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From Steel to Silicon: Ben Franklin uses partnerships to forge new economy in Lehigh Valley

by Lisa Lopez

October 2001

For decades, men and women toiled at the Bethlehem Steel Corp. mills in Bethlehem, Pa., part of the Lehigh Valley. There, they fabricated steelwork for landmarks including the George Washington Bridge and Rockefeller Plaza in New York and the Golden Gate Bridge in San Francisco. After decades of decline due to automation, failed market strategies, foreign imports and aggressive domestic competition, Bethlehem Steel ceased steelmaking activities at that location on Nov. 18, 1995.

Today, another era emerges not far from the defunct blast furnaces and foundries, where technology entrepreneurs are fashioning a new economy characterized by innovation and the lexicon of information technology – "microchips," "software customization" and "digital data."

Many of these entrepreneurs are clients or graduates of the Ben Franklin Business Incubator Center (BFBIC), a 21,000-square-foot building on the Mountaintop Campus of Lehigh University.

Driving this economic transformation is an 18-year history of partnerships forged by BFBIC. By leveraging professional networks and links with Lehigh University, the incubator has played a significant role in helping entrepreneurs and innovators shape northeastern Pennsylvania's new knowledge economy.

The incubator is part of the nonprofit Ben Franklin Technology Partners of Northeastern Pennsylvania (BFTP/NEP), a state-funded technology business development group.

BFTP/NEP has helped start 282 companies and create more than 9,000 jobs since it began in 1983 as one of four organizations in a state economic development initiative called the Ben Franklin Partnership Program. BFBIC's contribution to the Lehigh Valley region – essentially the cities of Allentown, Bethlehem and Easton – includes the launch of 56 companies and a hand in creating more than 2,400 jobs since the incubator opened in 1983. In recognition of such efforts, NBIA presented BFBIC with the 2001 Randall M. Whaley Incubator of the Year Award, its highest honor recognizing overall program excellence.

Setting up shop

BFBIC has cultivated partnerships from the get-go; even the incubator facility is a product of collaboration. BFTP/NEP, Bethlehem Steel, Lehigh University and the Lehigh Valley community initially developed the incubator facility, then owned by the steel company.

A feasibility study never was conducted, says Robert Thomson, BFTP/NEP's regional manager at Lehigh Valley, former BFBIC manager and a former NBIA board chair. "The year the incubator was founded – 1983 – was in the very early stage of incubator development, so there wasn't even really a realization that one should be done," he says.

The desire of government and Lehigh Valley leaders to promote technology in the region drove the development of the incubator. "Recognizing that they had a good university and some large companies in the region, they believed an incubator made sense," Thomson says.

BFTP/NEP approached Bethlehem Steel about using one of its former research facilities on a 1,800-acre mountaintop. BFTP/NEP then raised $90,000 from the business community for minor renovations to get the project off the ground. In late 1986, Lehigh University purchased Bethlehem Steel's research and development site, which included the incubator and five other buildings. The site then became known as Lehigh University's Mountaintop Campus. Over the years, renovations costing more than $300,000 have been completed at the incubator, with funds coming from a state grant, matching university funds, an alumni donor and BFTP/NEP. The result of the partnership was a win for each entity. Bethlehem Steel restored some community faith in its effort to promote job growth by selling its land for technology business development. Lehigh University gained a foothold in collaborating with high-tech leaders and fueling innovative growth. The Lehigh Valley business community, in turn, helped invigorate a new economy in a region long known for its steel-driven economy. For its part, BFBIC infused its operations with partnerships that brought together the best local business strategists, technology leaders and higher education administrators – a key strategy in its mission to nurture early-stage, high-tech companies with a strong potential to create and retain jobs, and to have a positive impact on the Lehigh Valley economy.

A firm footing

BFBIC has a strong foundation both in the form of active, high-profile supporters with valuable skills and in the form of committed financial backing. The BFTP/NEP's board of directors, which also has oversight for the incubator, includes a venture partner with entrepreneurial experience, formerly with Coopers & Lybrand (now PricewaterhouseCoopers); an individual with more than 15 years of entrepreneurial consulting and finance experience; and Lehigh University's vice provost for research, vice president of finance and administration, and the dean of the business and economics college.

The incubator counts on three reliable sources of operational funding: client rental income and related service fees, Lehigh University support and BFTP/NEP funds. BFTP/NEP covers BFBIC staff salaries, and the rest of the operations are covered by the rental and service fees and Lehigh University contributions.

Thomson says the relationship with the university has been critical to the incubator's success from day one. "Lehigh University's support is just as important as the funding we get from Pennsylvania's Ben Franklin Partnership Program," he says. It's obvious that the university is pleased with the relationship as well: it recently touted the incubator's NBIA award at the top of its home page.

Thomson notes that the incubator relies on BFTP/NEP support and expects to continue receiving that support, at least for the near future. The incubator is not putting all of its eggs in one basket, however. "We have no expectation that [funding] will be canceled tomorrow, but we're covering ourselves should it happen in the not-too-distant future," he says. BFBIC has several strategies in place to work toward achieving self-sustainability. First, it takes royalty or equity stakes in client companies that have received BFTP/NEP investments. "We're collecting that income as a hedge against any future reduction in Ben Franklin funds," Thomson says. Most clients choose the royalty option, as they want to conserve equity opportunities for subsequent venture capital funding rounds. The royalty agreement has a cap – never higher than three times the initial investment. "We're not collecting a perpetual royalty. It's really based on the level of funding that's provided, simply to bolster our efforts to work toward a self-sustaining operation," Thomson says.

Second, the incubator's parent organization (BFTP/NEP) is a limited partner in two venture capital funds, Mid-Atlantic Funds and Blue Rock Capital. Returns on those funds have exceeded expectations and future revenue from the funds will assist with all BFTP/NEP operations, including BFBIC.

Beginning next year, the incubator also will have the option to purchase stock in new client companies, Thomson says.

Solid services

Entrepreneurs who gain acceptance into BFBIC are in store for a solid program of assistance. Collaboration got the incubator off the ground and helps buttress its client services. BFBIC teams up with economic development organizations, professional service providers, venture capitalists, private investors, industry leaders and others to carry out its programs. BFTP/NEP strengthens these activities through its working relationships with Pennsylvania's leading colleges and research universities, whose faculty and students often work directly with incubator clients.

BFBIC has a straightforward approach to screening potential clients. An interested entrepreneur first meets with BFBIC Manager of Entrepreneurial Programs Wayne Barz to review the company's business plan, vision and goals.

If the incubator is interested in the client but the business plan isn't quite up to snuff, BFBIC may even provide pre-acceptance help. "If we see enough potential, we'll certainly provide a fair amount of help," Thomson says. Or, if the incubator doesn't have the in-house expertise to evaluate a particular technology, Barz will call in outside experts, usually from Lehigh University. For every applicant, Barz calls on two outside business advisers to provide independent opinions on the business plan, and then presents his conclusions to Thomson before making a final decision.

Once a client has been accepted, Barz assesses his or her needs and identifies the resources available to meet those needs. Matching client needs with resources is as individual as each client company, Barz says: "We have a whole laundry list of services, but we determine on a case-by-case basis what services will be used by the company."

If a client needs help with business basics, federal procurement aid or international trade assistance, Barz will tap the services of the Small Business Development Center (SBDC) at Lehigh University. Depending on a client's needs, Barz may link an entrepreneur with an expert from a pool of professional advisors in accounting, marketing, management, finance, corporate law and intellectual property.

For example, Millbrook, a software development firm and 2000 BFBIC graduate, received help in many areas. Lehigh University students helped the company design a software program, BEACON, which would manage data for the insurance industry. Then, the incubator called on Dale F. Falcinelli, a business strategy consultant and Lehigh University lecturer in marketing and management, to help Millbrook create a marketing strategy and product distribution plan.

Millbrook also secured a $254,000 investment from BFTP/NEP and BFBIC connected the company with experts who could help with intellectual property issues and provide corporate advice. The team effort produced a strategy that led to BEACON becoming the recognized leader in management information tools in the insurance industry. Moreover, the company now employs 25 full-time people, 10 of whom are university graduates who helped de-sign the program. The company reported $3 million in sales last year, following steady annual increases.

Jack Plunkett, Millbrook principal and cofounder, says the continuity of BFBIC'S client assistance and management expertise was a major boost for his company's success. "Their help allowed us to get enough technical talent, mostly from [the] affiliation with Lehigh University, to finish our product," says Plunkett, who is a Lehigh graduate. "The biggest thing we received was being part of a consortium of very talented people brought together on a continuum."

Although BFBIC's client assistance is custom-fit to each company's needs, sometimes a client needs even more targeted, strategic assistance. Enter the "Tiger Session," an aggressive business strategy review session where BFBIC staff, technical reviewers and business experts analyze and critique a client's business plan. Nicknamed the "Tiger Session" because an early participant felt as though he were thrown into a den of tigers, the Tiger Session is a turning point in the start-up process, clients say.

"We learned a lot from the Tiger Session," Plunkett says. "In particular, we learned that we need outside help to make our plan work. Our initial thoughts were 'we're so smart, we don't need anyone from the outside to help us [develop and market our product].'

"We also learned we needed help with the marketing aspects of our plan," Plunkett adds. "We were asked point-blank questions – 'How much are you spending on your marketing?' 'Why aren't you spending more on your marketing?' 'How do you plan to distribute your product and why?' Sitting down with the experts like that forced us to think about what we're doing [and] why we're doing it."

Cash for clients

Help with financing comes in many forms. Barz is on BFTP/NEP's portfolio team, which annually invests about $2.5 million of Ben Franklin funds into early-stage companies, including BFBIC clients. The incubator also can help clients access funding through other state and local programs and nearby venture capital funds and angel investors.

According to Thomson, most BFBIC clients receive a BFTP/NEP investment of $100,000 to $300,000 at some point during their stay at the incubator. To apply for this funding, clients work with Barz to create a funding request. "In our proposal form, you're explaining how you're going to spend the money, what you're going to use it for, etc.," Thomson says. The proposal then goes to BFTP/NEP, which makes the funding decisions. If funding is denied, the client may reapply after resolving technical and/or business issues identified by BFTP/NEP's review committee. If funding is granted, clients enter into either an equity or royalty agreement with BFTP/NEP.

BFBIC staff monitors the client's use of the funding, regularly checking on milestones related to the original funding proposal. If problems arise, staff identifies appropriate resources to solve them. Clients are required to submit formal midyear and end-of-year reports. Based on individual company needs and progress achieved, clients may receive additional funding.

The incubator's newest funding source for clients is the creation of the Northeastern Pennsylvania Angel Network, a group of individuals who each contribute $20,000 to an escrow fund.

BFBIC is formalizing this network, starting with 10 individuals who will serve as board members. "We've made a lot of headway there," Thomson says. "Up until this time, we've done private investment activities on an informal basis. [The board members] will help us do the solicitations for new angels so that we can eventually grow the group to 100 people."

Barz explains that the goal is not to create a single fund that makes investments in companies but to create a formal process through which individual investors can make their own decisions as to which companies they'll invest in.

A continuum of care

In the health-care industry, providing a continuum of care produces excellent long-term results. BFBIC has a similar method, providing systems of support at every step of an entrepreneur's journey – and the care doesn't stop after graduation.

When the Bethlehem Economic Development Corp. (BEDCO) noticed that BFBIC graduates were leaving the city for commercial space elsewhere, it teamed with BFTP/NEP and the Lehigh Valley Industry Park to secure financing to construct postgraduate facilities. The John M. Cook Technology Center includes two post-incubator facilities in the heart of the city of Bethlehem. One, a 44,000-square-foot structure built in 1993, houses two BFBIC graduates. The second, a 35,000-square-foot building completed in 2000, is home to three other graduates.

Contact with client companies also continues after graduation. BFBIC tracks graduates' sales, visits graduate facilities and invites graduate company leaders to serve as advisors and mentors to new entrepreneurs. These individuals help guide fledgling entrepreneurs as they navigate the waters of business. Former graduates have assisted with Tiger Sessions, provided industry-specific mentoring and even have returned to the incubator to launch new companies.

Frank Gillespie, a principal of Computer Aid, a 1986 BFBIC graduate, serves on the incubator's advisory board and is called on to counsel client companies periodically. Computer Aid, which provides specialized information technology services, entered the incubator in 1983 with two experienced employees and a business plan. BFBIC made the company's good start even better, in part by offering a credible business location for its clients and employee recruits – a significant benefit for businesses that don't yet have a strong identity. The incubator also gave Computer Aid the flexibility to grow quickly and accommodate new employees when it needed to – something that can be difficult with a traditional lease. Today, Computer Aid employs almost 1,700.

Mike Gausling, COO of OraSure Technologies (formerly STC Technologies) now mentors incubator clients seeking marketing strategy and guidance. It is little surprise that Gausling feels compelled to give back to the incubator. When STC set up shop in the incubator in 1987, it made smart use of everything available.

In addition to taking advantage of incubator space and technical assistance, the company secured a $95,000 BFBIC/NEP investment to finalize its development of a sunscreen towelette. In 1988, Kmart agreed to test market the product, and other retailers followed suit. BFTP/NEP then invested $140,000 so that STC could develop a new product – enzyme immunoassay tests for the insurance risk assessment market. STC went on to license its sunscreen towelette to Schering-Plough, which marketed it under the Coppertone brand, and to commercialize versions of the immunoassay tests.

Gausling feels that the credibility STC gained by locating at BFBIC was significant for the company. "The credibility of being in the program was critical for [securing] other forms of financing, whether it was with other government agencies or with eventual angel investors," Gausling says. "We'd bring potential corporate partners from anywhere in the world and they were expecting a rat hole in an alley. They'd see we were in a phenomenal setting with laboratories, a campus research setting, and an infrastructure in place. That established huge credibility for us."

In May of last year STC merged with Epitope, a publicly traded medical testing company, and is now known as OraSure Technologies. STC employees will retain their jobs and the new company is now based in Bethlehem. Gausling realizes some cultural change will come with this merger, but notes the economic impact will continue to have a positive effect on the Lehigh Valley region. With annual sales of $14 million, STC has created 85 new jobs.

Gausling's and Gillespie's participation as advisors shows the value of a continued relationship between BFBIC and its client companies, says Thomson, who calls it an example of the incubator's "home-grown success stories."

Steady success

The incubator's relationships have blossomed in the 18 years since its first manager, Louis Robinson, sought clients by traveling to chamber of commerce events and making presentations to companies in hotel conference rooms. "We've developed a lot of relationships since then," Thomson says. "We clearly have a presence … so if any of these groups [banks, academic institutions, industry representatives, professionals, etc.] encounter a potential client, they refer them to us," he says. "Word of mouth operates very effectively. We still do presentations, though. It doesn't hurt to remind people."

The incubator's reputation has grown over the years as well. While many incubation programs can't even handle a change in management without significant impact on the program's daily operations, BFBIC has quietly built a seamless system of support that is the foundation of the quality program – no matter who is at the helm. The incubator has successfully weathered changes in management, organizational changes at Lehigh University, and a fire in February 2000 that started in a client lab. The fire damaged several client offices.

Thomson credits the incubator's staying power to its partnerships, particularly with Lehigh University. He cites the example of the fire: "Since they own the building, they got the contractor in the building right away to start the clean-up process and construction."

After nearly two decades of continuously successful operation, BFBIC is not without its challenges. For instance, at press time the incubator was at a comfortable 80 percent occupancy, with seven clients. However, one company that occupies 40 percent of the incubator space is expected to graduate this fall, leaving room for three to four companies.

"We have a hole to fill here," Barz says. "Consequently, one of the messages I'll be delivering [to the community] is that there is space here, and I'll be reintroducing people to the package of services we offer."

Given BFBIC's track record, that should not be a hard sell.

Results that count

Ben Franklin Business Incubator Center 115 Research Drive Bethlehem, Pa.

Year Opened: 1983

Size: 21,000 square feet (gross, including common, electromechanical and administrative areas); 10,450 square feet (space rented to companies)

Focus: Early-stage, technology-oriented companies

On-Site Clients: 7

Graduates: 40

Sponsorship: Ben Franklin Partnership Program, Lehigh University, Jordan Family (Lehigh University alumni)

Tax Status: 501(c)(3)

Cost of Business Assistance Services: Rent is $10/square foot. Clients also pay for business and technical services at reduced rates on an as-needed basis.

Incubator clients and graduates have:

  • Gross revenues in excess of $330 million
  • Created more than 2,400 jobs
  • Introduced 70 new products
  • Received more than 50 patents

Source: Ben Franklin Technology Partners of Northeastern Pennsylvania www.benfranklin.org

Keywords: best practices, economic impact of incubation, in-house loan and equity financing program, partnerships -- organizational/corporate, technology incubator

Contact NBIA

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Fax: (740) 593-1996
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