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Business incubation goes corporate: What big business gets out of growing small businesses (besides money)

by Carol James

August 2001

Coca-Cola, H.B. Fuller, Intelligent Systems, Lucent, Matsushita, Monsanto, Reuters, Sony, Sun.

No, we're not just name-dropping. These are the names of some publicly traded companies that tout forays into business incubation programs. Most of them are relative newcomers to the incubation concept. But at least one corporate incubation program has been around for more than a decade: Intelligent Systems Incubator in Norcross, Ga., has been operating since 1990.

Intelligent Systems, a company that operates and invests in early-stage technology companies and once was the largest shareholder in Peachtree Software, developed its formal incubation program in the late 1980s. "There weren't a lot of corporations that were involved in incubation," says Bonnie Herron, director of Intelligent Systems Incubator and corporate vice president and CFO. "It's only been in the last four or five years that I've become aware of [other corporations' business incubation programs]."

Although the corporate model typically involves a private, for-profit company that owns, funds and operates an incubation program, those in the business will tell you that corporate incubation is more than just financial sponsorship. Corporate incubation programs serve their clients with the ultimate goal of meeting one or more specific objectives of the corporation. For example, corporate-affiliated incubation programs may have as goals to spin in innovations or to spin out companies built around their own research, or both. A corporation may want to work an incubation program into its investment strategy, an approach that has worked for Intelligent Systems. Or corporations may have other, more esoteric goals, such as developing a sector of the regional economy. Incubation can meet all of those goals and more.

"Corporate incubation is a different kind of animal," says Jim Robbins, executive director of Panasonic Internet Incubator, one of two corporate incubation programs he has helped start. (His company, Business Cluster Development, develops technology-focused incubation programs.) Corporations "have agendas when they get involved in incubation and it's important to understand those agendas," Robbins adds. "If you understand what the corporation's needs are – innovation, entrepreneurism, exposure to new ideas and new technologies – incubation can play a role."

Corporations operate incubators for reasons as varied as the products and services they deliver. Corporate executives exploring incubation and incubator managers interested in developing corporate partnerships can count on one thing: You won't find a template for corporate incubation. Every program is different.

Pick a model, any model

Intelligent Systems, which creates and grows early stage technology companies as part of its business investment strategy, was incubating companies before its executives even realized it, Herron says. Developing a formal incubation program was not part of any grand corporate scheme. Intelligent Systems Incubator came about as a natural next step after Intelligent Systems sold off some of its companies in the late 1980s, resulting in money and space.

"We were looking for new uses for [existing] resources," Herron says. "What we did well was work with early-stage companies; it was what we liked to do." So the company began to attract start-up companies to invest in and offer them the advantage of its executives' advice and experience. The program, originally called the Shared Resource Technology Center, often worked with companies involved with other incubation programs.

For example, Intelligent Systems invested in some companies affiliated with Georgia Institute of Technology's Advanced Technology Development Center (ATDC); some of ATDC's companies moved into the Intelligent Systems center. "We were [incubating] to use resources in a way to promote the real business of our company, which was to work with new companies that we could develop and increase in value. … Our business was trying to find good companies to invest in," Herron says. By 1990, Intelligent Systems launched its formal incubation program.

The 140,000-square-foot facility includes office, manufacturing and distribution space, and is considered a separate entity within Intelligent Systems' corporate structure. The incubator uses the company's management information systems, telecommunications and other resources, and most of the corporation's 12 to 14 staffers are involved with the incubator in some way.

In a move that also makes use of existing resources and offers investment opportunities, Panasonic Technologies, a subsidiary of Japan-based Matsushita Electric Industrial Co., started an incubation program in 1999 as a way to expand its ability to meet young technology companies and tap into technologies being developed in Silicon Valley. Panasonic hired Robbins to design the program. Robbins came up with a model that enables Panasonic to use existing resources in its Digital Concepts Center (which houses venture funding and global business development units as well as the incubator) to create strategic partnerships with emerging companies. The Panasonic incubator's main focus is to spin in technologies that could be of strategic value to the corporation, says Managing Director Carol Kraus Lauffer.

The incubation program, with sites in Cupertino, Calif., and San Francisco, functions as a research and development unit of Panasonic, but it's more cost-effective and involves less risk than traditional research and development (R&D), Lauffer says. "We're still a part of the company but we're operating differently," she says. "We're outsourcing [R&D] by partnering with these emerging companies."

Incubation also can help a corporation find new ideas from within. An incubation program was born at Reuters, the global information, news and technology group, after Andy Hatcher and two other executives questioned why the company's venture capital fund – aimed solely at investments that will help Reuters in the future – invested in outside companies but not in the people inside Reuters. After seeking advice from many people, and drawing on other incubators' experiences, Reuters established an incubation program that promotes innovation at Reuters by encouraging employees to contribute to the future of the business. "We're very much focused on those companies that are somehow going to help us deliver our own products better, vis-à-vis technology," says Hatcher, Reuters' vice president for new ventures in New York City and one of three incubator managers. Reuters' incubator exclusively admits entrepreneurs from within the firm.

Not all incubation programs are imbedded into the corporate structure, and not all are expected to produce direct profits for the company. Corporate incubators also can have broader economic development goals. Monsanto took off in what Robert Calcaterra describes as "a more radical direction" when it established the Nidus Center for Scientific Enterprise in St. Louis with the primary long-term goal of making the city a world center for plant sciences. Calcaterra, the center's president and CEO, says that overall strategy is shared by regional research, educational and other entities, and will benefit Monsanto by attracting world-class scientists and developing a pool of people that Monsanto can work with and hire. It may also result in technologies coming into or being commercialized out of the corporation – one of the five companies currently in the incubator is using Monsanto technologies. None of these goals will happen overnight. Because of the nature of its companies, the incubator that opened in 1999 may not see its first graduates until the second half of this decade.

The Nidus Center is a Missouri nonprofit corporation that doesn't fit into any particular division of Monsanto, although it's located on the Monsanto campus. It's fully funded by Monsanto, which pays for whatever client fees don't cover, and its staff are Monsanto employees. An independent 10-member board of directors that includes one active Monsanto executive – the corporation's president – and two Nidus Center executives governs the Nidus Center. The incubator takes a 4 percent founder's equity in each client firm, which is based on the value of the company before it received investments. Neither the Nidus Center nor Monsanto directly invest in incubator companies.

Admitting clients

As we have seen, some corporate incubation programs focus on clients from inside and others on clients from outside their corporate realms, and some on both. Whether the corporations or their incubators operate venture funds, take equity stakes, license technology to or from client companies, or develop other kinds of strategic partnerships with client firms, the deals that are struck are as individual as the companies involved.

Strategic fit takes on great significance in the corporate sector when reviewing prospective clients or projects. In deciding whether to take an entrepreneur into Reuters' incubation program, "we use criteria similar to any incubator," Hatcher says. "But there are some specific things we [Reuters] get testy about in making sure the company goes along the right course." For instance, the idea has to fit with the brand, a precious commodity to Reuters. Because of the organization's international reach, replication is a consideration. That is, if a new way of delivering a service works in Ecuador, can it serve all of South America?

Reuters doesn't have a designated facility for its incubated entrepreneurs, instead housing them in the corporation's fairly extensive office space wherever the entrepreneurs are located, unless a group gets too large. If an idea survives an initial review, a budding entrepreneur receives $30,000 to $50,000, administered by one of three incubation program managers, to develop the idea further on the employee's own time. The employee can work on his idea anywhere, including his regular office. At the end of three months, the entrepreneur delivers a proposal that shows, among other things, how much money he needs to get to the next level. He takes that report to an internal venture capital board that decides whether Reuters should support the idea further. If the idea gets go-ahead funding – perhaps $200,000 to $600,000 – the entrepreneur takes six months off from his job to build a prototype, conduct market research and prepare a business plan. Finally, the entrepreneur goes back to the venture board. If the venture is funded, it could become a Reuters subsidiary or a separate entity, depending on what the business is, Hatcher explains.

Keeping its finger on the pulse of the Silicon Valley, Panasonic's incubator is developing partnerships with other incubators to increase its client base. The Panasonic Internet Incubator occupies 17,000 square feet of the Panasonic Digital Concepts Center in Cupertino, Calif., and 5,000 square feet of the Women's Technology Cluster (WTC), a San Francisco incubator with which it partners. "We actually did a study before we decided to make this investment [in the WTC] to see if there was a difference in the market and a real reason for us to be there," Lauffer says. "It enables us also to use our resources cost effectively." The WTC has an expanded community of companies and networks in addition to the financial benefit of Panasonic's investment, while Panasonic has access to more technology companies.

Panasonic's criteria for taking companies into the incubator "is first to see the potential for strategic fit, and of course we want them to be venture fundable companies," Lauffer says. Companies applying to the incubator must show working prototypes of their technologies.

As part of the Digital Concepts Center, the Panasonic incubator and its clients have access to the resources of a number of Matsushita companies and groups that have offices there. Neither the incubator nor the corporation take equity in incubator client companies, but Panasonic's venture capital fund does make some investments, accepting the term sheets of lead investors. "We're taking a minority stake that typically comes out to be between $250,000 and $500,000," Lauffer says, or about 10 to 20 percent of a funding round. "We're not making the investment decision when they move in." Companies entering the program must have the ability to pay the rent for their month-to-month, market-rate leases.

At Intelligent Systems, investing in a company and accepting it into the incubator are separate decisions, Herron says. As an investment, "we don't care if they're in the incubator or not. We look at [technology companies] like a typical [venture capitalist] would. We're looking for good growth opportunities and returns." The incubator decision involves whether the company can benefit from being there and from the services provided, and can afford to pay the monthly rent. Intelligent Systems invests in some – but not all – of the incubator's clients.

Reaping the benefits

Corporations generally are not known for encouraging entrepreneurial activity and mindset. But once the entrepreneurial stage is set, potential benefits abound. Reuters' incubation program, which began in 2000, is capturing innovation and creating value within the parent company because it activated the process of building companies from within. For example, the program resulted in the formation of Kalends, an on-line personal calendar and event service that provides future-dated information from entertainment to sports to company announcements, drawing on the information resources of Reuters and other specialized data providers.

Helping to attract and retain employees is another way incubation programs can help corporations. Reuters has a strong focus on human resources, an important asset to a conglomerate that employs more than 18,000 people worldwide. The incubation program provides an opportunity for Reuters employees who have entrepreneurial bents – but also families, homes, and other responsibilities – to exercise that aspect of their natures without the risk that comes with ditching their day jobs to pursue innovative ideas. "It will be used as a way to really bolster the way human resources can look at how we deliver innovation within the company," Hatcher says.

Intelligent Systems Incubator has created value for the company through investment in companies such as ChemFree Corp., NBIA's 1999 Incubator Client of the Year in manufacturing. Intelligent Systems is majority owner in the company, now an anchor firm in the incubator. ChemFree, which manufactures a nonsolvent-based parts washing system, has continued to grow in revenue, profits and employees (from two in 1993 to 30 today), and has customers worldwide.

Intelligent Systems has invested in 20 to 25 percent of the companies that have been housed in the incubator over the past decade, Herron estimates. The incubator has served 45 companies on site and has 32 graduates. Intelligent Systems has invested in approximately 10 other off-site companies that have received the incubator's networking, coaching and management assistance services.

Not all of the positive results of corporate incubation are quantifiable. "[The incubator] clearly has enhanced our reputation with entrepreneurs, and gotten us more in front of the public," Herron says. Although the corporation doesn't invest in all of its incubated companies, the incubator increases the number of investment opportunities Intelligent Systems executives see, "so we hopefully can make better choices," Herron says.

It goes with the territory

Although all incubation models face some potential pitfalls, developers and executives of corporate incubation programs may face a few atypical obstacles to making their programs successful. They may also experience some benefits that the corporate model offers.

Selling the concept internally may be a challenge. Corporate culture prefers business as usual and incubation provides a new way of doing business. "We've basically learned not to scare anybody, show how it fits into the core business and make sure they can see the value add, synergy" and other benefits of corporate incubation, says Reuters' Hatcher. In a large and venerable 150-year-old company such as Reuters, incubation programs should start slow and engage senior managers. "You can't do this without high-level involvement," he says. For example, the incubation program's venture board is made up of people who report to the corporate executive committee.

The Reuters Business Incubator already has proved its value. The program includes about eight fledgling firms at any one time, and has produced six graduates. Its success has carried it from sponsorship by a single division to corporate-level sponsorship as part of a company-wide reorganization announced this summer.

Panasonic's challenges include wading through the depths of a gargantuan parent company. Ultimately Matsushita wants to develop long-term partnerships with the companies its West Coast incubator sites assist. That's not as easy as it sounds, since Matsushita, the fifth largest technology company in the world at $69 billion in product sales annually, doesn't provide a list of technologies it's looking for. Its consumer products sales range from home entertainment equipment to semiconductors and batteries to mobile communications and personal computer-related equipment. "That's perhaps one of our greatest challenges: What's strategic to a company that makes such a wide range of products?" Lauffer asks. "It could be just about anything."

To help solve that dilemma, the incubator has focused on software, services and platforms that work on the hardware the company makes and has developed contacts with the company's R&D directors to find out what they are developing and "what they are not developing, which is the real key," Lauffer says.

Although far from the public realm, corporate incubators may face the same types of pet-project problems that both government- and university-sponsored incubators face. Changes in corporate leadership can create problems for an incubation program, Robbins says: "If your champion leaves, you may have to resell the whole concept."

Corporate incubation offers its perks, too. Calcaterra has been able to help Nidus Center companies instead of spending most of his time fund-raising, as he used to do as head of two public-private partnership incubators. He also reports to one person – Monsanto's president – instead of to 60 sponsors.

Corporate incubators can bring resources, prestige and worldwide reach to their clients. "I don't think there's any down side [for clients] coming into a properly run corporate incubator," Robbins says.

Despite the deep pockets available to them, corporate incubators still must exercise fiscal responsibility. The Intelligent Systems Incubator is financially a break-even proposition for its corporate sponsor, which tracks the incubator as a separate entity within the company. "[Corporations] shouldn't plan to make a lot of money on incubator operations," Herron warns. "We make our money on the value of the investments that we make. We consider my time [as incubator director] an investment in our company's overall strategy."

Herron offers some words of wisdom to help incubation programs stay on the advantage side of the corporate ledger. "Always make sure that you don't get unfocused from what you're really trying to accomplish and make sure that how you run the incubator and what you're doing it for really work for the incubator and its sponsor."

Corporation Name Incubator Name Year Incubator Started Location(s) # of Current Clients # of Grads # of Emp. in FTEs Incubator Web Address
Panasonic Panasonic Internet Incubator 1999 San Francisco & Cupertino, CA 10 8 1.5 www.vcpanasonic.com/pii
Coca-Cola Fizzion 2001 Atlanta, GA 0 0 8 www.fizzion.com
Intelligent Systems Intelligent Systems Incubator 1990 Norcross, GA 15 32 4 www.intelsysincubator.com
Reuters Reuters Business Incubator 2000 Worldwide (prmarily London, New York, Hong Kong) 8 6 5 None (intranet only)
Monsanto Nidus Center for Scientific Enterprise 1999 St. Louis, MO 5 0 5 www.niduscenter.com
H. B. Fuller EntreGrow 2001 St. Paul, MN 0 0 5 In the works
Lucent New Ventures Group 1997 Murray Hill, NJ 30 30 35 www.lucent.com/newventures

Whose intellectual property is it?

Questions about intellectual property (IP) plague entrepreneurs and incubator managers alike. Entrepreneurs entering corporate incubation programs may have additional concerns about who will own the intellectual property being developed. It's a valid question, and one that start-up companies should ask and understand the answers to, in consultation with a lawyer experienced in intellectual property issues. Here's how two corporate incubation programs deal with intellectual property.

The international group Reuters incubates companies started by its employees inside the company, and "anything they create belongs to the company," says Andy Hatcher, a manager for Reuters' incubation program. "What we learned when we started out is that [intellectual property] doesn't exist until someone's defined it [legally]." And legal interpretations, particularly in Europe, can get pretty murky. For that reason, Reuters contracts for every new incubation idea. The contract prevents arguments and "basically definitely says you hand over IP rights to [Reuters which] says that at any point should an entity be established, that IP right will be transferred to that new entity," Hatcher explains. If the entity becomes independent of Reuters, then "we get whatever [it was] worth to create the intellectual property. People worry a lot about who owns it — you just get them over the worry," he says.

The entrepreneur's reward comes as a percentage of equity. How much equity an entrepreneur receives is determined case by case, and depends on many factors, including how early the individual was involved, what he contributed and whether he stayed with the project.

A properly managed incubation program also will take measures to ensure that a company's secrets are safe. At the Nidus Center for Scientific Enterprise in St. Louis, clients own the intellectual property they bring into the incubator. The incubator signs nondisclosure agreements with every client company. Because Monsanto is in the business of improving food quality and production, one agricultural biotechnology firm's confidentiality pact includes additional stringent requirements to ensure that only information the company wants out, gets out.

"We have to take extreme caution that we don't disclose anything to Monsanto" about that company's research, says Nidus Center President and CEO Robert Calcaterra.

In general, if Monsanto wants to buy or license a Nidus Center company's intellectual property, it would have to negotiate independently, Calcaterra adds, and incubator staff would sit on the entrepreneur's side of the negotiating table.—CJ

Big companies don't mean big staffs for incubators (and that's a good thing)

Although corporate incubators occupy a portion of the for-profit incubation market, in terms of staffing they closely resemble their nonprofit cousins. While some for-profit incubators boasted staffs of 30 to 150 employees at the height of the for-profit incubator rush to market, it might come as a surprise to some readers that incubation programs in large corporations have quite small staffs. Perhaps it's a reaction to corporate size, bureaucratic decision-making processes and the potential for inefficiency in implementing decisions. In the competitive marketplace, early-stage companies can't wait too long for answers, whether they're trying to improve their management teams, seeking investment or resolving a question in business ethics. They need quick access to the right person to help them make timely decisions or the connection they needed yesterday.

The staff dedicated solely to Panasonic's incubation program totals 1 1/2 people – full-time Managing Director Carol Kraus Lauffer and half-time Executive Director Jim Robbins. They screen and coach companies at Panasonic's Digital Concepts Center in Cupertino, Calif., and at the Women's Technology Cluster in San Francisco, where they have an office and serve companies as part of a partnership agreement with the WTC.

A staff of five serves St. Louis' Nidus Center for Scientific Enterprise, an incubator sponsored by Monsanto. Compare that to Monsanto, which has close to 1,500 researchers alone in the St. Louis area. The staff members include an executive vice president/COO, an office administrator, a receptionist and an intern. One of the side benefits Monsanto executives hope to receive from the program is a more entrepreneurial and less bureaucratic environment within the organization, says the fifth Nidus Center staffer, President and CEO Robert Calcaterra.

Even at Reuters, an international company with more than 18,000 employees worldwide, the in-house business incubation program has only five employees – three incubator managers and two assistant managers.—CJ

Fizzion to bring Coke sparkling innovations

Will business incubation go better with Coke? Fizzion will provide the answer.

Coca-Cola and Atlanta's Advanced Technology Development Center (ATDC) have joined to create Fizzion, a new business incubator, on Coke's Atlanta campus. To put some fizz into new businesses, Coke is funding Fizzion's operations and providing an investment pool of $2.5 million for the incubator's first year. With that money, Coke will make seed-stage investments of up to $250,000 each in Fizzion companies that obtain matching funds from outside investors, says Tony Antoniades, director of incubator operations for Fizzion. The incubator, a limited liability company wholly owned by Coca-Cola, will take up to 12 percent equity in client companies in exchange for up to two years of incubation services. Client companies will pay no other fees.

"The goal is to get innovation into Coke," Antoniades says. "It's a totally strategic incubator." Technologies that might prove useful to Coke include wastewater cleanup procedures, can packing techniques, wireless methods for managing 10,000 employees globally, or innovations that could affect volume growth or provide cost reductions. The list includes "anything that can impact the beverage value chain or a global company," says Antoniades, who helped develop the incubator's business plan.

Coke wants to use the technologies, but not own them. "We want to develop stand-alone companies … [that] can sell to other markets in other industries," he says. "We want them to have a customer base, not just Coca-Cola."

One of the factors that likely will help Coca-Cola's incubation program stand out is its partnership with ATDC, Georgia Institute of Technology's nationally recognized incubation program and a next-door neighbor of Coke. ATDC provides Fizzion with incubator expertise and knowledge of and connections to the technology and investment communities. Coca-Cola pays six Fizzion employees directly and reimburses ATDC for its Fizzion-related expenses, including the salaries of ATDC's Antoniades and three graduate research assistants who work in the incubator.

"ATDC got involved [in Fizzion] as a way to expand our reach," Antoniades says. "Our goal is economic development [by] accelerating formation and growth of advanced technology companies." Client companies will have access to all ATDC education programs, staff, resources and connections. The partnership also gives the ATDC community access to Coca-Cola's resources, such as market positioning and potential sales to the company.—CJ

Keywords: intellectual property, client selection/admissions, partnerships -- organizational/corporate, sponsor

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