What it Takes to be a Successful Business Incubator

Business incubators are designed to turn an idea or concept into a successful company. The goal is for these new companies to bring jobs and revenue. Across the Midwest, some have been around for decades, while new ones are just starting up. But many tend to produce few companies. Last week, we did a series of stories looking at the so-called Magic Bullets to save our economy. In that style, here, I report on what principles incubators need to focus on to create successful offspring.

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Ann Arbor's informal business community the Tech Brewery (photo courtesy of Dug Song)

Each Friday, inside the old Northern Brewery building in Ann Arbor, 4:30 p.m. is known as “beer thirty”. That’s when the self-described tech geeks who are part of this informal business community gather for drinks.

The Tech Brewery houses three dozen start-ups – but don’t call it business incubator.

“We don’t call ourselves an incubator,” founder Dug Song said. “If anything we call ourselves a start-up coop.

Song has his own start-up – Duo Security. He began the TechBrewery after being frustrated by traditional business incubators. In his opinion, they provide little more than cheap rent for lots of start-ups – instead of what it takes to get a company up and running.

“A lot of folks get to a point where they don’t want to be in a hoteling kind of environment, which is a lot of what these incubators tend to be,” he said. “They’re a little bit more isolated.”

The lack of a hotel environment drew Victor Volkman to the Tech Brewery. He had been involved in other incubators where he says his business ideas went nowhere.

“You have a biotech company next to a software company next to a something of completely different origin and we really didn’t talk to each other,” he said, adding the value in the Tech Brewery is running into someone in the hallway who can immediately help solve a problem.

The biggest cost for start-ups is office space. That’s why most incubators provide free or reduced rent. But it’s not just about office space. Having the same type of companies together helps everyone grow – something Volkman said he has found at the Tech Brewery.

Volkman left the traditional incubator environment because it didn’t work for him. That turns out to be a common sentiment.

The University of New Hampshire at Manchester’s Kelly Kilcrease studied incubators across the country. Out of the almost 500 entrepreneurs he surveyed, Kilcrease found that their opinion of incubators was “lukewarm – at best”.

Based on Kilcrease’s research, the happiest – and most successful clients – came from a specific type of incubator:

“Those that stress a certain type of clientele, deliver high quality services and those who have professional managers are more apt to be successful than those that do not,” he said.

Kilcrease thinks an incubator’s true measure of success is its graduation rate – the companies that actually make it on their own, apart from the incubator.

Psylotech's Alex Arzoumanidis at The Incubator in Evanston (Courtesy of The Incubator)

Often, incubators – like TechTown in Detroit – don’t publish graduation rates. The Incubator in Evanston, Illinois is one of the oldest in the Midwest – it celebrates its 25th anniversary this year. They’ve helped more than 350 companies and have graduated 23 companies that remain in Evanston. Director Tim Lavengood said a “fair number of graduates” overall is 135.

(Ask an incubator about how they define success and each one answers differently. Check out these profiles of eight business incubators across the Midwest.)

Jim Cossler is the CEO and Chief Evangelist of the Youngstown Business Incubator. It started out in 1995 in what Cossler describes as a typical incubator:

“You know – here’s some cheap office space, here’s a photocopier, here’s a fax machine,” he said, adding: “We don’t really care what you’re doing, but please turn yourself into a globally successful corporation.”

They quickly realized that approach wasn’t going to work. In 2001, they began to focus on software technology firms.

Today, the organization has a network of more than 1,000 people virtually through a private LinkedIn group, as well as four buildings full of clients – including nine companies that no longer need the incubator’s help. In fact, these companies pay rent which makes up about a third of the nonprofit’s $750,000 total budget. (A rent, by the way, that Cossler says is a premium on other commercial office space in Youngstown.)

Turning Technologies began as a Youngstown Business Incubator company a decade ago. Its estimates this year's annual revenue at $50 million. (Photo courtesy of Turning Technologies)

Ten years ago this month, Turning Technologies walked into the Youngstown Incubator with its idea – adapt audience response technology to be used in classrooms.

Today, it’s a $50 million company that employs 200 people. One of the YBI’s paying tenants, the company takes up an entire building.

Co-founder Mike Broderick says the YBI is “fairly rare” in its level of success, which he attributes to their focus.

“What we really needed the most was expertise,” he said. “The introduction to potential clients, to people who had been through the type of thing we had done before, who could provide advice.”

Broderick told me something academic research backs up – he thinks the company would have succeeded even without the incubator. But the YBI’s network accelerated his company’s progress. And he thinks that’s the best an incubator can do – accelerate a potential company’s growth.

This story was informed by the Public Insight Network.

Correction: An earlier version of this story did not fully elaborate how many companies “graduated” from Evanston’s incubator program, as the original number included only graduates that remained in Evanston. The director says a  “fair number” of overall graduates from the incubator is 135. 

One Reply to “What it Takes to be a Successful Business Incubator”

  1. Youngstown Business Incubator “YBI” is a great success story.  I see so many of these economic development groups, many of which are funding by our tax dollars which have very large operating overhead, salaries and staff members. YBI operates with only 3 full time employees and an overhead of $750k. 

    In comparison, an hour away in Cleveland, the state funded group Jumpstartinc.org, has a $13m budget and out of that $10m is used for their operating overhead.  Their CEO pays himself over $400k and they have a staff of over 40.  YBI provides all the same things as Jumpstart and also provides free or subsidized office space, funiture and equipment to their startup clients so their operating budget should be higher. 

    On every relevant measure, YBI’s results are much stronger
    than Jumpstart’s and they operate on less than 10% of their budget and offer more to the companies they work with.

    Congrats to YBI and they should be looked at as an example of how to create economic development instead of just cushy jobs for the people who work at these groups.

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