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Inside the (State) Lines: More States Are Gearing Up to Support Business Incubators

by Jennifer Agoston

April 1998

Findings from the Impact of Incubator Investments study, completed last fall by NBIA and its research partners, couldn't have come at a better time for the Long Island Regional Incubator Task Force (LIRITF). The State of New York assembled LIRITF in February 1996 to review and analyze the high-technology industries on Long Island and to make recommendations for the creation of incubators. Members of the group included economic developers, legislators, investors and incubator graduates.

After two years of analysis and negotiations LIRITF identified the need for incubators in the software, telecommunications, manufacturing, computer services and graphic design industries. Armed with the results of the Impact of Incubator Investments study, LIRITF pleaded its case with the state legislature. In March, Gov. George Pataki announced a $22 million initiative for the establishment of six new incubators on Long Island.

New York is the latest state to step up its support of business incubators, but many other states are also in the game. As a matter of fact, all but a handful offer some sort of assistance. The amount and type of support varies across state lines, but most comes in the form of funding provided directly to incubators to cover costs of feasibility studies, construction or renovations, daily operations or client assistance programs. A few states take a more novel approach, offering tax incentives and even, in at least one case, providing hands-on assistance to organizations developing incubators.

Direct Support of Incubators

In New York, results from the NBIA study were just what LIRITF needed to convince the state that incubation was the answer to their economic development questions. "The state was convinced to do this because NBIA and the [Impact of Incubator Investments study] say that [incubators are] the best way to do economic development," says Pat Hession, LIRITF member and director of the Long Island High Technology Incubator (LIHTI) in Stony Brook, N.Y.

"Incubators provide the fertile atmosphere needed for cutting-edge research and practical application of new inventions," agrees Gov. Pataki. "They are proven vehicles of significant economic development." Until the initiative was announced, New York had provided funding to incubators on a case-by-case basis. Incubators emerged as the answer to the state s question of how it would attract high-tech firms to Long Island and establish it as the Silicon Valley of the East Coast.

For incubation leaders on Long Island, the state initiative is an important victory. "On Long Island there hasn't been much success pursuing federal money because the Island doesn't qualify for many programs," says Hession. "We are neither rural, disadvantaged nor urban." The state has historically been supportive of individual incubators in the area.

The state funding will be used for construction or renovation of four facilities ranging from 6,000 to 50,000 square feet and for evaluating the need for two additional facilities. One of the first to be completed will be the SUNY Stony Brook Software Incubator, a joint initiative between SUNY and Computer Associates, a leading developer of business software (see "Two More for Software," pg. 12).

Incubator leaders in Virginia, like those in New York, also received good news from the state legislature in March. The General Assembly appropriated $1.5 million to start a statewide business incubation program that will provide funding for feasibility studies for construction or renovation or to cover first-year operating costs. The state also turned over a 35,000-square-foot surplus building to a local organization to be used as an incubator.

"We are very pleased that our legislature has recognized that small business incubation is a viable economic development activity to create jobs and new investment in our communities," says Rob Blackmore from the Virginia Department of Business Assistance.

One of the oldest incubator support programs is the North Carolina Technology Development Authority (NCTDA). Funded by the state, NCTDA has assisted 26 incubators since its inception in 1983. Incubators receive an average of $200,000 on a one-time basis for development costs and operational costs in the early years.

"We want to be part of the financing solution, but not the total," says John Ciannamea, NCTDA president. Incubators can also receive financial assistance to cover costs of connecting to the Internet. To supplement the financial assistance, NCTDA is developing a distance learning program, the Entrepreneurial Education Network, which will link incubators located in rural areas throughout the state for training and education programs.

Incubators must submit semiannual reports to NCTDA to demonstrate their performance. NCTDA in turn must request funding every year from the state for its incubator program and other technology assistance programs. So far it has been an easy sell. "[The state has] been pleased with the progress incubators have made," Ciannamea says. It has increased NCTDA's funding each year. Ohio's Thomas Edison Program has grown from four incubators in 1985 to 10 today It has an annual budget of about $2 million. Ohio is also home to an established program that supports technology incubators. The Thomas Edison Program, administered by the Ohio Department of Development (ODoD), has been in existence since 1985. It currently supports nine established incubators and one under development.

Funding is appropriated to Edison incubators every two years on a competitive basis with a maximum award amount of $200,000 a year. Eligible incubators must be nonprofit entities, and a majority of their client companies must be technology oriented. The state looks at the incubator's record of success to determine the amount of money it will receive. Each must provide matching funds from local sources and can use them to cover operating expenses, planning grants, feasibility studies and market assessments. Incubators may not use funds for bricks and mortar.

To monitor how the state's dollars are being spent, ODoD reviews incubator financial statements every quarter and randomly selects incubators for more in-depth financial audits every two years. Based on the success of the incubators it funds, the state has increased appropriations for the Edison Program each year.

Participating incubators agree that the program is valuable. "Not only is it one of the few sources available for operational funds, but it also has resulted in the commercialization of new technologies and new business startups throughout the state of Ohio," says Mike LeHere, director of the Akron Industrial Incubator, which has been partially funded by the Edison program since 1985. Ellen Blahut, director of the Edison Technology Incubator (ETI) in Cleveland, agrees and says the program s support goes beyond the $285,000 ETI is receiving this fiscal year. For instance, ETI has gained valuable public relations exposure to politicians and other influential figures through brochures, reports and presentations made by ODoD.

Supporting technology commercialization is also the aim of the New Jersey Commission on Science and Technology (NJCST), which administers a state-funded incubator program along with two other programs that assist emerging technology businesses. NJCST recognizes "the significant contributions that small and medium-sized technology-based companies make to both technological and economic development," says Gina Boesch, director of the Stevens Technology Ventures Business Incubator.

NJCST's Technology Business Incubators program, which supports six existing incubators and two others in the planning stage, has an annual budget of $350,000. Each incubator receives grants ranging from $30,000 to $60,000, awarded each year. Missouri appropriates $970,000 annually to support four Innovation Centers, all of which operate an incubator Each individual Innovation Center determines how much of the state funds it will allocate to the incubator.

"There are stringent guidelines for an incubator to receive this funding,” says Boesch. All companies must be technology-based and all companies' principals must be employed full-time by the firm. Grant applicants must also demonstrate that the program has been successful or has strong potential to be so. To monitor the performance of incubators receiving grants, the state conducts annual reviews of financial statements.

Colorado and Hawaii also support technology-based incubators through established statewide programs. The Colorado Advanced Technology Institute (CATI), which is funded largely by the state, provides $30,000 to $60,000 a year to the Boulder Technology Incubator in Longmont, Colo., and $200,000 a year to the Colorado Bio/Medical Venture Center in Lakewood, Colo., which CATI helped establish. Incubators must provide matching funding from other non-state sources. The High Technology Development Corp. (HTDC), an agency of the state of Hawaii, manages the Maui Research and Technology Center and the Manoa Innovation Center, both in Hawaii.

Not all of the nation's statewide incubator programs are technology focused. In Wisconsin, the Community Based Economic Development Program (CBED) assists those incubators that create jobs and businesses in distressed areas. CBED, which was initiated in 1989 and awarded its first round of funding the next year, has provided a total of more than $2 million dollars to incubators throughout the state.

CBED awards grants on a competitive basis once a year. "The programs must show the need, the success they have, the job creation and people they will help," says Dave Loomis, president of the Wisconsin Business Incubation Association and director of the Coulee Region Business Center. An incubator can receive up to $10,000 one time for a feasibility study; up to $30,000 a year for up to five years for incubator management and operations; up to $100,000 a year for up to two years for construction or building rehabilitation; and up to $50,000 for up to two years for the establishment of a revolving loan fund. Recipients must provide a 50 percent match either in hard cash or in-kind support.

To ensure that funds are being spent as intended, CBED conducts on-site monitoring of each grant recipient. It also keeps a close eye on the success of CBED-funded incubators through regular performance surveys. Other states with some level of state support are Indiana, Missouri and Pennsylvania. The support is not necessarily direct but may filter through another program.

Informal Yet Useful Programs

Not all states have formal incubator programs, but if one looks closely enough, the support is there. In Oklahoma, for instance, the state offers tax incentives for organizations operating incubators as well as their client companies. The incubator organization is exempt for up to ten years from paying state income tax on fees derived from rent, business assistance services or any other services provided to tenants. To be eligible, the incubator must first be certified by the Oklahoma Department of Commerce. "Every case is considered individually," says James Johnson, economic development specialist with the state of Oklahoma. Usually, though, the state looks for proof that services are being delivered, facilities are adequate and program managers have expertise that is being used to help tenant firms. Incubator client companies are exempt from paying state income taxes for five years.

"Just as incubators exist to serve as a helping hand to startups, we felt that anything that would add to their bottom line would help them," says Johnson. "The financial impact on the state revenues [of sacrificing incubator and client-company tax revenues] will be minimal."

The tax incentive has been in effect for five years, and, although it's a bit too soon to tell how much it has helped incubators and their companies, early indications say it has been a success. "My best tenants tell me this has saved them from $5,000 to $9,000 a year in state taxes," says Larry Atteberry, director of business assistance at the Pioneer Technology Center in Ponca City, Okla. Atteberry says as a result, the incubator has attracted "some very strong tenants."

Pennsylvania's Ben Franklin Technology Partnership is funded by state taxpayer dollars and administered through four Ben Franklin Technology Centers. Incubators may receive funding for feasibility studies or business assistance services from the Center in their region.

Incubators in Mississippi receive more than just financial assistance. To complement its $3 million loan program, which has provided at least partial funding to all 11 incubators in the state, the Mississippi Department of Economic Development provides hands-on assistance to organizations and communities developing incubators. "We hold their hand all the way through the process," says Jeff Dukes, the department's senior special projects manager. The department helps incubator developers identify funding sources beyond the state and conduct feasibility studies. It also plays a role on the board of directors of most programs once they are up and running.

In Georgia, all eyes of economic development officials are on the Advanced Technology Development Center (ATDC), the only high-technology incubator funded entirely by the state. "We are considered an economic development initiative for the state of Georgia," says Shawn Grover, senior business consultant and manager, Faculty Research Commercialization Program at ATDC. ATDC operates three facilities, two on the campus of Georgia Tech in Atlanta and one in Warner Robins.

"ATDC was a visionary concept," says Dwight Holter, ATDC executive director. In the first few years, the state provided modest funding. Early success paved the way for a gradual increase in support and partial funding of a new facility. The state keeps a close eye on its investment. Each year ATDC compiles a report card of its financial status to demonstrate how funds are being used and how much revenue ATDC companies are generating for the state. The legislature also conducts a more comprehensive review of the program every five years.

So far, the state is happy with ATDC's performance. It has recognized a 12 to 1 return on investment in tax revenues. "The satisfaction level is indicated by the continued level of funding and by the governor's initiative and the legislature's support for three new locations," Holter says. ATDC plans to open new facilities at Georgia Tech, the University of Georgia and at a joint Georgia Tech/Emory University location, all of which will be state initiatives.

Pending Legislation

Later this year, legislators from the state of Louisiana will be invited to take a firsthand look at how business incubation works. In honor of a governor-declared Business Incubation Day, incubator managers will invite their legislators to view their program, visit client companies and their employees and meet with incubator sponsors. The Louisiana Business Incubation Association (LBIA), which will sponsor the day's activities, will coordinate state-level media to attend the events. "If it goes according to plan, when [legislators] next meet in session they should have some common experiences, and we hope to leverage that into some additional support for business incubation," says Mike Hefner, executive director of the Enterprise Center of Louisiana in Carencro and chairman of LBIA.

Louisiana is one of a number of states with a bill before the legislature that would provide support to business incubators. Two years ago, at the urging of several business incubation leaders there, the secretary of the Department of Economic Development (DED) agreed to sponsor a bill that would allocate state funds for the construction or expansion of business incubators. "He agreed to help, as he was convinced that incubators work,” says Charlie D'Agostino, director of the Louisiana Business and Technology Center (LBTC) in Baton Rouge and a chief proponent of the bill. The Louisiana Business Incubator Bill passed, but lawmakers never appropriated funding.

Some incubators have received onetime state appropriations from the DED, based on the guidelines proposed in the bill. LBTC, for instance, used $100,000 in state funding, in addition to matching funding from other sources, to renovate 15,000 square feet of space. But most incubators have had to look to other sources for money.

Special state legislation has funded the construction of various incubator facilities in Minnesota.

Not far away in Alabama a similar situation has unfolded. The state's Small Business Incubator Act, which Louisiana used as a model for its own legislation, was passed four years ago but hasn't been funded since year one. "There have always been other competing interests [in the legislature]," says Jim Byram, chairman of the Alabama Business Incubation Association (ABIA) and director of Bessemer Business Center, Bessemer, Ala.

Last year three incubators received state money targeted specifically for them, but Byram wants all incubators to have access to funding. "We're trying to get back to a competitive situation where state funding would be available to any community that has done its homework and can provide matching funds," he says. The legislature is currently considering a bill that would provide $1.5 million in grants to incubators for capital outlay, construction, renovations and operations.

Legislators in California and Illinois are also keeping incubator managers on the edge of their seats. California lawmakers are considering a bill that would provide funds for incubator development and client company financing. The bill has passed the assembly and is awaiting approval in the senate. Although the amount at which the legislation would be funded is still unknown, last year a similar bill allocated $500,000 for the establishment of seed capital funds for client companies.

In Illinois, Roberta DeYoung, director of the Chicago Southland Enterprise Center, has convinced her state legislator to reintroduce in its next session a bill that would establish a fund for capital improvements of incubators in Illinois. Legislation was passed last year but never enacted.

It's been a long haul for supporters of these bills, but they're not giving up yet. In Alabama, the ABIA has turned to outside sources including professional lobbyists to help push its bill through the legislature. In Louisiana, Business Incubation Day and a statewide workshop that will educate politicians and economic developers on what business incubation is will provide awareness. In Illinois, DeYoung is encouraging more cohesiveness among incubators in the state to strengthen support for the bill. "The job [of garnering support] would have been a lot easier if there was communication," she says. "I'm working on that, though."

Thanks to the members noted in this article and the many others who answered our e-mail questionnaire and helped us gather information for this article.

Last year six incubators in California received grants ranging from $50,000 to $100,000 from the California Trade and Commerce Agency The California legislature is currently considering a bill that would provide similar funding this year.

Getting the State's Attention

Convincing lawmakers to pass and fund legislation can be a daunting process. Here are some tips from those who have been there and done that (and some who are still doing it).

Get to know your legislators

Seek out your state representative and get to know him or her on a long-term basis, suggests Roberta DeYoung, director of the Chicago Southland Enterprise Center in Chicago Heights, Ill. "Become very political and get legislative people on your side," agrees Pat Hession, president of the Long Island High Technology Incubator in Stony Brook, N.Y.

Educate legislators on business incubation

Let legislators know what business incubators are and how valuable they can be. Louisiana is taking this approach by hosting its statewide Business Incubation Day. "Most legislators don't know what an incubator is and an educational process is needed," says Rob Blackmore of Virginia's Department of Business Assistance.

Keep a record of your program's success

Most incubators stress to their client companies the importance of keeping good records. If you're rallying to enact state legislation, follow that advice. "It pays to keep a good impact statement on your incubator so you have statistics to back up your statements of success," says DeYoung. Also, utilize data from NBIA and existing studies when you can, suggests Blackmore.

Network, network, network

Talk to everyone you know about what you're doing. And don't stop there. Expand your network of contacts. "If you don't leave the office and make new resources you will eventually tap out the ones you have," says Yvette Berke, president/CEO of Adapt Consulting Inc. and developer of several incubators. She also suggests looking to peers for advice when facing challenges.

Be patient and persistent

A dose of patience will help when dealing with lawmakers. The process can be drawn out and often unpredictable. "No matter how many times you think something is going to go down one way, invariably it doesn't," Berke says. If it doesn't, don't give up. "If you don't get the money this year, start building a coalition to go after the money next year," Blackmore says.

Keywords: advocacy, budget -- incubator, economic development, economic impact of incubation, funding sources/fundraising -- incubator, impact of incubation, stakeholder development, stakeholder relationship management, effective communication, networking

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