University Business Incubators: Investing in Ideas

Despite budget cuts and a decline in venture investing, some university business incubators continue to grow with novel approaches

by: Tim Goral UniversityBusiness.com

Education funding is not the only casualty of the poor economy. Money earmarked for research and business incubation at colleges and universities is also on the chopping block in a number of states. In New Jersey, for example, the agency that has funded university research for nearly 20 years is slated to be abolished under the proposed budget put forth in March by Gov. James McGreevey.

The entire $14 million budget of the state Commission on Science and Technology could be eliminated in an effort to close a $5 billion budget deficit. Rutgers University may lose as much as $10 million over the next four years in CST funds, but the bigger loss is what that money might have helped produce. "CST provides the seed money that gets a project started and makes it eligible for federal money," said Michael Breton, associate vice president for Research at the university. "That $10 million could easily help bring in another $50 million," he told reporters.

And Maryland’s fiscal woes may mean at least a 26 percent cut to the budget of the Maryland Technology Development Corp. (Tedco), which funds incubators and research and development of university-grown technologies. If that budget is approved, Tedco will lose some $1.5 million in funding for fiscal year 2004.

Venture capital funding, too, continued its post-boom decline, ending the fourth quarter of 2002 at its lowest level since 1998, according to the quarterly Money Tree survey (www.pwcmoneytree.com) by PricewaterhouseCoopers. Venture investing in 2002 totaled $21.2 billion—approximately half of 2001’s $41.3 billion.

Grow Your Own

Still, some university incubator programs grow and even thrive, despite a dry venture capital pool and a tight economy. In fact, they are relying on innovation and technology transfer to improve the communities in which they are based.

"The major issue these days, here and across the country, is creating a diversified economy; an economy that has a lot more higher-wage jobs," says Carol Ann Dykes, associate director of the University of Central Florida Technology Incubator. "Our state generally has been dependent on agriculture and tourism," says Dykes. "We have not been known as a technology state."

Recognizing a few years ago that central Florida would have a difficult time persuading technology companies to relocate to the area, UCF hatched a plan to grow and nurture its own technology enterprises. This university-driven community partnership is intended to build high-tech opportunities into successful business ventures in central Florida.

Incubators dramatically increase a start-up’s chances for success. According to the National Business Incubation Association (NBIA), 87 percent of incubator-hatched companies are still in business today, and 84 percent of that number stay in the community. "That’s a dramatic statistic for a university or community to think about," says Tom O’Neal, director of the UCF program. "Growing our own companies, rather than trying to recruit the ones that will go to the highest bidder, has helped our region tremendously."

The UCF incubator, which nurtures promising young firms for up to three years, has generated more than 400 local jobs in its three-year history and over $100 million in revenue to the region from licensing, venture investment, and sales. The incubator was recently named by the NBIA as one of the top 10 incubator programs in the nation. Among its graduates are a number of nationally successful firms such as Alinean LLC, which develops research, methodologies, and software tools to measure the value and ROI from information technology. Alinean has formed strategic partnerships with companies such as Dell, PeopleSoft, and HP and is growing rapidly, says Dykes.

Another UCF-hatched firm, AppliCote Associates, was awarded an important NASA contract in March to develop a process to implant atoms in semiconductors. AppliCote’s technology could serve an integral role in the nation’s space program and could be a key to developing manufacturing technologies aboard spacecraft.

Filling a Need

In a departure from the not-long-ago days when venture money seemed to flow from all corners (often supporting vague business plans for "hot" start-ups), UCF’s approach is to build solid companies with steady revenue growth. "Most of the firms at the incubator leave when they have reached $2 million to $3 million in revenue," says O’Neal. "They’ve started to make money and can support themselves out in the community as good strong corporate citizens."

An entrepreneur himself, O’Neal was instrumental in launching the UCF incubator as a way to get the university and its resources involved in helping new businesses. "More and more universities are becoming aware of their responsibilities and impact on the local community from a corporate development point of view," he says.

But in the view of some, entrepreneurship and academia are opposing concepts. Indeed, says O’Neal, "One of the biggest obstacles faculty face is figuring out how to do a business in a university setting."

"Many universities are just now figuring out how to do this," admits Dykes. "For some, it may involve changing policies regarding conflict-of-interest issues for faculty who want to get involved in start-ups. You need to develop strong policies that help them get involved in an appropriate way, rather than keep them from getting involved at all."

One approach to the dilemma was to ensure the incubator retained its own identity. "Although it is linked to the university, we keep those activities separate," says O’Neal. "The incubator facility has its own address and phone numbers, and the faculty have their own business cards for when they have their ‘business hats’ on."

Another key was opening the facility and its resources to the community at large. That access includes a number of entrepreneurial training programs originally designed to help faculty become good businesspeople. "Our goal is to provide for every corporate development need community members have. We try to help them strike a good balance between long-term vision and day-to-day operations," says Dykes. "When they come from the outside, they usually don’t know how to do that."

The incubator offers access to attorneys, accountants, insurance companies, human resource companies, market research, public relations firms, and its own staff "serial entrepreneurs" to help mentor start-ups. "The expertise is gratis largely because this community believes strongly in what we are doing," says Dykes. "Of course, many of the participating experts hope that it will one day lead to a paying client relationship, and it often does because they have been of such help to the companies."

Boot Camp

Having the right tenants in an incubator increases its ability to help them grow and succeed, says O’Neal. In an effort to end up with the most promising tenants, UCF offers entrepreneurship training, certificate courses in business planning and strategy, and a seven-week "boot camp" course that acts as a self-selecting filter for start-ups, before they are accepted by the incubator.

Faculty and local accountants and lawyers conduct the boot camp. It addresses relevant topics such as raising venture capital in a poor economy, and creative ways to start a company without venture funding. It also helps prospective tenants define the type of company they want to achieve, O’Neal says. "We want them to think about why they are doing it—do they want a family business that will be around for a hundred years, or do they want to flip their company in three years? Are they aware of the time requirements and the hard work? We try to create a culture here where people can fail and not think that’s bad.

"At the end of the course, they present a business plan to our advisory board, and we decide whether they should be an incubator tenant or not," says O’Neal. "We haven’t had to make that decision very often because, by that last session, the ones who aren’t ready understand that they have to go off and do their homework and come back another time."

The effort that the incubator puts into its tenant companies often pays dividends when those firms graduate and succeed, notes Dykes. "We have grad students who have started companies in the incubator by licensing technology from a professor; then they come back to fund that professor and other grad students as well. It’s the most effective tech-transfer mechanism we’ve ever seen."

Like most incubators, UCF hopes it will one day hit the jackpot by licensing university technology to a major corporation such as HP or Dell, but for now, O’Neal says, helping smaller companies get a start is what it’s all about. "You don’t go at it from the ‘big deal’ perspective; you go at it by helping build these $10- or $20-million companies one at a time. It’s hard work, but it’s very rewarding."

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Sink or Swim
Blueprint for Success

What goes into making a successful incubator? The University of Central Florida’s Carol Anne Dykes and Tom O’Neal outline key points to consider:

• Make it part of the region’s economic development strategy. "If the university wants it but the community isn’t thrilled about economic development of this sort, you could run into trouble," advises Dykes. "You need not just the
university, but the city and the county, all going for the same goal."

• Find the experts. Incubators demand a great deal of outside support and expertise. "The real, hands-on entrepreneurial business expertise is usually not within the walls of the university; it’s outside, in the community," says O’Neal. "You need to develop those relationships."

• Clusters are good. "UCF specializes in optics and computer science, so many companies in our incubator are related to those fields," says Dykes. "They feed off each other, and that has been a very successful part of our effort."

• You can get there from here. UCF is fortunate to be close to Orlando International Airport. That access makes it not only an attractive location for companies looking to launch, but also a convenient destination for venture capitalists. "If they have to take three connecting flights to get to your business, they just won’t come," O’Neal warns. "Yes, you can work around those issues, but it makes it more difficult."

• Learn about licensing. "Historically, tech transfer offices have wanted to license to large companies where they knew the product would get to market quickly," says Dykes, "but these days, many start-ups may take longer. You may want to take in equity in lieu of licensing fees." —TG

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The Rose-Hulman Institute of Technology (IN) is recognized as one of the premier engineering schools in the country. It already operates a high-tech business incubator called Ventures, which is funded by the Lily Endowment. Formed in 1999, Ventures recently secured $24.9 million from the Endowment to continue supplying its 32 start-ups with capital, technical assistance, and the expertise of Rose-Hulman staff. Previous successful incubator graduates include NoInk Communications (which focuses on wireless solutions for business) and MusicRebellion (a Web-based digital music company).

But another arm of the Institute’s incubator program hopes to develop more mainstream products, while teaching undergraduate engineering students the lessons of corporate strategy and business development. Called Engenius Solutions (www.engeniussolutions.com), it’s a Web-based incubator that improves the chances that technical ideas developed by inventors and RHI students will make it to the marketplace. According to Dan Moore, associate dean of faculty and chairman of the program’s faculty governing board, "It’s a novel approach in that we are using undergrads to perform all the management aspects of the program; they sink or swim by being exposed to many things that a typical engineering student will not be exposed to."

Engenius Solutions received an initial $1.9 million grant from the Lily Endowment last summer to provide support for project work in which students are acting as entrepreneurs. Local Indiana inventors have come on board as well to find a venue for their ideas, but most of the projects are student-instigated, says Moore.

When an idea is introduced, the student managers look at the business aspects of it to judge how feasible it is, how much it would cost to develop, and its potential marketing aspects.

The initial group of eight projects was chosen from more than 40 ideas to be developed and brought to market. "Some of the ideas were out in left field," admits Moore. "But most of them were near the prototype stage and looked promising."

Current projects include a special "halo" orthosis for neck-injury patients developed by Stamper Medical Technologies. The device adapts to changes in the skull geometry that occur during treatment, resulting in fewer painful adjustments. Another product on the runway is an invention that allows the wheelchair-bound to play miniature golf.

The entrepreneurs collaborate with a team of student experts to bring the ideas to a demonstrable stage. "We’re not in the business of producing and selling it," Moore says, "but once we’ve developed it, we can use our Web site and our contacts through the site to try to get a conventional company interested and take it to market."

Because Rose-Hulman does not have a business school, it partners with the Kelley School of Business at Indiana University in nearby Bloomington, to collaborate on business and marketing aspects that RHI students may not have exposure to. "The people at Kelley help our students understand margins, how to create business plans, and set prices," explains Moore. "At the same time, the Kelley MBA students get exposure to the engineering issues that are involved in project work. When we finish a project, all the students have been exposed to an entire cycle of product development, from concept and marketing issues, to patents and business-plan development."

By the end of the process, notes Moore, students should feel comfortable addressing those issues in the corporate world, after they graduate. "Some of the better students will decide that they don’t want another company to pick up their product, but they’ll have enough confidence to develop their own business plan and marketing strategy, and seek out their own venture capital," he says.

An advisory board comprising business people, manufacturers, and venture capitalists oversees Engenius Solutions. The students make semiannual presentations to the board for feedback. Besides receiving the feedback on their work, they also get the opportunity to market their ideas to the very people who may want to invest in them.

Moore says the program prepares students for careers after school by merging their high technical skills with an understanding of marketing aspects. "The companies they go to work for are pleased with their ability to understand not just the technical side of an issue, but also the business and marketing issues that need to be addressed."

Although Engenius Solutions is still in its infancy, the idea has generated interest from other schools interested in trying it themselves, Moore says. He expects the first products will be on the market by the end of the spring semester, and is looking at expanding the program to support the many students interested in participating.

"We’ve had tremendous interest from students and potential clients who want to bring their own ideas into the program and see where they can take them," Moore says. "We want to provide that avenue for these creative people to discover whether theirs is the great idea that they think it is. That’s an avenue that’s not available in too many places, especially to undergraduate students."

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