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From steel town to technology town: Edison Technology Incubator does its part to build a high-tech community in Cleveland

by Jennifer Agoston

October 1999

Twenty years ago, maybe even 10, the city of Cleveland was best known for its grimy steel mills, vacant factories and a river that once caught fire. Such ignominy could have put off anyone who might have considered starting a business there. But in the '80s a new generation of entrepreneurs wasn't fretting about burning waters. They were igniting some ideas of their own through the Edison Technology Incubator (ETI). Judging from the incubator's track record, the companies might want to raise a glass of beer with Drew Carey to toast their good Cleveland fortunes: ETI clients have started 53 companies that have employed 449 high-skill employees and attracted more than $130 million in investment capital.

ETI has successfully leveraged resources from local and regional organizations to give its clients the best chance to succeed, and in turn ETI has planted the seeds for what some have reason to hope is becoming one of the country's technology hotspots. This year, ETI's efforts were recognized nationally when it received the 1999 NBIA Incubator of the Year Award in the high-technology category.

Background

ETI has its roots in the Center for Venture Development, an "incubator without walls" that Enterprise Development created in Cleveland in the early 1980s to combat economic decline in the Greater Cleveland area. (Enterprise Development, an independent, nonprofit subsidiary of Case Western Reserve University [CWRU], in cooperation with the Weatherhead School of Management acts as a catalyst for entrepreneurial activity in Northeast Ohio.) Funded by the Greater Cleveland Growth Association, Cleveland Tomorrow, the Cleveland Foundation and the Gund Foundation, the Center provided incubator-like services to local entrepreneurs but didn't house any of the clients it assisted.

When the Ohio Department of Development (ODOD) took the first steps toward launching the Thomas Edison Program, a statewide incubator network, Enterprise Development was one of the first organizations the ODOD approached. The department thought the Center for Venture Development was offering valuable services to local emerging companies, but one thing missing was a facility. "The Edison Program [originators] thought walls were an important part of the incubation process," says Diann Rucki, director of Enterprise Development, also parent organization of ETI, and a member of the group that helped develop ETI. The Development Department wanted to turn the Center into an incubator with walls and make it a part of the Edison network.

Before submitting a formal proposal to the Edison Program, the Center for Venture Development and EDI hosted a conference that brought together a group of 12 incubation experts for a roundtable discussion on the dos and don'ts of building a successful incubation program. They also conducted an in-depth survey of current and past clients to determine what services entrepreneurs felt would add value to an incubation program. "With these two groups we learned what kind of mistakes have been made and the critical success factors of a successful incubation program," says Rucki.

One of Rucki's duties in the early years was locating a facility to house ETI and its clients – a responsibility that she says was one of the most challenging aspects of the development process. "The state was not interested in contributing capital. They wanted to focus on operating aspects," Rucki says. That meant she had to find a facility that would require a minimum number of capital improvements and also fit the criteria of the entrepreneurs surveyed. "It was an intensive search process," she recalls.

Rucki, then a graduate associate at the Weatherhead School of Management at nearby CWRU, finally found suitable space in the University West Building on the campus of CWRU that could accommodate ETI. She also performed a cost-benefit analysis and break even analysis and developed the first set of services that would be offered to incubator clients. Almost three years after being approached by the state, Rucki's efforts paid off. EDI was awarded funding from the ODOD and given the green light to launch ETI, the second of the Edison incubators in Ohio.

Facilities

ETI is located in an 18,288 square foot section of the University West Building on the CWRU campus. Many of ETI's nine client companies are developing technologies that are rooted in research and development at CWRU, a university known for its strong science and technology programs, or the nearby Cleveland Clinic, a world-renowned medical institution.

Located just downstairs from ETI is BioEnterprise, which opened in 1997. This laboratory and office building for mid-stage biomedical and biotechnology companies also serves as a post-graduate facility for ETI companies. The 41,465 square feet of space that makes up BioEnterprise houses six companies, five of which were launched at ETI. "We're trying to create a pipeline effect," says Ellen Blahut, director of ETI. She explains that the main goal of BioEnterprise is to give mid-stage biotech companies a place to go when they outgrow the services and space that ETI provides.

"We had one company in particular from ETI that, when it outgrew the incubator, a next-stage facility wasn't available to them," Blahut explains. The firm would have had to build its own facility in the Cleveland area, which wouldn't have been practical for a company that was still experiencing a few growing pains and hadn't quite yet hit it big. The company packed up and moved to Baltimore where it found a facility suited to its needs.

"We knew this could become a trend," Blahut says. "If this particular company did it, what are the chances other companies wouldn't try to do the same at some point?" she asks.

The developers of ETI, including Rucki, first tried to secure funding from private developers for a mid-stage biomedical facility. "We worked for years trying to convince private developers that if they were to build it, these companies would come," Rucki says. The private developers wouldn't buy into the idea, but four organizations did — the U.S. Economic Development Administration (EDA), CWRU, the city of Cleveland and Cleveland Development Partnership II, the investment arm of Cleveland Tomorrow, provided about $4 million in funding to launch BioEnterprise.

Services

Although ETI and BioEnterprise have different missions and niches – ETI considers nearly all types of early-stage technology companies while BioEnterprise is more focused on mid-stage biotech firms – they offer the same bundle of services to their clients and tenants. The cost is included in rent for both ETI clients and BioEnterprise tenants to use any or none. Most BioEnterprise tenants are beyond the need of the basic assistance provided by ETI and have boards of directors in place that provide guidance, but the services are there should needs arise.

Blahut explains that ETI's business and technical assistance program is structured to be flexible, in response to clients' circumstances. "We're there if they need us," she says. Much of the technical assistance provided to clients is done in cooperation with resources at CWRU. Clients can go to the University staff and faculty for business and technical advice, conduct research at the school's libraries, or hire work-study students, typically available only to university departments. ETI and CWRU also partner on various other programs, including one that places Hungarian exchange students from the business school's MBA program to work with client companies during the summer months. Another collaboration between CWRU and ETI has earned national acclaim. The Enterprise Scholars Program (see "A Win/Win Situation" below ), an internship program that pairs MBA students with entrepreneurial companies in the Cleveland area, was named one of the top 25 internship programs in the country in 1997 by Success magazine.

Clients also can take advantage of the services that Enterprise Development offers in the community. They can participate at half the full cost in the Executive Education Program, which offers business courses to Cleveland-area entrepreneurial executives. They also have a chance at free publicity in Cleveland Enterprise, a quarterly magazine produced by Enterprise Development that features an incubator company in each issue.

In addition to programs, clients also have access to shared office equipment, a T-1 Internet connection and conference rooms, and they have flexible lease options. They also can get assistance from the incubator director and the incubator services manager, both full time, or four other employees – the vice president of finance, a systems administrator, a recently hired director of business development and Rucki – who split their time between business assistance at ETI and other duties with Enterprise Development. Jackie Dreher, as incubator services manager, handles most of the day-to-day interaction with clients. "Her job is making sure everything is running smoothly, from the copy machines to special programs like a monthly luncheon series," says Blahut. Blahut sees clients but focuses more on the "bigger picture," such as public and community relations and marketing the incubator to potential clients. The director of business development, Rich Simpkins, also spends a great deal of time serving clients.

All three also interact regularly with the community and work to expand the network of resources they can offer to clients. "We have an active network in place when they need it," Blahut says.

Client companies like Micro Medical Devices, which has been at ETI for three years, truly value the services and networking opportunities, both with other clients and organizations outside ETI. "We network with other small companies and get exposure to investment organizations," says Jim Ohneck, chief operating officer of Micro Medical Devices, which develops products that make surgical procedures less invasive, taking away some discomfort for patients and reducing recovery time. "Because of [those incubator benefits] we have been able to more sharply focus our resources on our product development," Ohneck says.

ETI clients who take advantage of everything the incubator has to offer increase their chances for success. Blahut points to ETI graduate Athersys, which created the first artificial human chromosome in 1997 and last year closed on $10.1 million in venture funding. Athersys drew on the Enterprise Scholars Program and ETI's many other business assistance services while in the incubator (1995-1998) and continues to take advantage of the services Enterprise Development can provide – the firm transitioned into BioEnterprise in February 1998.

"The staff at EDI has been instrumental in assisting the management of Athersys in building a network among the local professional services firms, such as legal, accounting and venture capital firms," says Gil Van Bokkelen, president and CEO of Athersys. "The staff at [BioEnterprise] has provided us not only with valuable advice and support, but has also provided capital for the company's early-stage growth and development."

Filling the space

The network Blahut and her staff have established in the community gives them an opportunity to spread the word about ETI and BioEnterprise to potential clients and tenants. "A lot of our marketing efforts are word of mouth," she says. Blahut has kept ETI at nearly 100 percent occupancy most of the time and she's done so without a public relations budget. "It's all about enhancing my network and the incubator's network and having feelers out there in the community," Blahut says.

CWRU is also an active source of referrals to both ETI and BioEnterprise. "Groups there are aware of us, and, especially when a company is developing a technology, they contact us for space," Blahut says.

ETI doesn't have any hard and fast rules on who they will or won't accept into the program. "We use our judgment," Blahut says. "By the time a company applies, I've usually met with the entrepreneur and other key folks involved with the company a few times. I can usually get a good feel if this person has what it takes."

Although Blahut says she prefers companies to be beyond the "idea stage" that doesn't mean they necessarily will have a business plan in place. If they don't, she'll ask the same questions of the applicant that would be answered in a business plan, including what the background of the entrepreneur is, where he or she expects to obtain funding and other key business questions. Successful applicants do usually have a licensing agreement or a patent pending.

Most companies remain clients of ETI for anywhere from three to five years, with the average staying time about two-and-a-half years. "Most of the time it's their decision to leave," Blahut says. "They outgrow us." Blahut's rule of thumb is to never give clients more than 20 percent of the space in the building. ETI clients sign a yearly rental agreement with Enterprise Development but terms are flexible and allow them to move out with 30 days' notice. BioEnterprise tenants, on the other hand, sign a formal lease with CWRU that may range from three to five years and is difficult to break.

Shared funding

ETI and BioEnterprise share more than space, personnel and services. They shared the $285,000 that parent organization Enterprise Development received from ODOD in fiscal year 1998. "The state considers ETI and BioEnterprise one," Blahut says. "They give us baseline funding. We don't get any additional money for BioEnterprise." They also both benefit from the savings resulting from a rent subsidy from CWRU, which equaled $91,100 last fiscal year, and they share revenues from rental income. In addition, the two programs split the revenues generated by fees clients pay for using office services such as copiers and fax machines in the building. BioEnterprise also receives money from CWRU on occasion for the build-out of areas inside the facility.

Every two years, Enterprise Development returns to ODOD to secure its next round of financing for ETI and BioEnterprise. To determine what level of funding it will supply, ODOD compares what ETI has accomplished with the objectives it set out to accomplish two years before and determines how much it should allocate for the next two years. The state also takes into consideration ETI's future plans. "It's a narrative and numbers," Blahut says. "We set programmatic goals and number-wise goals."

Although Edison program funding has been one of the oldest and most reliable sources of state incubator funding in the nation, Blahut says EDI is beginning to consider possible alternatives. "We're just now starting to take a really hard look at that," she says. With state budgets always in flux, EDI has realized its funding could be cut at any time. "It's always on our minds that this funding could be gone," says Blahut. Right now, she's in the early stages of identifying foundations that may be able to provide grants for capital improvements.

Advice

Blahut surmises that one of the keys to the success of ETI has been its ability to bend to the needs of clients. "You must be flexible," she emphasizes. "It's important to listen to companies and find out what they need," she says, even if that means along the way you have to adapt what you can provide clients.

Helping companies grow hasn't come without its challenges. "A major hurdle is always funding," she points out. "We've been able to get support for new programs that we develop, such as the Enterprise Scholars Program, but need to tap alternate sources of funding for operations."

She also points out that you have to expect some downturns when dealing with early-stage technology companies like those housed at ETI. "You're really taking a risk," she says, "but you have to do it."

Edison Technology Incubator (ETI) and BioEnterprise

11000 Cedar Ave. Cleveland, Ohio 44106 www.enterprise-development.org

Year Opened: ETI - 1986; BioEnterprise - 1997

Size: ETI - 18,288 square feet; BioEnterprise - 41,465 square feet

On-Site Clients: ETI - 9; BioEnterprise - 5

Graduates: ETI and BioEnterprise - 53

Sponsorship: ETI and BioEnterprise - Ohio Department of Development and Case Western Reserve University

Tax Status: Nonprofit 501(c)(3) as part of Enterprise Development

Rent per square foot: ETI - $9.50 to $14.55 per square foot, depending on the type of space and length of time a company has been in the incubator; BioEnterprise - $18.75 per square foot.

Cost of business assistance services: Included in rent

A win/win situation

The Weatherhead School of Management at Case Western Reserve University is known for churning out successful business school graduates who go on to climb the corporate ladder of major corporations throughout the country. But not all MBA students want to go the corporate route, and that's where the Edison Technology Incubator (ETI) comes into play.

Weatherhead's Enterprise Scholars Program, whose development was spearheaded four years ago by incubator staff, matches a select group of MBA students each year with companies in the Cleveland area that have an entrepreneurial focus, including clients of ETI. Interns spend one year working with the company and have a hand in all aspects of its operations. The objective of the program is to provide students who have expressed an interest in entrepreneurship with a chance to taste it first hand. "We want to provide them with real-life, hands-on experience with an entrepreneurial firm," says Ellen Blahut, director of ETI.

At Micro Medical Devices, a client of ETI, a student intern last year helped with market research. "It ultimately resulted in a more marketable product and dramatically increased our knowledge of the industry," says Micro Medical Devices Chief Operating Officer Jim Ohneck. "It was very valuable to us."

Funding from the Kaufmann Foundation, Weatherhead and Hi TecMetal Group, a Cleveland-area company, helps defray the costs of the program. Participating firms pay a sponsorship fee of $7,500 a year, and in many cases the incubator budget covers that cost for participating client companies. "We're providing firms with talented, motivated, bright help for an extended period of time at a reasonable cost," Blahut says.

According to Blahut, more than 50 percent of participating students have been offered full-time positions with the companies after their internship has ended. "The program is rated as one of the best in the country by Kaufmann," Blahut says.—JA

One building on the campus of Case Western Reserve University in Cleveland, Ohio, houses both the Edison Technology Incubator (ETI), on the fourth floor, and BioEnterprise, on floors one and two.

BioEnterprise client Advanced Micro Machines for Industry creates microelectromechanical systems (MEMS) that provide sensing actuation and control capabilities for a range of products, including "smart" tires that can tell you when your pressure is too low. The Aircraft Sensors Division of BFGoodrich Company recently purchased the firm.

Edison Technology Incubator (ETI) and BioEnterprise are located in the same building but on different floors, each with its own layout. The fourth floor of the building was already configured in such a way that ETI was able to move in with little modification. Director Ellen Blahut says the 160 square foot, windowed offices that line the perimeter of the building are perfect for early-stage companies. As the firms grow, the different shapes and sizes of space in the interior of the fourth floor offer options depending on clients' needs. BioEnterprise's layout was designed specifically as midstage suites for companies that need a lot of lab area as well as some office space. Companies can easily expand into a neighboring suite, using adjoining double doors.

Keywords: best practices, facility management, funding sources/fundraising -- incubator, partnerships --organizational/corporate, technology incubator, university partnerships

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