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No substitute for good advice: At Boulder Technology Incubator, custom-made teams are key

by Andrea Gibson

February 1999

It's always challenging to sum up success in one sentence, to say succinctly why someone achieved excellence or something became a hit. Jerry Donahue doesn't have to think for long, though, when you ask him what made the Boulder Technology Incubator (BTI) the 1998 NBIA Technology Incubator of the Year. "Our hallmark is putting good advisors around companies," he says, without pause.

Paul Ray, CEO of Image Guided Technology Inc., one of BTI's public graduate companies, agrees. "What strikes me about BTI is it has its tentacles and support throughout the community," he says. The incubator has drawn to itself an exceptional group of directors and advisors who provide detailed advice to companies and support the incubator in myriad ways.

The community, in turn, has become a beneficiary. BTI's clients from its two facilities generated revenues of $125 million in 1997 and have created more than 125 jobs in the Boulder-Longmont area. The incubator has helped client companies raise more than $73 million in third-party investment capital.

Since BTI's inception in 1989, more than 50 companies have graduated, creating nearly 700 jobs. All told, the incubator has had a $300 million impact on direct and indirect jobs in the region, according to Donahue. About 80 percent of the incubator's clients graduate, and 80 percent of those have a positive fund balance when they leave. Four of the companies have gone public: Bolder Technologies, Coral Systems, Requisite Inc. and Image Guided Technology.

Promising start

BTI, which opened in 1989, grew from a feasibility study commissioned by the Public Service Company of Colorado. At the time, Donahue recalls, Boulder didn't have the booming economy it has now. The energy company – supported by other interested entities, including the University of Colorado and Ball Aerospace & Technologies Corp. – suggested that the community needed a formal business development entity, according to Donahue. Among other things, the study predicted an incubator would be a good tool to improve the economy. Incubator supporters chose the technology focus for several reasons: The Boulder area was home to several university and federal labs that focused on technology innovation. Also, supporters felt that science- and technology-based businesses would bring higher-paying positions to the community. Finally, even though the economy was lagging, there were some wealthy individuals in the area, many of whom had made their fortunes in the technology field. BTI founders thought those individuals would invest in new technology companies to create more jobs.

The sponsors hired an executive director, Robert Calcaterra, who had a strong technology background to run the incubator. Funding was not hard to find, as there was a groundswell of support in the community for the incubator project, Donahue says. The long list of public and private benefactors included Ball Aerospace, Colorado Advanced Technology Institute, Public Service of Colorado and U.S. West Advanced Technologies. "It got off to a resounding start without any track record but with an anticipation of a track record," Donahue says.

There were some initial opponents to the business incubator idea, according to Donahue. Some private business consultants thought the incubator would compete with them for clients "and that public dollars shouldn't be put into something that was potentially competitive." But that problem never materialized, he says, and many of those early critics now serve as advisors to the incubator.

BTI's director also noted that being a nonprofit organization raised some eyebrows. Though the 501(c)(6) status offers the incubator more funding avenues, some people don't understand how a nonprofit organization can best prepare companies for for-profit ventures. "That often doesn't ring true with some people in the business community, including some of the entrepreneurs," Donahue says. "They see it as a conflict of interest of sorts." As the incubator developed a track record of successful companies, Donahue was able to offer a counterpoint to that argument.

University of Colorado involvement, which the feasibility study predicted would materialize, was slow in coming, Donahue recalls. While the university wanted to work on business incubation projects over time, the business community wanted to move quickly, he says.

From the start, the incubator drew dozens of prospective entrepreneurs, even without a formal marketing strategy. Donahue explained that because the incubator was unique in the area, and the economy wasn't strong, there was an existing, pent-up demand for BTI's services. About 120 businesses applied for entry into the incubator program, 12 of which made the cut.

Despite its impressive start, the incubator fell on hard times in 1991 and 1992. The financial model for running the incubator was imperfect, Donahue says, and BTI's money troubles earned it some bad press. How could an incubator that can't make ends meet help companies turn a profit? critics asked.

Donahue, who had held executive positions at three medical firms, served as a pro-bono consultant to BTI's board of directors in the fall of 1992. He conducted an economic study that proved that the incubator boasted some good results. "Even the first generation of the incubator did better than it got credit for," he says. The economic impact study, which earned some press in the Boulder-area media at the time, marked the end of the incubator's bad news. Donahue officially joined the incubator staff as its executive director in January 1993.

Dual community coverage

BTI's pervasive reputation draws companies from as far away as New York, Washington, Wyoming and New Mexico, Donahue says, but it primarily serves the immediate community. To do that BTI has to be in two places at once. Though born in Boulder, a few years later it moved to Longmont, about 15 miles away, to a 10,000 square foot facility that includes assembly manufacturing capabilities. Until two years ago, when BTI established a second facility in the University of Colorado's research park, the incubator had a fairly low profile in the city whose name it bears, Donahue says.

The Longmont facility, which serves as the headquarters for BTI, includes a lab area, light manufacturing-assembly floor space and office suites. It's located in the Pratt Industrial Park near Maxtor, Seagate and other major corporations. The Boulder facility is located in the U.S. West Advanced Technology Building on the campus of the University of Colorado. It offers offices and cubicle space and amenities such as Ethernet connections, video conferencing, a board room with audio-visual equipment, a health club and a full-service cafeteria.

Asked why BTI has put down roots in two communities, Donahue explained that there's a lot of job migration between the two locales, both within Boulder County. But Longmont and Boulder have separate identities, Donahue says, and the incubator needs a presence in both places to effectively serve those communities. Each facility draws different types of clients, and each community has its own set of politics. While Longmont, a politically conservative city, is eager to grow more business, Boulder, a liberal town, has been trying to cleanse its system of low-paying jobs. The university there, now fully invested in the incubator, uses it to find commercial applications for technologies and as an educational tool for student entrepreneurs.

The Longmont facility runs at about 80 percent occupancy, while the Boulder facility is overflowing. Clients spend about two years on average at the incubator. Though the occupancy level is high at both sites, BTI doesn't have enough space to generate cash flow on its facilities and so doesn't charge clients rent based on square footage, Donahue explains.

Incubator clients, public moneys, corporate donations and professional service firms fund BTI. Clients, who number between 15 and 18 businesses at any given time, contribute about one-third of the funding. Incubator businesses pay $500 per month on average for services regardless of how much space they occupy (BTI is too small to get the cash flow it needs from renting on a square-foot basis). BTI also gets support through holding equity positions in its client firms, which also allows the incubator to charge lower monthly fees and keep company cash flow up. Other contributors include public entities like the Colorado Advanced Technology Institute (the governor's technological development and promotional arm in the state), the county and the cities of Longmont and Boulder, as well as storage technology companies, private firms, banks, and large companies such as Ball Aerospace.

Besides seeking routine pledge donations, Donahue also works on a contract basis for corporations, helping them to develop innovative small businesses within their larger companies. "So it's kind of an in-house incubator for them," he says. This makes up the final piece of the funding pie.

The team players

It's the team of employees and advisors that make BTI what it is today. The incubator employs five and a half staff members who cover both facilities, which can be a challenge. Dave Riegel, executive vice president, coordinates entrepreneurial development and training programs, performs initial screening of prospective clients, manages the admissions process and works independently with BTI clients. Two office managers – one each at the Longmont and Boulder facilities – oversee scheduling of conference rooms, maintenance of computer databases, management of teleconferencing and word processing, and the incubator's Web site. A receptionist sets up conference calls and meetings, sends out materials for board meetings, organizes mailings and answers the phone. The incubator staff also includes one intern from Central State University in Wilberforce, Ohio, who serves as a research associate.

A 34-member board of directors, composed of community business leaders, oversees BTI. Dick Salberg, president of First National Bank of Longmont and chairman of the Economic Development Association of Longmont, says board members are active in incubator governance and take on responsibilities such as fundraising. The board tries to provide direction to the incubator without micromanaging the organization. "It's not just a rubber-stamp board," he says.

The exceptional professional advisory team on which Donahue says the success of the incubator lies is the third leg of the team. R.C. Mercure, CEO and chair of client company CDM Optics Inc., which specializes in digital imaging systems, and a member of BTI's board of directors, calls the advisory teams "blue ribbon," and says that advisors offer real world, sometimes critical advice for new companies. "This is very valuable to the entrepreneurs because they have a sounding board," he says.

BTI has been successful in finding people in the area willing to serve as advisors not only because the incubator is situated in an affluent community, but because the program offers these advisors a chance to get involved on the ground floor of a growing company, he explained. Some of these advisors come straight from BTI's board of directors Donahue tries to get as many board members as possible to serve as advisors. Some advisors wind up serving on the company's board of directors when it graduates from the incubator or even investing in it.

Though investors can get a heads-up on a good client through the advisory program, many professional advisors also volunteer their expertise because they get a great deal of satisfaction from watching small companies grow, Mercure says. "For business people, they like to help people because (they) were helped," he explains.

Finding BTI clients

There are always companies vying to get into BTI, in large part because it has made a concerted effort to keep the program and its accomplishments in the public eye. The incubator keeps an up-to-date, informative Web site and hosts a lecture series. "One of the biggest draws is we run some really good events," Donahue says about marketing the incubator. "We always have a speaker who's a nationally known person." In addition, a public affairs firm donates time to BTI, landing the incubator companies in the news almost every week, Donahue added. This helps BTI draw better clients, volunteer advisors and investors.

A constant flow of start-up companies presents BTI with their business plans. The incubator has a rigorous 60- to 90-day screening process for prospective clients, accepting just one out of every five applicants. Riegel and Donahue make the initial assessment on incubator applicants, who also must gain approval from an eight-member executive committee and the full board of directors. Evaluators look for the following criteria: innovative technical ideas; legal patent protectability; product feasibility without undue risk; technical knowledge and edge; market niche and understanding of market; broad application base; growth and job potential; adequate start-up funds; financial pro forma statements; professional experience and education; recognition of marketing, financial and management needs; community benefit/awareness; and ecological benefit.

Donahue says BTI is looking for entrepreneurs who have potential to become lead management in their growing companies or, if they can't serve in that capacity, have the flexibility and savvy to take the role best for them. As BTI's hallmark is placing a team of advisors around its incubator clients, applicants also must be receptive to learning, he says.

The incubator receives many applicants from the scientific community, so another big question in the screening process is whether a prospect has scoped out the market adequately before making its business pitch. "We're looking for some understanding of the market, that they're not going to develop a product or service in a vacuum," Donahue says.

Though BTI never planned to focus on information technology, the incubator has drawn its share of clients and applicants in that field. "When you do a good job for one or more companies in any of those (technological) areas, and we've had a lot of software companies ... it tends to draw others," Donahue says. BTI also attracts biomedical and environmental technology companies.

BTI currently has 15 incubator clients in residence and two off-site clients, who receive all the same services that the in-house entrepreneurs do. Donahue prefers to have incubator clients housed within BTI's facilities, because it gives them greater exposure to the incubator's resources. But it's impractical for some companies – such as those needing laboratories, model shops or machinery – to move into the incubator, which is why BTI allows a few affiliates beyond its walls.

Client services

Once in the incubator, a client proceeds through an orchestrated set of steps to make it ready for independence, investment and success. The advisory board is at the heart of this strategy. A company's two- to four-member advisory team typically includes a marketing specialist, a professional from a trade or industry related to the client business who is knowledgeable about the marketplace, and a financial expert who can crunch numbers, according to Donahue.

First, the advisory team helps the client write or refine a business plan, put together a good management team and network with the technology community. Next, the advisors perform "pre" due diligence, making sure a bank or venture capital firm will not run into any surprises when the client applies for funding. Finally, the team will help the client seek and secure capital, which can come from a variety of sources, Donahue says, including loans, profits from sales and services, and angel investors. Some clients have benefited from a strategic partnership with an established corporation. For example, a large office supplier pumped money into an incubator company working on a system to track all commodities for prospective purchases, in order to fast-track the software. The partnership triggered more revenues for both companies.

In addition, BTI has established a small venture capital fund to lend support to up-and-coming businesses. The fund also helps leverage outside investment capital.

Each company that comes in gets a tailored fit of business services, designed for its stage of development and needs. Paul Ray of Image Guided Technology says support in developing the company's first business plan, advice about raising capital and tips about creating a marketing strategy were some of the key ways BTI prepared his company for graduation. The company developed Flashpoint, a surgical guidance system sold to large medical companies. It also sells a commercial version of the product. One of the company's larger commercial customers uses the technology to measure the shape of automobile frames to check for quality control in body shops.

"The basic environment at the incubator is one that really fosters exchange of ideas, not only with the support staff at the incubator, but with other companies there's some cross pollination," says Jeffrey Hiller, chief financial officer of Image Guided Technology.

In 1994, the company boasted $1 million in revenues. Last year, the figure climbed to about $6 million, and the company expects to more than double that in 1998. Employees have grown from a handful in 1994 to more than 100 people today. About 80 of those workers are employed at a Massachusetts facility, where they manufacture the surgical instruments. The remainder of the staff is in Colorado, developing the electronics and software that make the image-guided systems operate, Hiller says.

The company's contribution to the economy hasn't been insignificant, Ray says. Payroll and tax revenues return to the community, and because the company ships 40 percent of its products overseas, it also impacts on the world market, he says. "I think that this company again exemplifies and is a model for the kind of economic impact these companies can have coming out of the incubator," he says.

Lessons and challenges

Though BTI has scored success in the incubator field, current obstacles and future challenges exist. Salberg says that the Longmont area is running out of developable land to accommodate new businesses, so finding a site for new companies will be a challenge. Mercure also noted the space crunch in BTI's Boulder facility and predicted that the incubator will need to find additional, high-quality space with access to local area networks.

BTI also will have to build a larger venture fund to meet the increasing financial requirements of starting a new business, Mercure added. As time goes on, entrepreneurs will find themselves raising a few million dollars to get their companies off the ground.

Donahue says that finding enough quality business opportunities continues to be a challenge. Networking and BTI's rigorous screening should help separate the wheat from the chaff. Once the incubator finds the quality deals, however, there's never enough investment capital to sink into those companies another lingering challenge, Donahue says.

Because the Boulder area has a fully employed work force, those in economic development circles sometimes ask why public funds should continue to be used to support BTI. But the incubator has always responded with the argument that it's raising the bar on wages and quality of life, and is offering the workforce training, Donahue says. That argument tends to win over the critics, he says, and BTI expects to be serving the area for years to come. "The incubator has nothing but a very bright future in technology," he says.

Vital Statistics

  • Year Opened: 1989
  • Site: Boulder facility -- 5,150 square feet; Longmont facility -- 10,000 square feet.
  • Focus: Information, process, environmental, biomedical and communication-related technologies.
  • On-Site Clients: 15
  • Off-Site Clients: 2
  • Graduates: 52
  • Sponsorship: A hybrid of dozens of sources, including Pratt Management Co. LLC, Colorado Advanced Technology Institute, Longmont Chamber of Commerce/Longmont Industrial Park Board and U.S. West Advanced Technologies.
  • Tax Status: 501(c)(6) non-profit organization
  • Jobs Created by Clients: 125
  • Jobs Created by Graduates: 700
  • Mission: To speed technology-based start-up businesses along the early stages of the growth curve.

Keywords: economic development, economic impact of incubation, service provider network, technology incubator

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