In the face of persistent high unemployment, political leaders are showing a renewed interest in business incubators as a way to assist startup businesses and create jobs. U.S. Rep. Nydia Velzquez, D-N.Y., chairwoman of the House Committee on Small Business, noted in a March 17 hearing that small businesses are central to creating new jobs. Dr. Robert Strom of the Kauffman Foundation illustrated that point at the hearing, citing foundation research that "young firms, less than five years old are responsible for virtually all net new jobs. Absent startups, net job creation would have been negative for 22 of the 29 years between 1977 and 2005. When startups are included there are only three years of net job loss."
There are more than 1,100 incubators in North America, predominantly in the United States, according to the National Business Incubation Association (NBIA). These incubators are overwhelmingly nonprofit organizations that provide entrepreneurs with a variety of business support services, including rental office space, management guidance, technology support and assistance in obtaining financing. In a 2006 report, NBIA estimated that North American incubators in 2005 assisted more than 27,000 startup companies, provided full-time employment for more than 100,000 workers and generated more than $17 billion in annual revenue.
Tracy Kitts, NBIA's vice president and chief operating officer, says five characteristics define business incubation programs: 1) they have a selection process; 2) they work primarily with new companies, either startups or very young companies; 3) they offer comprehensive business assistance; 4) there is on-site management that coordinates and facilitates the delivery of those services; and 5) there is a graduation policy.
Kitts points out that business incubators not only help create jobs but also help to retain jobs, as 87% of the companies that graduate from incubation programs remain in the communities that supported them. "What I have seen is because incubation programs work with small startup companies, many of those companies are going to handle all aspects of their business locally whereas a larger company may be looking for offshore solutions to their manufacturing needs," he says.
The Georgia Center of Innovation for Manufacturing provides networking and resources to entrepreneurs and existing businesses alike.
About 3% of business incubators focus on manufacturing but 54% serve a variety of businesses that include aspiring manufacturers. That's the case with the Business Incubator Center in Grand Junction, Colo. The center is housed in a compound that was part of an old Department of Energy site and currently has 45 companies in the incubation program. About 15% of the companies are manufacturers.
"We are always looking to grow businesses that sell products outside the community and therefore bring money in. Manufacturing is one of the strongest industries in terms of improving your local economy," says Chris Reddin, executive director of the center.
Reddin says the Grand Junction area has suffered from a boom or bust economy, most recently in the case of natural gas. "We have natural gas resources here and they're fairly expensive to tap, but when natural gas prices rose, we had all kinds of drilling. Anybody who could pass a drug test could get a job for $25 an hour." But when prices fell, drilling dried up and local unemployment shot from 2% to 10%.
To help change this cycle, Reddin says her center works to attract and support a variety of businesses. For example, she worked with one client, Timeless Millworks, a cabinet maker, encouraging it to shift from a plan to produce high-end cabinets largely by hand and instead invest in sophisticated automated machinery and programmers. "A cabinetmaker has higher-paid and educated employees and a more sustainable business model," asserts Reddin, than a company with large numbers of workers performing rudimentary assembly. The result, she says, is a business that may not produce the sheer number of jobs, but does offer good long-term prospects.
Like other incubators, the center's aim is to guide startup businesses on a path that leads to independence. Companies enter a five-year program but the center works to graduate them ahead of time. That means helping them grow to a point where they are cash-flow positive and have enough resources that they can invest in their own facility. The center has clients begin meeting with realtors, the local economic development agency and other resources about a year ahead of their expected graduation so that they are focused on the next steps in their development.
Reddin says good candidates for the incubation program are people with "strong technical expertise and a really good understanding of the product or service they want to provide." The center can then provide them with a variety of mentoring and other services, such as financial management, marketing or production expertise. "We are looking for folks where some support is really going to make a difference," says Reddin.
Help in Many Forms
While business incubators are located around the country, they are just one component of a vast network of public, private and combined agencies and organizations that provide assistance to startup businesses. In the Detroit area, for example, Automation Alley is a nonprofit organization designed to develop and market high-technology businesses.
In 2003, Automation Alley started a business accelerator program. To date, it has invested more than $5 million in 25 companies. "We have evaluated well over 1,000 business plans to date to determine which ones have a chance of successfully moving to venture capital financing," says Charles DeVries, the director of government affairs. "We take equity positions in these companies; these are not grants." So far, these companies have created 150 jobs directly and attracted more than $38 million in venture capital.
Chris Reddin, executive director of the Business Incubator Center, says the center's goal is to guide startups on a path to independence.
At the Georgia Center of Innovation for Manufacturing, director John Zegers works with both entrepreneurs and existing manufacturers to help them develop innovative products, progress to commercialization and expand or locate facilities to Georgia. Recently, the center helped Moto America, a small private company, redesign its three-wheeled vehicle, the Gashopper. Originally designed in the early 1980s during the gas crunch, the project had been shelved for years. Zegers put company managers in touch with Georgia Tech and projects were provided to four classes of senior students. The result was a redesigned interior and exterior, a lightweight composite material for the main body parts, a new suspension design and a subframe design for a potential battery-powered model.
Zegers said one of the main benefits his organization provides is connection to resources such as Georgia Tech and other educational institutions. "That is one thing we do a lot of," says Zegers, "help manufacturers find other resources in the state working on similar issues and get them working together."