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The great eight: Incubator managers reveal eight characteristics that form the personalities of the most successful incubated firms

by Meredith Erlewine

June 1999

Passion: The American Heritage College Dictionary defines it as "a powerful emotion, such as love, joy anger," or "boundless enthusiasm." That just about sums up the average day or restless night of an entrepreneur. But passion is more than a reactionary set of emotions. In fact, many incubator managers consider it to be a prerequisite for entrepreneurial success.

As small businesses command an increasingly larger share of the global marketplace, more and more people are studying the entrepreneurial process. Business professors, Fortune 500 CEOs and incubator managers alike all want to understand what's making these successful firms tick and to somehow systemize the process.

NBIA recently queried member incubator managers on this subject, asking two broad questions: What characteristics have you observed, time and again, to be components of successful entrepreneurs and their firms? And what characteristics repeatedly rear their ugly heads in firms that ultimately fail? Not surprisingly, the answers were opposite sides of one coin. Certain characteristics were described repeatedly as contributors to success; the lack of those very same characteristics consistently described firms that failed.

The results of our poll and follow-up are presented below, distilled into eight habits incubator managers identified as critical to company success. These characteristics have helped experienced incubator CEOs decide which applicants to admit to their incubators and which to send back to the drawing board, and have served as benchmarks for developing curricula and mentoring programs. The characteristics might seem simple at first glance, but after you consider the implications of each, you may want to use them to provide clients with an entrepreneurial reality check.

The firm has an effective management team

The principals of new firms must be committed to building a capable, well-rounded management team that plays off the strengths of its members. The word "team" is key because the principals have to cooperate with each other and agree on the company's direction. The ability to recognize weaknesses in the management team – coupled with a willingness to do something about them – is extremely important as well. "[Entrepreneurs] that have gone on to be successful have, at a fairly early stage, done a thorough skills assessment and come to the realization that they needed others to complete the company skill set," says Rick Ritter, director of the Idaho Innovation Center in Idaho Falls. "We see some relationship between the time that they come to this decision and the timing of 'success.' The earlier, the better." An entrepreneur who appreciates his or her employees also increases the firm's shot at success: Treating employees with respect and appreciation prevents high turnover rates and helps build a dedicated staff.

The venture has adequate financing

Funding is directly related to a firm's success, and in some cases turns out to be the deciding factor. "While businesses certainly can succeed without big-time funding, sometimes businesses fail for no other reason than insufficient capital," says Jim Currie, vice president of Ohio State University's Science and Technology Campus in Columbus. Many start-ups make the mistake of thinking their products will sell like hotcakes and the cash will come rolling in. "They underestimate cash flow," says Charles D'Agostino, executive director of the Louisiana Business and Technology Center (LBTC) in Baton Rouge. "Those that have adequate capital can bridge the cash flow problems. Firms will move faster toward graduation if they are adequately financed."

As long as a company is on solid footing, the earlier the infusion of capital the better, say most managers. Take the example of 1999 NBIA Incubator Client of the Year ChemFree Corp., for whom financing out of the starting gate made the difference between an idea and a production line. When the firm applied to enter Intelligent Systems Shared Resource Technology Center in Norcross, Ga., its principals had a great idea but not enough money to finance the initial market research and prototype development they needed to bring their parts-washing system to market. The incubator's sponsor, Intelligent Systems, knows the value of getting a company financed early. It agreed to finance those needs, retaining a stake in ChemFree – which is now on its way to being a $5 million company.

The principals are able to focus on a lead product or service

While an entrepreneur may find it difficult to resist the temptation to continue to improve a product or to diversify, staying focused is more important. Entrepreneurs who are able to "freeze development and get version 1.0 on the market" will do better than those who continue to try to add new features or perfect the package, according to Jim Hughes, president of Jim Hughes Advisory Services in Calgary, Alberta, Canada and former manager of the Technology Enterprise Centre in Calgary.

Keeping an eye on a lead product can mean narrowing a focus and sometimes even completely switching gears, depending on what the market demands. Requisite Technology, a former client of Boulder Technology Incubator and 1999 winner of NBIA's Graduate of the Year Award, has made some big changes since forming in 1993. Initially focused on developing automatic procurement software, the firm found itself competing with others who already were experts in the field. Corporate soul searching resulted in a radical change of focus to electronic cataloging – followed by a jump in revenues from zero in 1995 to $2.9 million in 1998.

The principals have a clear understanding of the market and the competition

Many entrepreneurs are so smitten with their own product or technology, they fail to realize that the market may not be so enamored. "They believe that everyone will want what they have at any price they set," Ritter observes. Some entrepreneurs "don't understand why people aren't flocking to them," says Roberta DeYoung, economic development coordinator for the village of Mokena, Ill., and former director of the Chicago Southland Enterprise Center in Chicago Heights. "'What's wrong with them? (the public),' they ask, instead of looking at themselves and their methodology as possibly being at fault."

Entrepreneurs who are starstruck by their own products also may fail to anticipate that others could be way ahead of them. Sometimes that competition is coming from unexpected quarters. "The uniqueness of their device blinds them to the possibility of something better being developed by someone other than themselves," says Pat Hession, incubator project director for the North Shore-Long Island Jewish Health System in Great Neck, N.Y. Hession recalls the fate of a company he helped start that produced a type of microfiche film. "Within a few years all information was being stored in computers and microfiche was no longer used. Our product life was less than 10 years, which was nowhere near long enough to provide any return to Bell & Howell, the company we sold our business to – just in time."

Managers with highly successful companies are bullish on marketing plans for avoiding pitfalls such as these. Lesley Anne Rubenstein, managing director of The Initiative Center of the Negev in Beer-Sheva, Israel, is one. She believes it's imperative for new entrepreneurs to formalize their market research, focusing intensely in two or three potential market niches and to characterize each of those markets (penetration problems, strategy, trends, major players, etc.). Without that kind of research, a company can't know which product to emphasize or how to get it to market.

The principal seeks information and is open to advice and change

To keep on top of the best practices in every area of business, successful entrepreneurs tend to surround themselves with a network of knowledgeable people – other entrepreneurs, service providers and advisors – in order to keep on top of the best practices in every area of business. Bob Calcaterra, president of the Nidus Center for Scientific Enterprise in St. Louis, notes that in his experience, "the better entrepreneurs have a voracious appetite for information....They are very good at narrowing uncertainty and reducing risk by good logic and information research." Paired with this appetite for information is a willingness to use the information to revise strategy as the firm changes and to improve weaknesses as they become apparent.

Calcaterra said that former client Leading Edge Technologies was the poster company for recognizing the value of advice. The principals of the firm, which created a global positioning satellite-based information system for golf courses that helps course managers increase speed of play, "never assumed they knew anything," Calcaterra recalls. "They sought significant amounts of advice from golf pros all over the country....[and] designed the product to the exact specifications that the customer desired." They did the same when problems arose. Qualities such as this helped the 1998 NBIA Graduate of the Year firm grow from two employees and no revenue in 1993 to its current 40 employees and $8.5 million in sales.

The firm has a well-researched business plan in place

"Without a plan, a company doesn't know which way is up or where its focus should be," Rubenstein says. A business plan helps a firm get a grip on many of the other characteristics highlighted in this story, such as focus, marketing and cash flow projections. This holds true even for companies with principals who have been around the business block, so to speak. Take Access, a recent graduate firm of the New Century Venture Center in Roanoke, Va., that continues to reap benefits from the business plan its principals developed while at the incubator. President Todd Marcum says he's always known the importance of a good business plan, but admitted that he wouldn't necessarily have written one if it hadn't been a requirement of the incubator. He says he initially felt his extensive background in advertising and marketing was a sufficient stand-in for a business plan, and that his time could be better spent on other start-up tasks.

"But the incubator made us go through that process," Marcum says, "and now it's a tool that we look back on all the time." The detailed plan has helped the company with everything from marketing to clients (Marcum said their well-researched business plan differentiates the firm from competing advertising agencies) to making the decision to purchase their own building upon graduation.

The principal or principals are good money managers

Being actively involved with the financial dealings of a start-up is important for making sound, informed financial decisions. Principals who are in control of their ventures' books and keep up with financial statements are better able to anticipate cash flow needs. Keeping abreast of the financial dealings of the firm goes hand in hand with frugality, according to many managers. Entrepreneurs need not be misers, Hughes says, but should indulge in "few frivolities and no extravagancies." Hughes suggested that entrepreneurs acquire hard assets only as a last resort: "Beg, borrow or lease specialized equipment or contract out unique projects to specialists."

Bonnie Herron, director of Intelligent Systems Shared Resource Technology Center notes that the principals of soon-to-graduate client software company Corporate Solutions International (CSI) are experts at prioritizing cash expenditures. (The firm, incidentally, was just acquired by ALLTEL Information Systems, a division of ALLTEL Corp., for a "confidential but very big valuation after only two and a half years," Herron says.) "From the start, they made sure their engineers had excellent computers to work on but kept other costs down by limiting the number of direct phone lines, top-of-the-line phonesets and direct Internet connectivity to those who needed it," she explains. "At the same time, they leased a conference room on a full-time basis rather than use one of the shared ones because their customers were big banks who would come for full-day sessions. They wanted to make sure they were never inconvenienced or couldn't schedule a session because of a room conflict."

The entrepreneur is passionate about his or her venture

Finally, back to "boundless enthusiasm." For an entrepreneur to succeed, managers agree he or she must be passionate about the firm's technology, product or service. "They must be motivated to communicate their passion with others," Hession says. To sell a product or service, an entrepreneur's passion must be evident to potential customers, funders and mentors. An entrepreneur also needs to communicate it to his or her family, for passion translates into commitment for both the entrepreneur and the family: Everyone must be willing to sacrifice time together and the entrepreneur must be committed to travel wherever necessary and to work long hours every day of the week. The road to success will require risks and sacrifices; passion sometimes will be the only rope left to hang onto.

The author would like to thank the many NBIA members who contributed to this story by responding to an e-mail survey. In addition to those members mentioned in the body of the story, thanks go out to Wilson Harrison, John Heeboll, Lisa Ison, Marie Longserre, Tom Mancuso, Gus Myran, Don Patrick, Edward Sybert and Linda Yost.

The Technical Sandbox

Many respondents described a characteristic they have observed to be a major component of many firm failures, and they did not mince words: Good scientists too often don't understand how to make money. Managers with tech firms in their programs repeated this sentiment over and over, having seen many promising firms falter due to lack of business planning, management experience or entrepreneurial instinct on the part of the scientist or engineer trying to run the business. Lesley Anne Rubenstein, managing director of The Initiative Center of Negev in Beer-Sheva, Israel, has seen technology firms fail when a manager wanted to focus on research and development with no regard for commercialization and other business and market development issues. William Sheppard, technology counselor at the Southern Technology Applications Center in Stennis Space Center, Miss., described failed-scientists-turned-entrepreneurs in layman's terms: "Most of them never made it to entrepreneurship status. They stayed in the technical sandbox and kept playing around."—M.E.

Keywords: benchmarking clients, coaching clients

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