by Sarah Dahlberg
Incubation is an art – that much every incubator manager knows. But can it be a science? The Colorado Venture Centers (CVC) believe they have made it one, or at least gotten pretty close.
Starting with a goal common to incubation programs everywhere – helping start-up firms succeed – CVC has developed a system to guide its companies through the early growth stage. The Investment Track program, winner of the 1999 NBIA Innovation Award at NBIA's 13th International Conference on Business Incubation in March, provides all CVC clients with an easy-to-understand process for turning good ideas into successful business opportunities. Essential to the program is CVC's Venture Guild, a group of nearly 140 experienced entrepreneurs, investors and management professionals committed to building strong businesses.
"From my experience, the basis of a company's success is experiential input from people who have been around the block and done it before," says CVC's CEO Jonas Kiken. "The heart of the program is people."
Since Investment Track's creation two years ago, five companies have graduated – each of them earning at least $400,000 in capital financing. What makes this rapid graduation and financing possible? According to Kiken, it's a systematic procedure with hands-on advisors.
The Investment Track began in 1997 when two Colorado incubators – the Colorado Biomedical Venture and the Colorado Innovation Foundation – merged to become the Colorado Venture Centers. With Jeffrey Nathanson as executive director, the newly restructured incubator staff set out to develop an exceptional business assistance program that would increase the number of local jobs and boost the tax base.
Nathanson, along with Gary Smith of the University of New Mexico business school, implemented what would become the Investment Track and dreamed up the idea of the Venture Guild. With support from Jane Evenson, a marketing professional from Evenson and Associates, and Kiken, the incubator assembled its client assistance program whose focus is step-by-step business success.
Through the Investment Track, Kiken says CVC quickly became a sort of virtual incubator. Although today some of the incubator's nine clients are located in-house, CVC focuses less on the client's physical demands and more on business strategy.
"What clients need are milestones to meet and experts to help them meet the milestones," he says. Venture Guild members fill the bill by teaching clients how to be effective businesspeople. Each client has a strategic team that hones in on the company's strengths and refines and improves any weaknesses.
A company's journey through the Investment Track begins with three major processes: preliminary assessment, formal application and acceptance into the program. During preliminary assessment, companies submit a Venture Profile – a two-page summary detailing the company's opportunity, position, market, management, achievements and financial status. This gives CVC a basic understanding of the company's readiness to participate in the program. The incubator looks for companies with business plans and opportunities for patents, copyrighting and trademarking. Companies with sufficient initial thought and preparation will be invited to apply.
During application, the company submits its business plan for review by a CVC "censor" – a Venture Guild member with experience in the company's industry. This censor then determines if the business plan will work, and why or why not.
Next Kiken and the incubator's client services director, Ron Baird, assemble a team of five to 10 Venture Guild members with experience in every facet of business necessary to the company. This group, which includes anyone from marketing experts to attorneys, holds a 90-minute meeting to evaluate the company and to determine its strengths and weaknesses. It issues a preliminary judgment and sets up a future meeting at which the company can provide additional materials needed for evaluation.
At the next one-hour meeting, the group reviews all the information and determines if the business should be admitted. If it's in, CVC assigns as potential mentors and coaches those Venture Guild members who are interested in the company. The new company and its team leaders determine the company focus and formulate action steps and goals. Finally the client is presented to the Board of Directors for acceptance into the Investment Track. If approved, the company must sign a contract of terms.
As part of the program, CVC assumes 5 percent of every accepted company's stock. Half of that stock goes to the incubator; the remaining half is distributed among the five to 10 members of the Venture Guild assigned to the company. Each team member receives a stock percentage proportionate to the amount of work he or she contributes to the company. Kiken says the CVC's client services director facilitates most of the day-to-day operations, calling in guild members for 90-minute advisory sessions whenever needed.
"We're investing in them, in their future," Kiken says. Although many clients balk initially at the 5 percent, he says they always come around once they understand the value they receive. The rigorous process virtually guarantees client success.
"We have this system down to a science," Kiken says. "Once we explain the process, I don't hear any boos from the gallery."
Kiken says the percentage of stock may be higher than 5 percent if more-than-average work will be invested to bring a company to portfolio status. For example, CVC currently has a 30-percent equity agreement with one client. Eventually, CVC's equity position with its clients could generate revenues to support the incubator and the Investment Track. Currently, the incubator's budget (which includes the cost of the Investment Track program) is approximately $250,000, funded mostly by the Colorado Advanced Technology Institute (CATI) and individual contributions and grants. This budget covers the salaries of the four full-time incubator staff, utility costs and rent. The only income source is a $250 monthly fee assessed to cover the services guild members provide.
The incubator aims to graduate all clients within one year – an intensive growth and development period during which the company receives structured support from Venture Guild advisors. Each month, the client must meet specific milestones to help prepare for upcoming presentations to investors.
First the client perfects its business plan, Kiken says. Next the company thoroughly researches its marketplace and competition. After three to four months, each client must have a full-time management group in place, including staff to handle sales and marketing, financial control and operations, and research and development. Kiken says this management often comes from the guild or from outside. Frequently, the business owner serves as the operations manager. Before reaching portfolio status, the company formally enters the marketplace with a product launch and initial sales.
The final step is the client's search for investments, a quest that can be frustrating for a growing start-up company. Banks often won't consider companies with fewer than three years of profits, and venture capitalists, who don't want in until a company is ready for $1 million or more in investments, frequently jockey for majority control of the business.
"Venture capitalists either cancel out the entrepreneur or diminish him to a point of frustration," Kiken says. "That leaves angel financiers, family, friends, peers, customers and strategic partners." Even securing funding from these investors can be difficult, and a team of investment bankers and venture capitalists from the Venture Guild coaches clients to present their firms in the best possible light.
"After about three rehearsals, the client does a dress rehearsal and is ready for prime time," Kiken says. Using connections in the Venture Guild, CVC calls in institutions, private investors and colleagues to consider investing in the company. When the company begins to receive checks, they are considered to be graduates.
Although guild members guide the client through each step, the team does not simply conduct these operations for the company. Instead they help company owners to understand the problems and to fix them on their own.
"We are not going to feed you fish," Kiken says. "We teach you how to fish independently."
The Investment Track's formulaic structure is meant to increase the client's potential for success. Kiken says the program provides companies with four major benefits. First, the use of a censor in the screening process helps determine whether or not the company has the potential for success. Companies without that potential are not admitted, but also are told why. Secondly, the Investment Track ensures the company will have a first-rate management group of seasoned advisors in or known to the Venture Guild. Thirdly, the process helps the company and its new management to package its technology in the most marketable way. Finally, the program establishes a process that thoroughly prepares the company's new CEO to present the company to the financial community.
Since 1998, five companies have graduated from the Investment Track. Each one is still in business and creating jobs in the Colorado area. Although Kiken did not have specific employment figures for the five graduate companies, he says each company follows a typical hiring pattern of 12 to 15 new jobs created in the first year after graduation and 20 to 50 new jobs in the second year after graduation. Kiken is quick to point out that the program is young, though, and the true proof of graduate companies' success will not be seen for several years.
Another major benefit of the Investment Track is the speed at which companies move through the program. By setting a one-year graduation goal and using monthly milestones, each company in the program hits the market quickly.
Of the five Investment Track graduates, each acquired initial capital financing between $300,000 to $700,000. Although Kiken pins these numbers as averages, he says he hopes current clients will secure even higher investments (see "The Right Tools at the Right Time" below).
But companies aren't the only winners in the relationship. Kiken says benefits to Venture Guild members are threefold. In one respect, the Investment Track allows these businesspeople an opportunity to change scenery from a corporate atmosphere to a fast-paced entrepreneurial world. Through their involvement in the new company, guild members have an opportunity to become CEO of a growing company. Members also have the opportunity to invest in companies that could become highly profitable. Finally, guild meetings serve as a networking one-stop shop.
Since June 1998, CVC has been fine-tuning the program to make it even more successful. One of the biggest refinements came in restructuring the qualification process to make each step as precise as possible. From an entrepreneur's initial submission of materials through the auditing and acceptance process, CVC follows a rigorous screening procedure.
Another change implemented by the CVC is the complete documentation of each company's history. By using interns from nearby universities, CVC now records each step in the process – from initial evaluation to the meeting of monthly milestones through the company's success after graduation. Each client has access to this documentation.
But what does CVC view as success? Kiken says CVC looks at two primary factors: number of jobs created and the amount of accrued investment capital. The amount of capital collected demonstrates the financial marketplace's confidence in the company's success. To follow that, an advisory board of guild members (many of whom will have invested in the company) continue to monitor the company's progress throughout the company's life. CVC also uses recruitment to gauge the program's success. Kiken says the incubator's goal is two companies per month.
Perhaps nothing speaks more of the program's success than its national appeal: two of its newest clients are not from Colorado but from Michigan and Arkansas. Kiken attributes this expanding client base to word of mouth – and, of course, the success of CVC clients.
In the end, it's clear the Investment Track is working and showing signs of getting stronger. In only a few years, the program has created many jobs in Colorado and contributed to local economic development. Whether the Investment Track is a science or a well-crafted method is up for debate, but there's no question that the advice and intuition of Venture Guild members is key. Kiken says every person working with a client is an asset to the company's ultimate success.
"It takes a team of brains, almost like a tennis match. Back and forth," Kiken says. The companies will vouch for that. Jack Wheeler of Molecular Innovations, a CVC graduate, knows his company would not be around today if CVC advisors hadn't helped him focus on the most viable product. He says establishing long-term connections with guild members might be the most important factor in start-up companies' success.
"You can't do it by yourself," Wheeler says, "and I still continue to lean on those relationships."
Innovative ideas aren't always enough to get a company rolling. To really take off, a business needs experienced leadership and access to funding – two factors integral to Colorado Venture Centers' (CVC) Investment Track.
Jack Wheeler, CEO of incubator client Molecular Innovations, says the Investment Track played a critical role in his company's growth. During the dispute at the O.J. Simpson trial about tainted DNA, Dr. John Gerdes from the Bonfills Blood Bank conceptualized and later developed a highly accurate DNA diagnostic process which is inexpensive, can't be contaminated, and can be done on-site. But Gerdes couldn't break into the marketplace, and after almost depleting initial U.S. Department of Commerce funding, he approached the CVC for assistance.
During the assessment phase of Investment Track, CVC teamed Gerdes with Wheeler – an industry veteran with 27 years of medical diagnostics experience. Wheeler then determined there were multiple applications for the technology, not just one. Within 10 months the company had secured additional grants and several strategic partners, resulting in close to $1 million in funding and, with introductions from the CVC, attracted $400,000 in angel investor financing.
"Without the CVC, we would not have had a company," says Wheeler, who remains a Venture Guild member.
Finding eager investors was the challenge for Pet Imaging, a Denver business providing MRI technology for pets. Mary Nunnally, vice president of operations, says CVC linked the company with the contacts needed to get the business off the ground – including a major investor who would become Pet Imaging's CFO.
Keywords: benchmarking clients, best practices, client selection/admissions, coaching clients
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