Growing Innovation: Winning Formulas for Tech Incubators

Technology incubators intended to turn innovative ideas into viable new companies are a key piece of economic development plans for many cities and states. But what’s the recipe for success? For this story, we interviewed the directors of five tech incubators about their operating models, relationships with the public sector and metrics of success.

A 2011 research study, Incubating Success: Incubation Best Practices That Lead to Successful Ventures, provides some guideposts. Funded by the U.S. Department of Commerce Economic Development Administration, the study was conducted by the University of Michigan’s Institute for Research on Labor, Employment and the Economy; the State University of New York at Albany; the National Business Incubation Association; and Cybergroup Inc. It surveyed more than 100 incubators and came up with several observations.

The best-performing incubators collect client outcome data more often and for longer periods of time than their peers, the study found. Overall, two-thirds of top-performing incubators collect outcome data. More than half collect this information for two or more years, while slightly more than 30 percent collect data for five or more years. “Measurement is key,” said Megan Reichert, who has served as venture accelerator program manager at the University of Michigan and director of incubation at the University of Toledo. Incubators must keep a focus on client milestones as well as the measures that the funders are interested in, which may be jobs or investments from venture capitalists or angels, said Reichert, who also has served on the board of the National Business Incubation Association (NBIA).

Most high-achieving incubators are nonprofit models, and public-sector support contributes to program success. Only three of the top-performing incubation programs in this study operate without public-sector support. (Reichert noted, however, that for-profit incubators are becoming more common these days.) On average, nearly 60 percent of an incubator’s budget is accounted for by client rent and service fees. That would suggest that some level of public-sector investment contributes to greater incubator outcomes in terms of job creation, graduation rates, etc.

Reichert said NBIA surveys indicate that one-third of incubators are affiliated with educational institutions and many have funding from economic development organizations.  “It takes a diverse income stream to become self-sustaining,” she said, “and government funding is one component.”

From her experience in Ohio and Michigan, Reichert said economic development officials are focused on incubator data that makes a case for the return on investment, including jobs, leveraged funding and Small Business Innovation Research grants won. “They look for the effectiveness of the programs and absolutely will pull the funding plug on ones that can’t demonstrate it.”

Here’s what directors of a handful of thriving incubators had to say:

DUMBO Incubator

Location: Brooklyn, N.Y.
Founders: New York University School of Engineering, with support from the New York City Economic Development Corp. and Two Trees Management Co.
Executive: Samir Ajmera
Date opened: January 2012
Number of current participants: 19 resident and 6 virtual

How it works: One of three incubators launched by NYU, the DUMBO Incubator focuses on hardware companies, mobile technology, enterprise software and Web 2.0. It’s also very design-oriented. “We help [participants] build out their team and make connections with people at NYU,” said incubator manager Samir Ajmera. Startups usually come in with one to five employees and graduate with 10 to 15 within 12 to 18 months. By then they usually have raised $1 million to $3 million and open their own offices. “We don’t invite them to stay longer than 24 months,” he said. “If you can’t graduate in 12 to 18 months, something is not working.” The incubator charges the startups $400 per desk per month, and in exchange they get an array of business services, as well as access to angel investors and venture capitalists.

Government links: New York City Economic Development Corp. negotiated subsidized rent on the incubators’ behalf, “so we probably pay a third to a quarter of what other companies in our building pay. They also pay a percentage of our budget,” Ajmera explained. The state of New York recently declared the three startup business incubators of NYU tax-free zones as part of the START-UP NY program to foster job growth and economic development.

Secret sauce: I believe we are one of the best university-run incubators,” Ajmera said. “How do you leverage your university to scale startups in a really interesting way? I think NYU has made a strong push to make that happen. People want to be associated with NYU’s incubators because they want access to the talent. We have a strong pipeline of NYU engineering students, computer scientists, Stern business school and law school. They believe when they come into our office that they have really good connections to talent. Because that is one of the big challenges startups face — building out their teams.”

Measure of success: Since 2009, the three NYU incubators have served more than 100 companies, with seven of those acquired by established public and private companies. Program graduates have created 900-plus jobs and raised more than $60 million in equity funding.

Rocky Mountain Innosphere

Locations: Fort Collins (headquarters), Denver and Golden, Colo.
Founders: An array of private and public partners, including the cities of Fort Collins and Loveland and Colorado State University
Executive: Mike Freeman
Date opened: 1998
Number of current participants: 39
How it works: Companies stay in the incubator a little over two years on average. “The whole idea is to support companies through a certain phase of growth. We have a very defined process, but it is not cookie cutter,” said Mike Freeman, Innosphere’s CEO. Space is an important aspect of what the Innosphere offers, because many startups need access to specialized facilities to do energy applications and large engine controls. The Golden office is located at the Colorado Center for Renewable Energy Economic Development, which is co-located with the U.S. Department of Energy’s National Renewable Energy Laboratory. The Innosphere recalibrates with the companies every six months, defining milestones and successes. “We evaluate whether we are providing valuable services and whether the company is moving forward,” Freeman said. “If either is not happening, we will sever the relationship.”

Government ties: The cities of Fort Collins and Loveland as well as Colorado State University are founding partners and provide sustaining funding. “I’m not clear how you would do what we do if you didn’t have strong public support,” Freeman said. “Fort Collins’ economic development strategy has a significant component around innovation and entrepreneurship, and as they were developing that strategy a few years ago, we were tightly woven into that plan by design. The city is able to leverage their investment almost 10 to 1, because we fundraise and bring in other partners.”

Secret sauce: “We have radically redefined how we screen companies by developing an online tool that our internal team and outside reviewers can use to quickly and effectively assess where a company is,” Freeman said. “For the companies we think aren’t ready yet, we offer them pre-client services. Their problems usually fall in one or two buckets: the technology is not far enough along or not enough market analysis has been done. We have built services for those companies. We want them to be clients, ultimately. I don’t see a lot of places doing that.”
Measure of success: In 2013, the Innosphere had its largest graduating class yet: 13 new companies. Client companies employed the most workers to date, with almost 200 full-time and another 100 part-time employees. Fueled by angel investors, client companies attracted more than $35 million in new investment.

Gangplank

Locations: Chandler and Avondale, Ariz., as well as Richmond, Va., and Sault Ste. Marie, Ontario
Founders: Derek Neighbors and Jade Meskill
Date opened:  2008
How it works: Gangplank is a nonprofit collaborative workspace group and startup incubator that works on a pay-it-forward or gift economy model, said Co-founder Derek Neighbors. “Whatever participants get out of it, we ask them to give something equal in return,” he added. That might include mentoring or teaching a class. “We don’t do a typical incubation model for some time-lock period. Some people come in just for a few days, some run their business and have 10 to 15 employees.” Gangplank provides electricity, Internet and the space, as well as courses on how to run a business and mentoring. “We teach them how to succeed or fail fast,” he said. “People figure out if what they are doing is working for them or not working for them. If it is not working for them, they might join up with somebody else they meet here. But when a company gets to about 10 to 15 employees, it gets difficult for the company to separate its culture from Gangplank’s culture. That is about the time they start to look to move somewhere else. It becomes easier to grow by having their own space.”
Relationship with government: Gangplank provides services to city governments, such as helping them with open data initiatives and educational events. In return, the city provides space, Internet and electricity. “Some cities we are in don’t have a physical building so they give us a stipend to pay those bills,” Neighbors explained. “In other cities they have a physical building we can occupy, so we do a $1-a-year rent.”

Secret sauce: “We are trying to show a new way to work,” Neighbors said, “and show cities new ways to diversify themselves and prepare for an economy that looks much different.”

Measure of success: Gangplank doesn’t formally track traditional business metrics. “If you want to change the model, you can’t use old metrics to determine success, so we have purposefully avoided those,” Neighbors said. “But we do follow everyone who has spun out of Gangplank. We have a strong alumni group that stays connected. They tend to be our biggest supporters. A lot of our graduates go to San Francisco, Seattle or Portland, so we have mini-Gangplank communities there. We are still connected to those individuals.”

Healthbox

Locations: Headquartered in Chicago, with seven hubs: Chicago; Boston; Tampa, Fla.; Nashville, Tenn.; Salt Lake City and London (and soon Tel Aviv)
Founders: Nina Nashif and Sandbox Industries
Date opened: 2012
Employees: 22

How it works: Healthbox typically works with six to 10 startup companies per program. It raises money in a microfund structure to pay for its operations as well as make investments in early stage health-care companies. Funding comes from strategic partners, usually in the health-care field. “A good example is in a Chicago program where we have HCSC, Advocate Health Care, Ascension Health and several others participating,” explained Jill Seidman, a Healthbox director. “The typical structure is $50,000 in exchange for 7 percent equity, but that structure does vary based on the stage of the company,” she added. Partner organizations invest for several reasons, Seidman said. They want to look at the broad base of innovation in health care and see where trends are going. They don’t want to be left behind. They want to see the companies coming along that may create something that would change the way they do business. Or they are looking for companies that may be able to meet their current needs. “For instance, in our last Chicago program, one of the large health-care companies became partners with two of our portfolio companies,” she said. “They also want to expose their own employees to innovation. There are things employees of large organizations can learn from startups about flexibility and agility.”

Relationship with government: Healthbox does not have any formal partnerships in the United States. It uses local economic development resources to help source companies to work with, and to expose that Healthbox is coming. In partnership with the government in the United Kingdom, this fall it is launching the Health Social Innovators program, which has a social enterprise focus. “As we raise a certain amount of funding, the government is going to match that amount,” Seidman said.

Secret sauce: “Our health-care focus is different,” Seidman noted. “But the real secret sauce is how deep we go in working with our partners. Our thought process is that in other industries you are able to code and create Uber and disrupt an industry, but for health care you can’t just sit behind your computer. You need to be out there, interacting with physicians and understanding their workflows. The partnerships we formed to help these companies are the key differentiator.”

Measure of success: Healthbox has invested in 61 companies that are still operating. “A lot of accelerators will talk about fundraising — how much money the companies have raised. For us, that is just one factor,” Seidman said. “We look at the number of pilots, partnerships and early customers these companies are forming, with the idea that market traction really does help grow your business.” In addition, Healthbox looks at how many jobs they are creating. “We also look at the number of lives that have been touched by their product,” she said. “How many patients are you touching with the company you are building?”

Maryland Center for Entrepreneurship’s Innovation Catalyst (iCat)

Location: Columbia, Md.
Founders: Howard County Economic Development Authority
CEO: Larry Twele
Date opened: 1999
Number of current participants: 20 resident companies and 55 affiliate companies

How it works: In the last few years, the organization changed its name from the NeoTech Incubator to Innovation Catalyst. Speaking about the change, Howard County Economic Development Authority CEO Larry Twele said, “Incubators bring to mind a nice warm place where things are nurtured. That is a part of it, but we are trying to spur innovation. We want to get them in, coach them up and launch them out of here. Instead of a place where they could have small offices and some mentorship, we have structured it to force collaboration.” The iCat shifted the model of how it works with companies. There had been companies there for six to seven years in the old model. “We feel if they are here that long we are not doing our jobs,” Twele said. “We have graduated them out.” Previously the incubator took an equity share of 1 percent for every year the companies were there. “We no longer do that,” he said. “We felt it limited the pool of candidates.” The iCat affiliate members pay a fee and residents pay rent. While not completely self-sustaining, it is funded in large part by program participants.

Government ties: Howard County funds the operations of iCAT. The quasi-public Economic Development Authority gets a large portion of funding from the county but also solicits private investments. The organization also works with the Maryland Technology Development Corp. (MTDC). “Their role is to help commercialize technology for companies that are part of the statewide incubator system,” Twele said. “The companies we work with get some grant funding directly from MTDC to develop prototypes or build branding.”

Secret sauce: iCat is part of a larger ecosystem that makes it work. For instance, one component is the 300-member Howard Tech Council, whose member companies interact with iCat companies. “That cross-pollination and connectivity makes the iCat a more valuable experience,” Twele said. “We have a very interconnected system that I think is unique. They can leverage each other’s strength and interconnected platform.”

Measure of success: The iCat tracks capital fundraising and job growth. For instance, one recent participant came in with two employees and graduated as a 30-employee company.