the Empire State Development Corporation estimated the NYS incubator population at 52, though this did not include any virtual incubators. The 2006 Handbook for New York State Incubators published by NYSTAR estimated the population at approximately 80. Some of the increase can be accounted for by different definitions and/or data validity, but clearly the state s incubator community is growing. The international incubator [provides] a soft landing for international firms seeking to locate in the U.S. Much of the success can be directly linked to public support that enables programs to develop new services. All 10 economic regions now have at least one business incubator. According to the aforementioned sources, 16% of the state s incubator population are for-profit incubators, which is larger relative to the nation, though still a relatively small fraction of the entire community. The not-forprofit segment is 80% while the remaining 4% are in other categories. The relative proportion of incubators by industry sectors reflects the national picture, though with notable differences. In NYS, approximately 47% of incubators classify as mixed-use, 37% technology-focused, 7% manufacturing, and 6% services. The higher percentage of manufacturing and service incubators in NYS relative to the nation could be the result of the definitional differences, since the Empire State Development did not include an other category in their survey. Another interpretation could be that the service industry sector is much larger due to the NYC service industry effect. In the case of manufacturing, the early history of the NYS in incubation may have long run impacts on the industry, boosting the number of manufacturing incubators. 3

Compared to other states, NYS would rank about the middle in terms of its policy support for business incubation. Some of the leaders are Pennsylvania, New Jersey, Connecticut, and Wisconsin. Each of these states has state-level policy targeted to monitor and support its business incubation industry. These states provide a range of policies the target incubators and their client firms including: bricks and mortar assistance for creating new incubators, operating support for new or existing incubators (though often conditioned on performance and The preponderance of evidence indicates that business incubation is a cost-effective economic development policy when best practices are implemented utilization of industry best practices), tax credits to client firms, centralized data collection, seed and venture fund support for client firms, marketing assistance for the incubator industry, and other complimentary policies not necessarily targeted at the business incubation industry. The recent formation of a statewide incubation association in NYS may signal a growing cooperative spirit among its members. Collaborative frameworks can leverage resources, stimulate peer-to-peer learning among incubator managers, and facilitate client-to-client networking across programs. In addition, the organization can play a key role in assisting incubation programs to implement best practices through training seminars and raise the visibility of the industry in the state. Policy Implications for Elected Officials While some questions remain unanswered, the preponderance of evidence indicates that business incubation is a cost-effective economic development policy when best practices are implemented and there is sufficient oversight of the public investment. Research on best practices in business incubation has documented a strong correlation between the implementation of industry best practices and successful incubation of entrepreneurial firms. This provides guidance for policymakers interested in optimizing the public investment this economic development tool. Policy recommendations include: Measures to track: number of jobs produced by client firms, particularly by graduate firms growth of revenues by client firms (including graduates) survival rate of graduate firms retention of graduate firms in the host region number of graduates per year; and the number of new patents produced by client firms, which may be an indicator of future growth. Programs receiving public funding for start-up and/or operating revenue should be required to implement best practices and their operating budget should be sufficient enough to ensure programs can provide the entrepreneurial support services demonstrated to catalyze success. Leveraging existing institutional resources such as a Small Business Development Center or higher educational institution facilitates the delivery of critical services. Public funding agencies should develop standardized outcome measures to monitor the public investment and require programs receiving public support to collect the data. Some key measures are shown in the box at left. Taxes paid by client firms and their employees can be used as a measure of the return on public investment. Periodic assessments of the business incubation system and individual programs receiving public support should be conducted by external independent evaluators. There is a need to control for the age of the program and the client base that is served. A statewide database of incubator programs, their characteristics, and area of expertise should be developed and made available for public use. Again, policy should leverage existing organizational capacity to minimize costs. To ensure optimal placement of new clients that matches client need to incubator program focus, publicly funded programs should have a shared database of new applicants. Programs receiving public support should be required to submit annual reports to a central organization to monitor progress toward the funding goals. This may include periodic independent audits of program budgets. 4

Operating budgets of publicly-supported programs should be submitted in annual reports, and made available for independent evaluation. Once adequate data collection and monitoring of best practices has been launched, complementary policies are advised. Examples include state support for seed funding, creation of appropriate graduate space, tax credits for client firms, state competition for best incubator program (by type) and incubator client, development of a business service provider network, and encouragement of state higher educational institutions to support business incubation programs. Findings from published research follow, with references at conclusion. Research Data on Survival Rates of Incubator Graduates Study Type of Incubator(s) Studied Geography Number in Study Survival Rate Lewis 2003 Technology US 147 70-80% RESI 2001 Technology MD 6 70% DiGiovanna and Lewis 1998 Technology NJ 6 85% Molnar et al. 1997 All types US 50 87% Campbell et all 1988 All types US 13 86% Allen and Bazan 1990 All types PA 32 68% Research Data on Retention of Incubator Graduates in Region Study Type of Incubator(s) Studied Geography Number in Study Retention Rate Linder 2003 All types US 84% Lewis 2003 Technology US 147 70-80% DiGiovanna and Lewis 1998 Technology NJ 6 85% Molnar et al. 1997 All types US 50 84% Campbell et all 1988 All types US/Can. 13 86% Allen an Bazan 1990 All types PA 32 76% Research Data on Public Sector Cost Per Job Author Year State Cost per Job DiGiovanna and Lewis 1998 New Jersey $3,000 Culp 1996 Georgia $3,785 Markley and McNamara 1995 Confidential $6,580 Human Resource Investments 1994 Ohio $6,609 Human Resource Investments 1994 random $11,353 MD Dept. of Economic and Employment Development 1990 Maryland $3,000 Roberts, at. el. 1990 Iowa $5,916 5

Research Data on Return on Investment Study Geography Type of Incubator(s)) Studied Number in Study ROI Molnar et al. 1997 Multiple US 4 5 to 1 Markley and McNamara 1995 Manufacturing One Small Metro* 1 1.21 to 1 Battelle 1995 Technology Virginia 1 7 to 1 RESI 2001 Technology State of Maryland 6 $31.6 m to $151.9 m Research (quasi-experimental) on incubated vs. non-incubated firms Study Studied Geography Finding Shahidi 1998 Shahidi 1998 Technology US Incubated firm tend to have more partnerships in R&D and Joint ventures relative to non-incubated firms. Technology US Non-incubated firms have greater access to traditional financial instruments (commercial bank loans and SBA dollars), but incubated firms have greater funding from equity capital, grants, and seed funds. Culp 1996 Technology Atlanta There is no difference between graduate firms and non-incubated firms in time to market. Culp 1996 Technology Atlanta There is no difference between tenant firms non-incubated firms in time to market. Culp 1996 Technology Atlanta Graduate firms have greater access to capital relative to nonincubated firms. Culp 1996 Technology Atlanta Tenant firms have greater access to capital relative to non-incubated firms. Culp 1996 Technology Atlanta There is no difference between graduate firms and non-incubated firms in employment growth. Culp 1996 Technology Atlanta There is no difference between graduate firms and non-incubated firms in sales growth. Culp 1996 Technology Atlanta Tenant firms out perform non-incubated firms in employment growth. Culp 1996 Technology Atlanta Tenant firms out perform non-incubated firms in sales growth. Allen and Bazan 1990 Allen and Bazan 1990 Allen and Bazan 1990 Allen and Bazan 1990 All types PA Control group firms have faster employment growth than incubated firms. All types PA Slightly faster growth in sales for graduate firms All types PA Control group firms have faster employment growth than incubated firms. All types PA Slightly faster growth in sales for graduate firms 6

Research on Incubator Best Practices Category Management of the program Best Practice Conduct feasibility study before starting program Develop a consensus-driven mission statement Establish client entry & exit criteria Collect outcome data Provide networking opportunity between client firms Establish effective tools to deliver support services Key entrepreneurial support services Business plan writing and business basics Legal assistance, including but not limited to: general legal services, intellectual property protection; incorporation or other legal business structures; import/export requirements Access to capital Marketing assistance Access to broadband high-speed internet Establish mentoring boards for client with area business service providers Where possible build close ties with institutions of higher education Accounting and financial management services Networking with other entrepreneurs; particularly other clients Networking with area business community Assistance in developing presentation skills Assistance in developing business etiquette Additional key services Technology commercialization assistance Access to specialized equipment and laboratories at reduced rates Intellectual property management assistance 7

References Allen, D., Bazan, E. 1990 Value Added Contributions of Pennsylvania s Business Incubators to Tenant Firms and Local Economies (Appalachian Regional Commission and Pennsylvania Department of Commerce, State College, PA) Battelle. 1995. Virginia s Center for Innovative Technology: An Economic Impact Assessment. Columbus, OH: Battelle. Bearse P, 1998, A question of evaluation: NBIA s impact assessment of business incubation Economic Development Quarterly 12(4):322 333. Campbell C, Allen D, 1987, The small business incubator industry: Micro level economic development, Economic Development Quarterly 1(2) 178 191 Campbell C, Berge D, Janus D J, Olson K, 1988 Change Agents in the New Economy: Business Incubators and Economic Development (Hubert Humphrey Institute of Public Affairs, Minneapolis, MN) Culp R P, 1996 A Test of Business Growth through an Analysis of a Technology Incubation Program Doctoral dissertation, Georgia Institute of Technology, Atlanta, GA. DiGiovanna S, Lewis D A, 1998, The Future of Technology Incubation in New Jersey: A Strategy for the New Jersey Commission on Science and Technology (NJ: Project on Regional and Industrial Economics, Rutgers University, New Brunswick) Gwynne P, 1998, Universities Nurture Researchers Business Start-Ups, Scientist August 31, 11 12. Hackett S, Dilts D, 2004, A Systematic Review of Business Incubation Journal of Technology Transfer 29 55-82. Hansen M T, Chesbrough H, Norhoa N, and Sull D, 2000, Networked Incubators: Hothouses of the New Economy Harvard Business Review September-October, pages 74 84. Hayhow S, 1997 Business Incubation: Building Companies, Jobs, Wealth (OH: NBIA, Athens,) Hernadez-Gantes V, Sorenson R, and Neiri A, 1995 Fostering Entrepreneurship through Business Incubation: The Role and Prospects of Post-Secondary Vocational-Technical Education (CA: National Center for Research in Vocational Education, University of California at Berkeley, Berkeley) Kang B S, 1991 Relationship of Public-Private Partnership Activities in the Small Business Incubator in Michigan to Small Business Success Doctoral dissertation, Department of Urban and Regional Planning, Michigan State University, East Lansing, MI Knopp, Linda. 2007. Across State Lines: US Incubators Report how State Governments Support Business Incubation. NBIA Review. Athens, OH: NBIA. Lewis D A, 2003 Innovation, Incubation, and Place: An Evolutionary Theory of the Performance of Technology Business Incubators Doctoral dissertation, Department of Urban Planning and Policy Development, Rutgers, The State University of New Jersey, New Brunswick Lewis D A, 2001 Does Technology Incubation Work: A Critical Review of the Evidence (U.S. Department of Commerce, Economic Development Administration, Washington, DC) Lichtenstein G, 1992 The Significance of Relationships in Entrepreneurship: A Case Study of the Ecology of Enterprise in Two Business Incubators Doctoral dissertation, Management Department, University of Pennsylvania, Philadelphia. Lyons T, 1990 Birthing Economic Development: How Effective are Michigan s Business Incubators? (MI: Social Science Research Bureau, Michigan State University, East Lansing) Markley D, McNamara K, 1995, Economic and Fiscal Impacts of a Business Incubator Economic Development Quarterly 9(3) 273 278 Mian S, 1996, Assessing the Value-Added Contributions of University Technology Business Incubators to Tenant Firms Research Policy 25 325 335. Molnar L, De Pietro R, Gillette L, 1995 Sustaining Economic Growth: The Positive Impacts of the Michigan Incubator Industry, 1985 1995 (School of Business Administration, University of Michigan, Ann Arbor) Molnar L, Grimes D, Edelstein J, De Pietro R, Sherman H, Adkins D, and Tornatsky L, 1997 Impact of Incubator Investments (U.S. Department of Commerce Economic Development Administration, Washington, DC) NBIA, 2002. State of the Industry (National Business Incubation Association, Athens, OH) NBIA, 2006. State of the Industry (National Business Incubation Association, Athens, OH) NGA, 2002a A Governor s Guide to Cluster-Based Economic Development. (National Governors Association, Washington, DC) NGA, 2002b, A Governor s Guide to Building State Science and Technology Capacity (National Governors Association, Washington, DC) Quittner J, 1999, Can Business Incubators Justify Their Existence? Newsweek Online 25 October RESI, 2001, Maryland Incubator Impact Analysis Maryland Technology-Development Corporation, Baltimore, MD Rice M, 1992 Intervention Mechanisms Used to Influence the Critical Success Factors of New Ventures: An Exploratory Study Doctoral dissertation, Management Department, Rensselaer Polytechnic Institute, Troy, NY. Rice M, Matthews J, 1995, Growing New Ventures, Creating New Jobs: Principles and Practice of Successful Business Straszheim Incubation (Quorum Books, Westport, CT) Shahidi H, 1998 The Impact of Business Incubators on Entrepreneurial Networking: A Comparative Study of Small, High- Technology Firms Doctoral dissertation, George Mason University, Fairfax, VI Sherman H, 1999, Assessing the Intervention Effectiveness of Business Incubation Programs on New Business Start-ups Journal of Developmental Entrepreneurship 4(2) 117-133 Sherman H, Chappell D, 1998, Methodological Challenges in Evaluating Business Incubator Outcomes Economic Development Quarterly 12(4) 313 321 Smilor R, Gill M, 1986 The New Business Incubator: Linking Talent, Technology,, and Know-How (Lexington Books, Lexington, MA) Tornatzky L, Sherman H, and Adkins D, 2002 Incubating Technology Businesses: A National Benchmarking Study (National Business Incubator Association, Athens, OH) Tornatzky L, Batts Y, McCrea N, Lewis M, and Quittman L, 1996 The Art and Craft of Technology Business Incubation: Best Practices and Tools from 50 Programs (Southern Technology Council, Research Triangle, NC) U.S. Small Business Administration, 1986 Small Business Incubator Handbook: A Guide for Start-Up and Management (SBA, Washington, DC) 8

Incubators Operated by BIA/NYS Members Region Adirondack Regional Business Incubator Advanced Biotechnology Incubator at SUNY Downstate Biotechnology Business Incubator/Accelerator at UAlbany East Campus Broad Hollow Bioscience Park at Farmingdale Brooklyn Enterprise on Science and Technology at Polytechnic University CASE Incubator Program at Syracuse University CITEC Incubator Program Cornell Center for Life Science Enterprise Incubator Environmental Business Association of NYS Incubation Program Griffiss Institute Incubator Program Harriman Research + Technology Park Business Center Incubator Hudson Valley Center for Innovation ITAC Virtual Incubator Kitchen Incubator at CWE Artisan Baking Center Lennox Tech Enterprise Center at High Tech Rochester Long Island High Technology Incubator at Stony Brook University (and also Stony Brook Software Incubator and Calverton Business Incubator) Mancuso Business Development Group Incubators at Batavia and Lockport (and also Geneva Enterprise Development Center, High Falls Business Center, etc.) New Business Incubator at exubrio Group NY Designs at LaGuardia Community College of CUNY Rochester BioVenture Center RPI Incubator Program Saratoga Technology and Energy Park Schenectady County Community Business Center SCI2 at Pace University SparkSpace at RoseTech Ventures Start-up Suite at Binghamton University SUNY Fredonia Technology Incubator Syracuse Technology Garden UB Technology Incubator Venture Creations at RIT Watervliet Innovation Center NYC LI NYC CNY North Country Southern Tier Mohawk Valley Lower Hudson NYC NYC Finger Lakes LI Finger Lakes and WNY WNY NYC Finger Lakes NYC and Lower Hudson NYC Southern Tier WNY CNY WNY Finger Lakes 9

Business Incubator Association of New York State, Inc. P.O. Box 95 Albany, N.Y. 12201