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Summary

In "What are the new seed or venture accelerators?" in the June 2011 issue of NBIA Review, author Dinah Adkins looked at what seed accelerators do, how they differ from business incubators, the potential impacts they have on business incubation and other topics. Here, Adkins addresses why and how NBIA members have adapted various seed accelerator characteristics to serve the needs of their communities.

How business incubators have adapted accelerator-like services to woo new clients and serve more entrepreneurs

by Dinah Adkins

August 2011

Recent buzz about seed and venture accelerators has made some business incubator managers leery of potential competition for clients or, perhaps worse, fear that local and national stakeholders might withdraw funding or support in favor of the new accelerator model.

These concerns have certainly been a motivating factor behind incorporating accelerator-like programming into some incubators' services. These accelerator-like components include providing seed investment, "fast test" product validation during 90-day entrepreneur boot camps (high-energy meetings of founders and experienced entrepreneurs), and preparation for entrepreneurs to pitch to follow-on investors.

A review of NBIA members' activities suggests there are some compelling reasons to expand programming and provide more diversified services to larger markets.

Karl LaPan, president and CEO of the Northeast Indiana Innovation Center in Fort Wayne, Ind., says his primary consideration for any programming decision is to get "first crack" at local entrepreneurs. LaPan emphasizes that business incubators need to serve both less- and more-mature companies to be perceived as the "hot spot" for entrepreneurship. "In today's world, it's not a linear process where all companies start and end at the same place," LaPan says.

Citing the book Blue Ocean Strategy, which focuses on how to make the competition irrelevant, LaPan is seeking to serve noncustomers – transforming them into customers and increasing deal flow. To that end, he is adding co-working space and student and adult entrepreneur boot camps, applying to become an affiliate of seed accelerator TechStars, and implementing NIIC's own investment funds. (See "Co-working and the entrepreneurial ecosystem" for a discussion of incubator co-working.)

Though NIIC already provides traditional incubation services to a 10-county region with the assistance of 10 staff members, the incubator is branching out quickly to serve businesses from idea stages all the way to scale up.

Why is LaPan moving rapidly in these directions? So he can:

  • Get ahead of the competition and remain relevant. LaPan says he's not about to let anybody steal market share.
  • Serve more segments of the community and attract more individuals to the entrepreneurial ecosystem.
  • Build deal flow. Co-working, boot camps and investments bring more clients to NIIC.
  • Get more buy-in from stakeholders and partners.
  • Respond to the convergence of technologies causing companies simultaneously to be about biomedicine, information technology and advanced manufacturing, which LaPan says requires the incubator to be "more adaptive in our methods and the development and delivery of our programs."

"Time is money," LaPan explains. "There is allure to fast test programs, which conserve burn rate and assist in quickly identifying potential successes."

Although most incubator managers aren't trying to incorporate the entire spectrum of accelerator activities, many are adapting one or two accelerator attributes. For example, Massey University's ecentre of Auckland, New Zealand, added an intensive preincubation program called ecentreSprint to its traditional services.

According to Business Strategist Sabrina Nagel, the center found that many potential clients lack market and business model validation – and thus are too early-stage for the incubator. The new preincubation program – like accelerators – focuses on major components of business building. Adding an "acceleration experience" helps the ecentre improve its customer focus. "We try to stay as close to our customers as possible; we looked at this and thought maybe there's something here that we can adapt to add more value to our clients," Nagel says.

If seed and venture accelerators are new (Y Combinator was founded in 2005), incubator adoption of accelerator-like features is even newer. Few of them have had sufficient time to develop perfectly polished programs or long-term metrics. Recognizing that program successes largely remain unvalidated and that there is still much to learn, NBIA is showcasing incubation programs that are leading the pack.

Seed funds

Eric Mathews, president of LaunchMemphis and Seed Hatchery, describes Seed Hatchery as a "for-profit seed accelerator almost exactly like TechStars in Boulder," a boot camp cramming 12 months of entrepreneurship into 90 days. Mathews says the program provides the "three M's" – mentoring, milestones and money.

Seed Hatchery is the last-implemented of the major components of the Memphis entrepreneurial continuum. This continuum starts with EmergeMemphis, a business and technology incubator that opened in 1998, and now includes the LaunchPad, the LaunchMemphis co-working space. "We have a full pathway from 'I've got an idea' to 'I'm going to be taking up space in the incubator,'" Mathews says.

LaunchMemphis schedules Startup Weekends, business plan boot camps, pitch competitions, Ignite meetings, BarCamps and other entrepreneurial networking events (see "Incubator resources") EmergeMemphis serves resident and affiliate incubator clients, and Seed Hatchery offers start-up accelerator services. Unlike Seed Hatchery, LaunchMemphis and EmergeMemphis are nonprofits.

Seed Hatchery initiated its first class of entrepreneurs in March and ended with a demo day (with entrepreneurs pitching to investors) in June. The accelerator supplied six to 10 teams (selected this year from more than 65 applications) each with $15,000 and strategic mentors who assist during a 90-day boot camp in return for approximately 10 percent of equity. Funds were from Solidus Co., a Nashville, Tenn., venture capital firm with seed investing expertise.

Seed Hatchery's program started with a weekend kickoff followed by a mentor introduction night to begin selection of mentors. Each week included a "reporting night," during which teams report on their progress, as well as a training and information session. Seed Hatchery also scheduled social gatherings.

Mathews believes there is great potential in the cohort system – social competition that encourages people to step it up and get feedback along the way from peer founders and "rockstar" mentors.

The Memphis continuum is important because it provides a framework for entrepreneurs to grow. "We don't want to say, 'Be entrepreneurial' and then drop the microphone. We might not ever see them again," Mathews explains. "We want people to take real actionable steps. That is where LaunchMemphis and Seed Hatchery succeed."

While Mathews can't yet provide success metrics for Seed Hatchery alumni, he says the Seed Hatchery and LaunchMemphis components of the region's entrepreneur support activities touch approximately 1,000 people annually. "That's about 50 businesses a year that come to us for mentorship, using co-working space, etc.," he says. "With Seed Hatchery sitting here, six start-ups have access to this wonderful, intense system that can move them to the next level. Around half of these companies will get $250,000 to $2 million in follow-on capital." Mathews contends that it could take years to achieve the same results without this entrepreneurial infrastructure.

NIIC also developed a seed/pre-seed fund – the LEAP Fund. LaPan started the fund with $300,000, plans to invest another $500,000 and anticipates adding $1 million in the next two to three years. These funds are derived from a successful NIIC 2001 capital investment that continues to provide returns, and a $250,000 match from the city of Fort Wayne, Ind.

Pre-seed funds are available in two phases: Idea Stage ($10,000 to get to a prototype with protectable intellectual property) and Pre-Launch Stage ($15,000 to continue product development, marketing and commercialization planning). These two stages can last up to six months each, and clients get free co-working space at NIIC. A third Venture Launch Stage (up to $25,000 for acquisition of key resources, protection of intellectual property and other start-up expenses) is available if entrepreneurs meet every milestone. However, they must locate their venture within NIIC to access Venture Launch Stage funds and assistance, which includes pitch practice and introductions to angel investors. (Generally NIIC investments do not exceed $50,000 per company, but companies that are further along may start with a $50,000 seed investment and bypass the pre-seed stages.)

All returns from NIIC's investments flow back into the incubator's entrepreneur support activities. "There's a belief that it [seed investing] may be a conflict for the incubator, but I say, 'I'm conflicted every day of the week,'" LaPan says. "The fact that I control the tool gives me an advantage in the marketplace. I still make good investment decisions."

LaPan, who benchmarked other gap financing programs, says such funds must be prepared for a 25 percent to 30 percent default rate for their early-stage investments. "I am very selective – probably harder on my companies than would be the case if the fund were independent of the incubator." But because all the returns go back to new companies, revenues aren't "unrelated business income," which creates tax consequences for nonprofits with the Internal Revenue Service.

LaPan is not simply adopting attributes of accelerators; he is adapting key components and integrating them within NIIC's existing framework. NIIC's seed fund, co-working space and expanded programming are open to entrepreneurs across a broad spectrum of industries, including life sciences, healthcare, clean energy, materials science, etc. This distinction sets him apart from many for-profit accelerator programs that focus solely on the Web or mobile applications. LaPan believes such diversification also helps increase program sustainability, protecting against bubbles and fads.

Similar to Mathews in Memphis, LaPan is putting together a complete spectrum of entrepreneur-support services. "You have to be the best of the breed, always benchmarking, improving by investing in the entrepreneur's experience, and taking best practices to next-practice levels," he contends.

Fast test boot camps

Both Seed Hatchery and NIIC include fast test boot camps based on the seed accelerator model. These events bring entrepreneurs together in intensive but brief programs while they validate their markets and products and prepare pitches for potential follow-on investors.

Other NBIA members have created boot camps as well. The models vary from one-day camps held twice yearly at the Louisiana Business & Technology Center in Baton Rouge, La., to approximately 90-day camps at New Zealand's ecentre. A program operated for several years at Purdue University in Indiana is being expanded, says John Hanak, statewide director of the Purdue Regional Technology Centers. Hanak has developed a nine-week schedule of group sessions, assignments and speakers to serve as the basis for a new boot camp.

NIIC's new Launch Pad program (which includes LEAP Fund investment) is modeled after its Student Venture Lab, a fast test program that has been in operation three years. (See related article on student incubation) "Launch Pad is prep school for the incubator," LaPan says, noting that the "market has gone so risk averse, we're not seeing innovative ideas in the raw form, and this helps to see them and determine their worth." Launch Pad will soon accept its first applicant. But unlike most accelerator boot camps, NIIC will work with firms on an individual basis, driving results for each company, rather than simply providing programming for a cohort of companies.

LaPan also has applied to become a TechStars affiliate, which requires a $14,000 licensing fee. "If you want to 'hang out a shingle,' you've got to say you've been approved," says LaPan, who believes it's beneficial to brand his program by aligning with a nationally recognized model. (TechStars, which is part of the Obama administration's Startup America partnership, is building a network of acceleration programs.) "People are in love with the fast test model. I'm going to give them the love affair and see what happens," LaPan says.

The focus of ecentre's 90-day ecentreSprint program, which began in February and will be offered twice a year, is validating the market and building a prototype. Nagel says the ecentre's expanded programming focusing on preincubation captures a new client market.

"We put a high emphasis on whether entrepreneurs are addressing a real market problem," Nagel says. The ecentreSprint program uses many tools, but a favorite is the book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, named by Fast Company as one of the best business books of 2010. "We find that they haven't thought enough about their value proposition, the cost structure, partners that might help deliver the product, etc. Early in the process, we want them to establish who the customer will be, what he/she will look like and develop a profile," she says. "We get them to contact people who fit that profile and ask them to validate the entrepreneur's assumptions. So they learn quickly what their customers value. Then they build a prototype. Alongside that, they have access to mentors – business people and professionals – and they meet on a regular basis."

The frequency of those meetings varies, "but we've found that continuity is the key so that people can add value," Nagel says. Program participants also write a private blog and provide an update on their progress or challenges weekly. "This is a great way for the entrepreneur to self-reflect," Nagel explains. During the 12 weeks, six modules cover market validation, but in alternate weeks, lecturers discuss agile development and other topics, including how to be a better listener. "A lot of people are not really good at listening; they're concentrating on what they want to say next," she says.

The program seems to be paying off, as inquiries about ecentre's business support programs have increased slightly. Generally, potential clients meet with the center's business manager to determine eligibility, which includes fitting with the expertise of the ecentre. Applicants receive initial feedback, and if the idea and the entrepreneur show promise, they are invited to an informational session to learn about the program and their required commitment.

"More important than the idea are the personality and capability of the entrepreneur," Nagel says. "The best idea driven by the wrong person will not get anywhere, whereas an average idea with the right person will take off. An entrepreneur needs to be able to adapt to customer feedback, and this is not natural to everyone."

Selection involves presenting to a panel of top incubator management for 10 minutes, followed by a structured interview. If selected, clients pay NZ$1,500 per month and give up 5 percent equity. At the program's end, participants pitch to investors and will often progress to a subsequent incubator program to build a sales pipeline.

The Oregon Technology Business Center in Beaverton, Ore., completed its first boot camp, called TechLaunch, earlier this year. The program included seminars, luncheon meetings with investors, pitch practice and a demo day. Seminars included sessions on common start-up mistakes, market validation and customer development, stock issues, business models, developing financial presentations, working with investors, protecting intellectual property, and the "pitch." OTBC Manager Steve Morris describes TechLaunch as a "grand experiment."

Morris attributes the first program's success to several key factors. One is that each of the six participating companies is teamed up with a CEO coach who has CEO, start-up and fundraising experience. "We've got coaches out there spending lots of time and adding a lot of value," he says. All participants are nascent entrepreneurs who have "made huge headway" in initiating their ventures, Morris says. "Another critical part is that investors participate in each weekly luncheon. Both the investors and the participants benefit by getting to know each other early in the program rather than only at the end."

While Morris is still processing what he's discovered from his "grand experiment," he would like to allow more time for companies to give each other feedback – to create more of the synergy that occurs naturally during traditional business incubation. Morris expects to develop new clients from TechLaunch, appeal to a larger group and roll out a successful TechLaunch program statewide. Remaining relevant is a big concern for him, given Portland metro's location between San Francisco/Silicon Valley and Seattle. Also, OTBC competes in the same market targeted by the new seed accelerators.

"Portland is very much in the Web and mobile spaces, and those segments are applying to Y Combinator and TechStars, even though those programs are not offered here locally. There's a real mystique built up around boot camps, and I see a growing sense from Web entrepreneurs that traditional business processes (and traditional incubators and business plans) aren't relevant. They just don't think we have anything they need. Office space? Don't need it. Coaching from experienced entrepreneurs? Not if they haven't built a successful Web business in the last few years. And they can get 'coaching' for free on AngelList (see "Incubator resources")," Morris says, adding, "I guess there is something I'm trying to prove."

Startup Weekends

Many NBIA members have conducted Startup Weekends or their own version of the programs, which began in Boulder, Colo., in 2007 (see "Incubator resources"). OTBC's Morris says, "Startup Weekends are an abbreviated boot camp. Ideas are pitched; teams are formed (with developers, marketing people, designers, financial experts, etc.); a product is prototyped; a pitch is created." Judges then complete a comprehensive review, provide feedback and name a winner. The entire process is condensed into 54 intense hours.

OTBC's recent Startup Weekend attracted 90 individuals, including 75 to 80 participants who stayed throughout the weekend. These participants formed 14 teams. The judges were "so impressed by two projects that they wanted to declare a tie, but Startup Weekend requires a clear winner," Morris says. While a majority of attendees came from the Portland metro region, others came from elsewhere in Oregon and other states. Morris notes the weekend netted OTBC two new clients.

Startup Weekend didn't have the educational component of TechLaunch; "it's more a team effort and being thrown into a pool," Morris says. The Startup Weekend organization took care of marketing and programming and arranged for food and sponsors; individuals pay $59 each (latecomers pay $84) and get six meals during the weekend. It's a volunteer-driven activity, and the volunteers get "really pumped," he says.

"Bottom line," Morris says, "it was fabulous exposure for OTBC."

Purdue's incubators have hosted three Startup Weekends, which Hanak describes as "very much into ideation – the teams are at such an early stage." He questions whether many of these firms will be commercially viable down the road. But Purdue – with its longtime excellence in engineering – is still concentrating on information technology, defense and biotech, in other words, hard science that requires more infrastructure, time-to-market and investment than the Web world.

According to Executive Director Charlie D'Agostino, LBTC also skews to technology-intensive businesses based on cybersecurity and other technologies. "Still, Startup Weekends are helpful to us," says D'Agostino, noting that they attract people who have day jobs but have an idea they want to vet. "Those people could potentially become incubator clients."

These new incubator-sponsored accelerator activities have expanded the reach of entrepreneurship support to new communities, age groups and sectors – spurring a sense of urgency in would-be entrepreneurs and incubator staff and management. They also show that business incubation isn't static. As DeAnna Adams, executive director of the Casper Area Business Innovation Center in Casper, Wyo., says, "We are not cookie cutter … and that is what makes us strong!"

Co-working and the entrepreneurial ecosystem

Co-working spaces are gaining popularity in the business incubation community. Creating such space can expand services to start-ups currently underserved in traditional incubation programs, increase deal flow by introducing these new clients to incubator services and increase program revenues.

"The co-working venue allows us to serve people who would not meet our criteria for the incubator," says Karl LaPan, president and CEO of the Northeast Indiana Innovation Center in Fort Wayne, Ind. It helps bring the "people who are not your customer today" on board. "In the old days, we'd call that enlarging the pond." LaPan emphasizes, "If we want to build an entrepreneurial ecosystem, we need to be more ecumenical."

NIIC's co-working space, "Destination: Your Future," is being branded as an entirely different incubation experience. As in all things NIIC, LaPan is "doing it big." He has dedicated 2,300 square feet of space and invested in cubicles and a few private offices, noting Midwestern entrepreneurs don't want tables; they prefer more privacy. Co-workers pay a $25 monthly membership fee and monthly rents of $275 to $775. The incubator's networking activities are included: client appreciation days, lunch-and-learn sessions and meetings with "experts in residence." Some participants pay extra for add-on coaching and training.

The program has helped forge new client partnerships and create more deal flow and buy-in from program sponsors. "A county commissioner who came to our open house said, 'This is terrific because now anybody in our community can access services, not just tech companies,'" LaPan says. He stresses co-working clients have no entry criteria. NIIC generated more than $30,000 in fees for co-working in 2010 and is on track to collect $40,000 in 2011. These fees contribute to the overall sustainability of the incubator, and LaPan says the benefits far outweigh the costs.

The key to success, according to LaPan, has been creating a sense of community in the co-working space. "We wanted to create a user experience," he says. "You are selling community, and it's a chicken or egg thing, as you need community to attract people." To do that, NIIC partnered with local organizations including WorkONE Northeast, a local Workforce Investment Board, which sponsored NIIC entrepreneurship training for displaced white collar professionals; Women's Enterprise, which provides coaching services on site; and Ameritrade Business Exchange, which helps its members barter for products and services throughout North America. This organization now leads a weekly networking group that draws 30 to 40 small business owners and entrepreneurs to the NIIC campus.

These partners enlarged the network, creating even more word-of-mouth promotion. The end result, according to LaPan, is "instant community."

Incubator resources

AngelList (2010) – A "curated list" of angel investors, AngelList also features start-ups and includes blogs and chats, book lists, "The Venture Hacks Bible" and more. See http://angel.co/.

BarCamps (2005) – "User-generated conferences (or unconferences)." Anyone can run a BarCamp, and participants determine the topics of each day's sessions using a whiteboard. See http://barcamp.org.

Blue Ocean Strategy (2005) – Authors W. Chan Kim and Rene Mauborgne contend that most companies compete head-to-head over a shrinking profit pool. Blue Ocean Strategy helps entrepreneurs reach beyond existing demand. Available at the NBIA Bookstore. See www.nbia.org/store.

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (2010) – Authored by Alexander Osterwalder and Yves Pigneur, this book provides a template for visualizing the process of developing a business model. Available at the NBIA Bookstore. See www.nbia.org/store.

Ignite (2006) – High-energy evenings during which people with ideas (including personal and professional passions) pitch them to community members in five-minute slide presentations. See http://ignite.oreilly.com/.

Startup Weekends (2007) – Events during which entrepreneurs and others come together to network, form teams and launch businesses in 54 hours. See http://startupweekend.org.

Featured Sources

DeAnna Adams, executive director, Casper Area Business Innovation Center, Casper, Wyo.

Charlie D'Agostino, executive director, Louisiana Business & Technology Center, Baton Rouge, La.

John Hanak, statewide director, Purdue Regional Technology Centers, Indianapolis, Ind.

Karl LaPan, president and CEO, Northeast Indiana Innovation Center, Fort Wayne, Ind.

Eric Mathews, president, LaunchMemphis and Seed Hatchery, Memphis, Tenn.

Steve Morris, manager, Oregon Technology Business Center, Beaverton, Ore.

Sabrina Nagel, business strategist, Massey University ecentre, Auckland, New Zealand

Keywords: business plan – incubator, economic development, for-profit incubators, special focus incubator, technology incubator, venture capital

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