What it takes to be a successful business incubator

October 26, 2011

By Niala Boodhoo

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Business incubators are designed to turn an idea or a concept into a successful

Business incubators are designed to turn an idea or a concept into a successful company; and these new companies hopefully bring jobs and revenue. In the Midwest, there were some long-standing incubators but new ones were also starting up. One problem with incubators--they produce few companies. Changing Gears’ Niala Boodhoo reported on the principles that help incubators create successful offspring.

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.

Psylotech's Alex Arzoumanidis at The Incubator in Evanston, Ill.  (Courtesy of TSong 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.

Often, incubators – like TechTown in Detroit – don’t publish graduation rates. The incubator in Evanston, Ill., 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 overall graduates from the incubator is 135.

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 aTen 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. 

Changing Gears is a public media collaboration between Michigan Radio, WBEZ and Ideastream in Cleveland. Support for Changing Gears comes from the Corporation for Public Broadcasting.