by Carol Brzozowski and Meredith Erlewine
Your incubator has been operating successfully for some time and you’d like to focus on a new sector, such as life sciences. Or perhaps your facility is consistently full and you need more space to meet demand.
Because most incubators’ operating budgets can’t handle such big strategic moves, some turn to capital campaigns to cover the costs. A capital campaign is an intensive, time-limited fund-raising endeavor to meet a specific financial goal to fund a special project. Recent capital campaigns have helped incubators expand facilities or build new ones, and have helped established incubators address new segments.
A capital campaign is a huge undertaking of both time and money. Raising several million dollars can command six to 18 months of more than one person’s full-time attention. Tasks include identifying key players to lend their names and expertise to the cause; developing a list of prospects, calling on them and following up; developing fund-raising materials; leading incubator tours; and tracking pledges and fulfillment. That may sound easy, but think about how much time, energy and diplomacy it could take to meet with up to five prospects a day for months – not to mention all the paperwork and follow-up those meetings require. And remember: The purpose of each meeting is to ask someone for tens of thousands of dollars.
But even though a capital campaign is a lot of work, a well-planned strategy executed by a strong team of volunteers, consultants and in-house staff can cement the incubator’s future.
NBIA asked several members who have conducted capital campaigns to share their tips and strategies.
Incubators often hire consultants to assist with part or all of a capital campaign, which frees the incubator manager to work with clients and manage the program.
A fund-raising consultant also brings specific skills and expertise in asking for money, skills that not every incubator manager has. “In my opinion, it’s best for a consultant to go out and sell your incubator for you,” says David Cattey, executive director of the Business Technology Center (BTC) in Columbus, Ohio. BTC launched a campaign in 2003 to raise $3 million to help the incubator expand not only its building, but also its capacity to reach out to the life sciences sector. Cattey believes a professional fund-raiser with a strong track record who understands economic development issues – and who understands and can articulate an incubator’s mission – is more likely to land commitments than an incubator manager. When Cattey met with prospects, he was inclined to get into detailed discussions about incubator activities that were unrelated to landing the deal. “I found it was better not to be there,” he says.
In 2002, Susan Matlock, president and CEO of the Entrepreneurial Center in Birmingham, Ala., embarked on a $7 million capital campaign to expand the facility. She and her board solicited consulting proposals from three firms and, upon finding that costs didn’t vary much, focused on the consultants’ services and how much of the process the consultant would manage. “We wanted to be sure that I wouldn’t be overly burdened,” Matlock says.
After interviewing representatives of two firms, they hired Bill Evans, owner of Catalyst Resources, a fund-raising consulting firm in Circleville, Ohio. Evans was already familiar with major players in the area from previous work and was strongly recommended by an individual who headed up several economic development organizations in Alabama. “We considered that an asset,” Matlock says.
Having a hometown consultant paid off for Cattey. BTC hired Chuck Stein, president of the economic development consulting firm Strategic Development Services in Columbus, Ohio, to manage his campaign. “Our cost was for his time, not travel and incidental expenses.”
However, not every community has a fund-raising professional with economic development experience. Stein says he’s been a stranger in town on most of the dozens of campaigns he’s conducted. “The benefit [in those cases] is that I don’t know what’s impossible, and I don’t have preconceived prejudices about who has turned me down before.”
But not all incubators hire campaign consultants. Bruce Gjovig, entrepreneur coach and director of the Center for Innovation at the University of North Dakota in Grand Forks, N.D., did the work himself, with the support of his staff. The goal was to raise $3.8 million to expand the incubator’s facility and $160,000 for operating support until the space is 60 percent occupied. Why take on such a major task alone? “Because we thought we could do it ourselves, which we did, and we already had an established relationship with [some] potential donors.”
Indeed, Gjovig jump-started his campaign with two major investments right off the bat: $1 million from the late Ray Rude, creator of the Duraflex diving board (who went on to make two more pledges totaling $750,000), and $500,000 from a seasoned North Dakota investor.
To undertake a capital campaign, an incubation program needs a team of individuals who can work together to make connections and develop a support network. Here is a list of typical team members and their roles:
The community leaders who chair the campaign play an important role because they already have the respect of the local business community. According to Stein, recognizable names bring credibility to the incubator, which may be unknown outside a small circle of business leaders.
For BTC’s campaign, Stein secured four heavy-hitting co-chairmen: then president of The Ohio State University (OSU) Brit Kirwan (BTC leases a building in the university’s research park in Columbus); John Kane, then president and chief operating officer of Dublin, Ohio-based Cardinal Health, the world’s largest pharmaceutical distribution company; then mayor of Columbus Greg Lashutka; and Doug Olesen, then CEO of Battelle Memorial Institute. Each of these entities committed $50,000 a year for five years.
Although Kane had never heard of the incubator when Stein first approached him, he quickly became BTC’s biggest proponent. “He was truly the godfather of this operation,” Cattey says. “He believed that it was in the community’s and Cardinal Health’s best interest that we grow a vibrant, dynamic bioscience community here.”
Less recognizable names can be helpful, too, if they can make a compelling case for the need for small business support. Incubator clients and graduates, in particular, can be strong advocates in a campaign. “When successful entrepreneurs talk to other successful entrepreneurs, that’s been the key to our success,” Gjovig says. “By being our advocate, they can tell our story more convincingly than I can.”
The incubator manager or CEO is an essential fund-raiser, too. Although Matlock believes key volunteers can lend the campaign credibility, she says the incubator CEO can tell its story with the most passion. “That’s why you will end up making key calls,” Matlock says.
A successful campaign begins with a feasibility study to assess the incubator’s level of community support, the community’s feelings about the proposed project, the campaign’s potential to raise money, and who key investors should be.
When Evans headed the Entrepreneurial Center’s campaign, his feasibility study included interviews with more than 35 business leaders and public officials in Birmingham to obtain their perceptions of the center, Matlock and her staff; their sense of the incubator’s stewardship of its existing funds and its potential to use campaign investments successfully; and their thoughts on key issues affecting the region’s growth.
The feasibility study also identified potential investors and characterized the conditions under which they would be willing to invest. A report based on the study’s findings concluded that “the vast majority of those interviewed would make a multiyear investment, especially if the campaign is positioned as a one-time fund-raising effort designed to elevate the Entrepreneurial Center to the point that it could serve more tenants and become self-sustaining.” This type of information can be critical when crafting the campaign message.
You’ve probably told your clients a million times: You have to spend money to make money. The same is true for capital campaigns.
Expect to pay between $15,000 and $30,000 for a feasibility study by a professional fund-raiser. And that’s before the actual fund-raising begins. Once the campaign launches, expect to pay a consultant 3 percent to 5 percent of the campaign goal to manage the campaign. (Note: It’s against the code of ethics of the Association of Fundraising Professionals to charge a fee based on a percentage of charitable contributions. Rather, fund-raisers charge an hourly rate for time they spend working on a campaign. According to Stein, on average, those fees typically correspond with the percentages provided above.)
In addition to consultant fees (or staff time, if incubator staff manage the campaign), expect to devote one staff person to support the campaign manager. At BTC, one staff member provided 20 hours of campaign support a week for about a year. Matlock hired a support person who worked full time for nearly six months, switching to part time as the campaign wound down.
Incubators that choose to manage the campaign without a consultant should expect the campaign manager – whether it’s the incubator manager or a volunteer – to work on the campaign for 20 to 40 hours a week for six to 18 months.
Where do the resources come from to cover these expenses? The Entrepreneurial Center budgeted campaign costs into its operating budget over a two-year period. “It was our feeling that we did not want monies raised from the capital campaign to pay for the consultant, that it would need to come from our operating budget,” Matlock says.
Cattey’s board, on the other hand, considered consultant fees a project cost. “Basically, we said we’re going to raise $3 million, it’s going to take a year to do it, and it’s going to cost to do it, and that would come out of the proceeds of the campaign.” BTC paid for its campaign feasibility study with cash reserves.
After conducting a feasibility study, the next step is to develop a list of prospective donors, which should include a mix of private and political/public entities. By far, most prospects are private entities that do not have a financial relationship with the incubator.
Gjovig went directly to the entrepreneurial community to help his staff develop a prospect list. Entrepreneurs not only helped develop the list, which included successful entrepreneurs like themselves, but also gave to the campaign.
“Successful entrepreneurs really do care about the next generation of entrepreneurs,” he says. “They remember the days when resources were scarce, and they want to develop support to help the entrepreneurial community increase chances for success.”
The entrepreneurs who invested in Gjovig’s campaign were typically between 50 and 75 years old; had launched and run successful, high-growth small businesses; and were “in the prime or harvesting time of their careers,” Gjovig says.
Once you have identified prospects, it’s time to go calling. When approaching potential investors, think first about the prospect and what that individual or organization stands to benefit from supporting your cause.
According to Stein, private organizations rationalize investments differently than public organizations. Private-sector contributors want to see a return on their investment. “They’re not investing out of altruism, but enlightened self-interest,” he says. Law firms, accountants and banks likely want to have opportunities to interact with clients at the incubator. Utilities will invest because they want to strengthen the local business environment. “These companies are going to graduate, buy power and turn meters,” Stein says.
Public-sector prospects, on the other hand, are interested in creating jobs and generating tax revenues. An incubator that wishes to launch a capital campaign must demonstrate the impact of its past services. In Matlock’s campaign feasibility study, community leaders noted the center had become “incredibly effective” and a national model, creating a positive environment for growing companies and jobs in the Birmingham area.
Karl LaPan, president and CEO of the Northeast Indiana Innovation Center in Fort Wayne, Ind., is raising $7.5 million to build a new incubator facility. LaPan says some of his supporters gave because they want their grandchildren to have good employment opportunities locally, and they believe the incubator can help create a future that will keep young people in Fort Wayne.
“We’re at 83 percent of the national average for wages here in Fort Wayne,” LaPan says. “You can’t shrink yourself to greatness.”
And some people give simply to network with high-profile individuals, because they have no other access. “I had a couple of people put in $5,000 a year [for five years] just to have the opportunity to have access to John Kane of Cardinal Health and Brit Kirwan of OSU,” Stein says.
When you ask a prospect for an investment, request a specific dollar amount by using a formula approach, by benchmarking commitments made to other incubator capital campaigns, or by disclosing commitments made by prospects’ competitors.
“It’s critical to ask for a specific amount and to get your lead investments first,” Stein says, explaining that the “ask” should be commensurate with the potential return for the prospect or the prospect’s stature in the community. Once you know what your highest-level investments look like, it’s easier to see what sort of mid- and low-range investments you’ll need to secure.
For banks, the amount might be based on assets. “If the biggest bank in town is [pledging] $25,000 a year, based on assets I’ll ask a bank with half the assets for $12,500,” Stein says. For law firms and accounting firms, the request might be based on a formula that multiplies the cost of a firm’s average billable hour per partner by the number of partners in the firm.
It’s helpful to emphasize peer commitments, Cattey says. “If we went to a law firm and had a contribution in hand [from another firm], it was pretty easy to tell the prospect the competition down the street has committed at this level and that we were confident they would want to do that as well,” he says, explaining that firms typically do not want to appear less effective or influential than their competitors.
Cattey says it’s also important to make it clear to prospects that the funds you’re requesting are not for operational expenses, but for capital expenditures. “There are hundreds of other competing organizations knocking on the same doors asking for funds and in almost all cases, they are [looking for] operating dollars,” Cattey says. Capital expenses are likely to be more appealing because prospects don’t want their support to become an endless obligation.
However, Stein believes it is possible to secure funds for operating expenses if it is clear to investors those funds will enable the incubator to become self-sufficient in the future. (As mentioned previously, Gjovig secured some operating funds as part of his capital campaign.)
There is always the chance some pledges won’t be fulfilled; 17 percent of BTC’s pledges fell through. On the other hand, the campaign also exceeded revenue estimates. Cattey suggests setting aside some money as a reserve against losses. Stein recommends using signed, five-year commitments that are subject to annual approval mandated by Financial Accounting Standards Board regulations.
Another thing to consider is the cost of keeping the money you raise. Cattey said he and his board didn’t realize that investors would want to see the project begin before all pledge commitments were in. BTC borrowed $2 million to begin construction before it had collected all pledges. “We got to the point where the final bill came in and we still had pledges outstanding,” he says. All told, Cattey says the “cost of money” over the five-year period for which he secured campaign commitments was approximately $500,000. “That cost of money has to be factored into the project costs,” he says.
No matter which prospect you’re trying to woo, don’t forget that your core activity – helping entrepreneurs – will be an easy sell for some.
LaPan initially believed a tough economy would make raising money more difficult, but instead it became his incubator’s greatest opportunity. Huge job losses and an overdependence on manufacturing in Fort Wayne convinced key political and community-oriented entities that a vibrant incubation program could be a cornerstone in a diversified economic community development strategy.
“Our fundamental message is the importance of creating higher-quality, higher-paying, higher-potential jobs in Fort Wayne and Northeast Indiana,” he says. “[These investors] recognize the community has to have what young people are looking for, and they see the center as integral in creating the ability to attract that kind of talent in the future.”
Printed fund-raising materials provide comprehensive information about an incubation program and its capital campaign that prospects can read at their leisure. These materials also project a professional image for the incubation program. Karl LaPan, president and CEO of the Northeast Indiana Innovation Center in Fort Wayne, Ind., says it’s worth budgeting and spending the necessary funds to hire capable graphic designers and to print high-quality, high-impact materials. “The campaign has to tell a story,” he says. “It has to strike at the core of what will move donors to act.” Effective materials don’t come cheap, however: Expect to pay between $30,000 and $50,000 for a $5 million campaign.
A capital campaign’s marketing brochure likely will contain the following elements:
Keywords: budget -- incubator, consultant, financial management -- incubator, funding sources/fundraising -- incubator, partnerships -- organizational/corporate
Phone: (740) 593-4331
Fax: (740) 593-1996
PO Box 959
Athens, OH 45701-1565