For-Profit Business Incubation Strategies
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For-Profit Business Incubation Strategies This information originally appeared in A Comprehensive Guide to Business Incubation: Completely Revised 2nd Edition, ©2004 by the National Business Incubation Association. When Joeseph Mancuso started the first busi- “We always create jobs and fill our building in ness incubator in 1959, little did he know that he had a way that will make money,” says Tom Mancuso, launched a new industry. At the time, he was just Joseph’s son and president of the Mancuso Business trying to find someone to lease an empty, 850,000- Development Group, which operates BIC. “It’s really square-foot former Massey-Ferguson plant. He knew not that different from any incubator because sus- that he could not fill the space with a single tenant, tainability at the end of the day is all about making so he started small – his first tenant occupied just money.” 2,000 square feet. There is a difference, though; for-profit incubators, Mancuso quickly learned that smaller tenants as their name indicates, are in the business of turn- could be his bread and butter, but that many of them ing a profit. But that profit relies on the success of needed help with bookkeeping, financing, and other their clients. Faithfully serving both of these masters business services in order to remain solvent (and pay is what makes sustainable for-profit incubation pos- the rent on time). So he helped them. It made good sible. In this chapter, managers of the three types of business sense; helping his tenants be successful for-profit business incubation programs outline the helped him keep the building full. strategies they use to succeed. Opened that year, the Batavia Industrial Center Real Estate Incubators (BIC) in Batavia, New York, became the world’s first for-profit business incubator and a model that has Carl Tiedemann, president of the Tiedemann been adapted by for-profit and nonprofit incubators Group in Elkhart, Indiana, sees business incubation the world over. While nonprofit incubation programs as a natural fit with his commercial real estate often operate as a program of a city or county eco- business. Not only is he able to keep tabs on start-up nomic development organization, a university de- companies that may need his services as they mature, partment, or community development organization, he’s able to build lasting relationships with them that for-profit programs, like BIC, generally follow one of he hopes will make them more likely to use his ser- three basic models: vices when graduation comes. “Because we’re in the real estate business as a primary business, what we’re · Those that seek returns from rent and service trying to do is grow our future clients,” he says. fees For-profit incubators like Tiedemann’s, which de- Those that seek returns from equity holdings · pend on rents and service fees for their returns, gen- or royalty agreements with clients or gradu- erally are mixed-use, targeting a range of client types. ate firms As with any commercial real estate venture, one of · Corporate incubators that seek collaborative the major goals of this type of business is to keep its relationships with client companies based on building(s) filled with rent-paying companies. technologies that complement the corpora- tion’s core technologies Many incubators of this type are owned and oper- ated by commercial real estate businesses that use Although for-profit incubators have a different the incubator partly as a means to create relation- fundamental goal than their nonprofit counterparts, ships with clients and eventually attract them into the outcome of the incubation process is often the other space. This is the case with the Tiedemann same – the creation of successful companies and jobs. Group, which operates the Lexington and Eastpoint National Business Incubation Association Business Centers. The company has made its incuba- Tiedemann assesses applicants’ desire to participate tor suites small – about 1,000 square feet each – so in “Shop Talk” workshops on specialized business successful clients outgrow the incubator and must topics. “If you don’t want to participate, then we don’t seek larger spaces, Tiedemann says. This serves a want you,” Tiedemann says. Mancuso and Tiede- two-fold purpose. First, it forces clients to move out mann provide free assistance with writing business as they grow, which makes room for new incubator plans and free advice in the form of assistance with clients. Second, it provides customers for the accounting and cash-flow management. They also Tiedemann Group’s real estate business, the largest negotiate reduced rates on behalf of clients with busi- commercial-industrial realtor in a two-county ness attorneys, accountants, and other professionals. market. Mark Fessenden, who runs a management con- “That’s the purpose of having an incubator and sulting business and an Internet retailing venture wanting our clients to be successful,” Tiedemann says. from the Eastpoint Business Center, became an incu- “They’re going to lease space in another facility that bator client in 2001. He had been operating out of his we have, or one of our agents will find them a space.” home but took space at Eastpoint because it offered In Batavia, Mancuso’s incubation program helps him the credibility of having an office and enabled him fill the 958,000 square feet of commercial space him to operate without the expense of acquiring ad- that BIC now owns. Because the space is much too ministrative help and office equipment. Fessenden is large for the incubator program alone, Mancuso says, impressed with the quality of experts that Tiedemann the BIC limits participation to three years, during brings in to advise clients. which clients receive management assistance, attend “These people are just amazing in terms of the workshops and seminars, and enjoy gradually increas- value they bring in areas that can really affect the ing, but below-market rent. After the three years, businesses dramatically,” he says. Among the exam- clients must pay market rate for their space in the ples he cites are a banker who discussed approaches center or move. to and availability of small business loans, and finan- “Because we have so much space, we don’t have cial planners who talked about investment vehicles to throw you out of the building,” Mancuso says, “but for small businesses. you do graduate from the incubator program.” Because of their sympathy toward entrepreneurs A clear advantage of having an incubator run by a and willingness to get involved with slow-growth, old real estate business is that management doesn’t have economy businesses, real estate incubators provide to hire staff dedicated to operating or maintaining only a modest direct return on their owners’ time its incubation program because it already has those and investment. But, owners say developing future personnel for its other business, Tiedemann and tenants for their commercial ventures and creating Mancuso say. sustainable businesses and jobs in their communities are equally important returns. It is important to note what differentiates real estate model incubators from other commercial real “I don’t need to earn my living in the incubator estate businesses. Foremost, they are sensitive to the business,” Tiedemann says, “so I can take all the mon- needs of early-stage companies and much more likely ey that’s generated from that and put it back in the to offer short-term leases, below-market rents, and program. Because I’ve been able to do this, we’ve cre- other accommodations for start-up enterprises than ated more than 300 jobs over the last thirteen years.” standard real estate businesses. This is evident at the Equity/Royalty Incubators BIC, where clients rarely must sign a full-year lease and often start out paying rent that is more than 50 Harlan Jacobs, president of Genesis Business percent below market rates, Mancuso says. Centers in Columbia Heights, Minnesota, is in the business of bartering. Genesis barters its incubation These incubators also include in the rent many of services for equity positions in technology firms, pro- the same incubation services that nonprofit incuba- viding them with management assistance, business tors provide and expect clients to take advantage of mentoring, and help finding outside investments. In them. For instance, as part of the screening process return for these services, Genesis negotiates to re- for the Lexington and Eastpoint Business Centers, ceive from 5 percent to 10 percent of a client’s equity, ©2004, National Business Incubation Association www.nbia.org Jacobs says, but receives no direct payment from Jacobs and other investors continue to invest in them. Genesis to support its operations while waiting for Many for-profit incubation programs operate on client liquidity events. this type of system. Clients may pay for some services, Because some companies will be profitable but but the incubator makes little initial income from will never become heavy hitters, incubators may clients. Instead, the incubators must have enough negotiate royalty agreements to develop a steadier patience to wait until clients successfully execute revenue stream, says Mary Pat Moyer, CEO of TEKSA a merger, sale, initial public offering (IPO), or some Innovations, a for-profit life sciences incubator in San other highly profitable exit strategy (liquidity event). Antonio, Texas. These incubators resemble venture capital funds: TEKSA negotiates royalty agreements with all its They must own a percentage of many companies to clients, using a tiered approach that raises TEKSA’s have a realistic chance of an adequate return; they share of revenues as a client’s sales increase and look for companies that have the potential to grow decreases it if the company’s sales decrease, Moyer rapidly and attract the attention of investors; and says.