[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                   FULL COMMITTEE HEARING ON BUSINESS 
               INCUBATORS AND THEIR ROLE IN JOB CREATION 

=======================================================================

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             March 17, 2010

                               __________

                   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               
            Small Business Committee Document Number 111-060
Available via the GPO Website: http://www.access.gpo.gov/congress/house

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

        .........................................................

                                  (ii)

  


                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                W. TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               W. TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas

                                 (iii)

  


               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia, 
MELISSA BEAN, Illinois               Ranking
JASON ALTMIRE, Pennsylvania          STEVE KING, Iowa
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
BOBBY BRIGHT, Alabama                GLENN THOMPSON, Pennsylvania
                                     MIKE COFFMAN, Colorado

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                 HEATH SHULER, North Carolina, Chairman


MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri, 
BOBBY BRIGHT, Alabama                Ranking
KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                  (iv)

  
















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

DMonkman, Mr. David, President and CEO, National Business 
  Incubation Association, Athens, OH.............................     3
Cooperhouse, Mr. Lou, Director, Rutgers Food Innovation Center...     5
Lewis, Dr. David A., Assistant Professor, Department of Geography 
  and Planning, SUNY Albany, Albany, NY..........................     7
Strom, Dr. Robert, Director of Research and Policy, The Ewing 
  Marion Kauffman Foundation, Kansas City, MO....................     9
Linder, Mr. Peter, Chair, Mid-Atlantic Angel Group Fund, Board 
  Member, Angel Capital Education Foundation, Malvern, PA........    10
Early, Mr. Timothy, President and CEO, Hampton Roads Technology 
  Council, Hampton, VA...........................................    12

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    25
Graves, Hon. Sam.................................................    27
DMonkman, Mr. David, President and CEO, National Business 
  Incubation Association, Athens, OH.............................    29
Cooperhouse, Mr. Lou, Director, Rutgers Food Innovation Center...    42
Lewis, Dr. David A., Assistant Professor, Department of Geography 
  and Planning, SUNY Albany, Albany, NY..........................    51
Strom, Dr. Robert, Director of Research and Policy, The Ewing 
  Marion Kauffman Foundation, Kansas City, MO....................    61
Linder, Mr. Peter, Chair, Mid-Atlantic Angel Group Fund, Board 
  Member, Angel Capital Education Foundation, Malvern, PA........    68
Early, Mr. Timothy, President and CEO, Hampton Roads Technology 
  Council, Hampton, VA...........................................    76

                                  (v)

  


                   FULL COMMITTEE HEARING ON BUSINESS
               INCUBATORS AND THEIR ROLE IN JOB CREATION

                              ----------                              


                       Wednesday, March 17, 2010

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Dahlkemper, Clarke, 
Bright, Graves, Fallin, and Luetkemeyer.
    Chairwoman Velazquez. I call this hearing to order.
    In recent weeks, our economy has started showing signs of 
economic recovery. Gross domestic product has swung from 
negative 6.4 to 5.7 percent growth, the biggest nine- month 
swing in nearly 30 years. While indicators like these are 
promising, we are still not seeing the kind of job creation 
Americans deserve.
    When it comes to creating new jobs, small businesses are 
always central to the equation. Following the recession of the 
early 1990s, small firms created 3.8 million jobs. After the 
recession of 2001, micro-businesses alone generated one million 
jobs. Entrepreneurs will be just a important to bringing our 
nation out of today's downturn as they were during those 
previous recoveries.
    Business incubators have long been a powerful tool for 
helping new businesses launch and existing firms grow. In 2005 
alone, incubators assisted 27,000 start-up companies that 
provided full-time employment for over 100,000 Americans and 
generated $17 billion in revenue.
    Beyond promoting business growth, business incubators also 
bring proven benefits to the communities in which they are 
located. Nearly eight out of ten incubator graduates stay in 
their local communities, meaning job opportunities and economic 
development remain in that region for the long term.
    Today, the role of incubators is changing as the business 
world evolves. Although many of us think about traditional 
incubator services, like office equipment or meeting space, 
contemporary incubators offer everything from technical 
assistance to financing options, to marketing and manufacturing 
advice.
    One promising trend has been the emergence of incubators 
that are especially tailored to an industry located in their 
community. For example, we have seen the development of a 
fashion focused incubator in New York City. Agribusiness 
incubators have sprouted up in areas with a high concentration 
of food production. In other parts of the country with a 
history of technological innovation, software business 
incubators are taking root.
    These industry-specific incubators allow new firms to tap 
into local knowledge and business networks that are already in 
place. By leveraging a town or city's existing assets, these 
incubators can accelerate economic development and create local 
jobs.
    After all, that is what today's hearing is really about, 
putting Americans back to work. We already know the job 
creating potential of small, growing firms. Now the question 
becomes how to create conditions that maximize the chances for 
budding enterprises to get off the ground. Business incubators 
have a proven track record in this area. In fact, 80 percent of 
firms that graduate from these institutions remain in operation 
to this very day.
    During today's hearing, we will hear from some of the most 
innovative business incubators from around the nation. I look 
forward to your testimony, and I take this opportunity to thank 
you for coming today and participating in this hearing.
    It is my hope that this discussion will not only highlight 
their success stories, but also identify how we can replicate 
those stories in communities across the nation.
    With that, let me thank our witnesses for being here, and I 
yield to the Congress Member Ms. Fallin for an opening 
statement. The Ranking Member will be joining us at a later 
point.
    Ms. Fallin. Thank you, Madam Chairman. I appreciate that.
    And I am sitting in for Congressman Graves right now, and 
so it is a pleasure to be able to help out on this hearing.
    And I think this hearing is very timely, Madam Chairman, as 
we are very concerned about our national economy and certainly 
about our local states and the recession that we have 
experienced, but we, as you just said, heard some better 
numbers, and I hope that we can continue to climb out and help 
our businesses grow and flourish.
    I want to thank all of our participants here today for 
coming to this hearing. We know that you all are very busy. You 
have businesses and companies and associations that you are 
running. So we appreciate you taking time to lend your 
expertise and to talk about a very important topic with us 
today, and that is how we can create more jobs and opportunity 
and capital and investment and encourage our economy to grow. 
It is all about jobs right now, and that is what people need to 
have in America is jobs. We are very excited to hear your 
expertise about incubators and small business and what our 
small business owners needs and entrepreneurs need so they can 
grow.
    Our Committee has actually held several hearings, numerous 
hearings on the credit crunch, on access to capital, on 
lending, and I know that small businesses are finding it harder 
and harder to come by the capital that they need to be able to 
create those jobs and to expand their businesses, and not to 
even mention the purchasing of inventory, making payroll, 
expansion of their businesses or even just to pay the rent. And 
so this is a very important topic for us.
    I know that the Small Business Committee is very anxious to 
learn how we can further help support our small business 
incubators and help you be successful in the local communities 
and in the capacities in which you operate.
    So we are looking forward to hearing from you and taking 
your recommendations, hopefully hearing some what I call the 
best practices around the industry, and that we can further 
share and take back to our individual states.
    So thank you so much for coming today, and Madam Chairman, 
I yield back my time.
    Chairwoman Velazquez. Thank you.
    Our first witness is Mr. David Monkman. He is the President 
and Chief Executive Officer of the National Business Incubation 
Association based in Athens, Ohio. The National Business 
Incubation Association is the world's leading organization in 
advancing business incubation and entrepreneurship, focusing on 
early stage companies.
    Welcome, and you have five minutes to make your 
presentation.

    STATEMENT OF DAVID MONKMAN, PRESIDENT AND CEO, NATIONAL 
                BUSINESS INCUBATION ASSOCIATION

    Mr. Monkman. Thank you, Madam Chairperson, Representative 
Fallin, and the Committee for giving us a chance to speak about 
business incubation.
    As you have introduced, I am President of NBIA. The 
National Business Incubation Association is perhaps the leading 
business incubation association in the world, with 1,900 
members in 65 countries. We have 1,400 members in the United 
States alone.
    I also represent entrepreneurs. I have started ten 
companies in different countries, and I think I have something 
to say about entrepreneurs and their interests in incubators. 
Thank you for the opportunity.
    Indeed, I think business incubation does have an important 
role to play in creating jobs, and I am delighted that you are 
thinking about this.
    Entrepreneurs are the secret to creating jobs, as we will 
talk more about soon, but as you know, starting a business is 
not easy. There are many obstacles entrepreneurs face in their 
process of starting companies. That is where incubators come in 
to play a role.
    You could think of an incubator as a university of a kind 
where the incubator manager is very careful in selecting the 
right companies to come in and gain access to comprehensive 
services that help improve the sustainability of these firms. 
Incubator clients usually stay for about a two or three-year 
period of time, depending on the industry they operate in. They 
expect to graduate, having internalized the assistance over 
time, too. They are going to graduate, and there are strong 
indications that they stay also in their industry; they stay in 
their communities for time afterwards. So it is an important 
consideration.
    The institution is 50 years old here in the States. We 
developed it out of upstate New York, the Batavia Industrial 
Center is still in business today.
    The institution is growing as local residents recognize 
that it is easier to build businesses locally than to chase 
smoke stacks from elsewhere. That is part of the reason why the 
industry has grown to now have more than 1,100 incubators in 
the United States.
    Business incubators do create jobs, as you have summarized. 
In a recent study, we have seen that in 2005, 27,000 businesses 
were assisted by American incubators, creating nearly 110,000 
jobs, and it is worth repeating, $17 billion worth of income 
was produced.
    In a study that was conducted for the EDA, we see that 
relative to other infrastructure projects that were supported, 
business incubators created 20 times more jobs than 
infrastructure projects like sewer and water projects.
    Now there are 7,000 incubators around the world. 
Unfortunately, the United States is beginning to trail behind 
the growth in incubation overseas where over the last 30 years 
alone, we have seen 16 percent growth on a year-on-year basis 
of incubators in the States. We see that growth overseas is 
closer to 25 percent.
    Also we see that today the U. K. and Germany have between 
40 and 45 percent more incubators per capita than we do in the 
United States, despite our having an early lead in this. One of 
the largest sources of federal funding for business incubators 
is the EDA. Unfortunately EDA allocates funding to business 
incubation only through its public works program. In other 
words, they finance the bricks and mortar aspect of a business 
incubator, which is tantamount to building a university without 
covering the professors and the programs that make an education 
experience rich.
    But the story is not over yet. I would like to make some 
policy recommendations that I think are important here. I would 
like to recommend that we consider widening the scope of 
funding support that is offered to business incubators. I think 
that we need to include the support for their operations. So I 
would implore you to think about that.
    Also, I suggest that we also not consider business 
incubation as a tool for serving only distressed areas. In 
today's economic crisis, this is a time we need to consider a 
much larger set of sectors and locations than before.
    Now, you are going to hear today that business incubators 
that follow best practices out performed those that do not. So 
we are hoping to help develop legislation that encourages 
incubation programs to use best practices. Indeed, we expect 
responsibilities associated with any additional funding that is 
made available to business incubators.
    Also we find that incubators that network and collaborate 
together are in a better position to out perform others. They 
share best practice and they understand each other's businesses 
more effectively. So we would like to see more support 
allocated to the development of new state associations where 
local work programs can be developed.
    We would also like to see that we standardize outcome 
measures and develop better ways to monitor return on 
investment for incubation programs, increase the frequency of 
data collection, and synthesize and act upon the lessons we 
learn from the process.
    And NBIA is prepared to help. We can convene a panel, an 
advisory panel, comprised of some of the leading experts in the 
United States, advising on better ways to disseminate best 
practices, identify better proposals and proposal funding 
models, and develop evaluation criteria that improve federal 
funding allocations.
    We can play a continued and larger role in business 
incubation education, and we can, most importantly perhaps, 
mobilize our members to respond to and act on recommendations 
and queries that are required to make more important 
legislation.
    There are a couple of points I would like to highlight. 
High risk start-ups are instrumental in creating jobs, and 
business incubators play a role in making and leveraging the 
investments these entrepreneurs make. We have to recognize 
these entrepreneurs often have these barriers. They may be 
experts in a particular product or service area, but in the 
commercialization of this, this is where they face challenges. 
The roles that incubators play both on the technical assistance 
side and the network assistance side are crucial for 
commercialization.
    Chairwoman Velazquez. Mr. Monkman, the time has expired.
    Mr. Monkman. Thank you.
    Chairwoman Velazquez. But you will have an opportunity to 
expand during the question and answer period.
    Mr. Monkman. Thank you.
    Chairwoman Velazquez. Thank you.
    [The prepared statement of Mr. Monkman is included in the 
appendix.]

    Chairwoman Velazquez. Our next witness is Mr. Lou 
Cooperhouse. He is the Director of Rutgers Food Innovation 
Center based in Bridgeton, New Jersey. The center is a 
university-based business incubation program that supports 
start-up and established food and agricultural companies 
throughout New Jersey and the northeast region with business, 
technical and operational expertise.
    Welcome.

STATEMENT OF LOU COOPERHOUSE, DIRECTOR, RUTGERS FOOD INNOVATION 
                             CENTER

    Mr. Cooperhouse. Chairwoman Velazquez and distinguished 
members of the Committee, thank you for giving me the 
opportunity to address you today.
    As you mentioned, my name is Lou Cooperhouse. I am Director 
of the Rutgers Food Innovation Center, a university-based 
incubation program located in rural southern New Jersey, which 
has been globally recognized for our economic development 
impacts, including the award of Incubator of the Year by NBIA.
    I speak to you as a practitioner of a leading business 
incubation program and as an individual that has extensive 
leadership experiences in new business start-ups, gained in 
both an entrepreneurial and corporate environments.
    There are some common misconceptions about business 
incubator programs. So it may be best if I begin my comments 
today by describing what an incubator is not. An incubator is 
not a program that offers one-time or episodic business and 
financial assistance to aspiring entrepreneurs. Also, an 
incubator is not a building or research park that simply offers 
cheap, subsidized space for tenants or shared administrative 
resources.
    The heart of a true business incubation program is the 
ongoing, personalized, and comprehensive services that are 
provided to clients. By following best practices, an incubator 
will customize its mission, clients targeted, services 
provided, and infrastructure that is required in order to 
integrate its program into the fabric of the community and the 
broader economic development goals of the region.
    A best practice incubator will provide the expertise, 
networks, tools, and a social capital environment that will 
dramatically enhance the success of a new entrepreneurial 
venture. An incubator can become the catalyst for the creation 
of a business cluster in a community, county, state or region 
by creating concentrations of interconnected companies, 
suppliers, service providers and associated institutions.
    As a case in point, our Rutgers Food Innovation Center has 
created a statewide food industry cluster where we have 
aggregated the entire food industry value chain, and where we 
have also aggregated a network of resources to meet the diverse 
needs of our clientele.
    Because of the depth and breadth of their services, 
business incubators do not duplicate any programs administered 
by the SBA or any other federal agency, but instead utilize and 
integrate a number of federal, state, and community agencies as 
part of their comprehensive resource network strategy.
    With your help, we now have an opportunity to enhance and 
expand our nation's business incubator programs which will 
serve as a catalyst for effective and efficient economic 
development in regions across our country. With strong 
conviction, I feel that what is needed first is a dedicated 
federal program that specifically supports existing incubator 
programs nationwide and also supports new incubator programs 
under consideration. Currently there is no dedicated federal 
program that supports business incubators and very few state 
agencies have this capability either, and the situation at the 
state level is only getting worse.
    Incubators today must create a continually evolving 
patchwork of funding programs every single fiscal year in order 
to enhance and in some cases even continue their operations. 
Ongoing operational funding for existing incubation programs is 
critically needed and will sustain and leverage our nation's 
established infrastructure and enable these programs to do so 
much more.
    Funding should also be available for the development of 
feasibility studies and business plans for entities considering 
establishment of new incubator programs so that we can 
proactively develop a continual pipeline for new innovative 
companies in the years ahead. In my opinion, our objective 
should be twofold: substantially increase the already 
compelling impacts of our existing incubator programs and 
double the number of incubator programs in the U.S. during the 
next five years. We must take a leadership position globally in 
our support of business incubation.
    I also feel strongly that federal support to incubators 
should not be biased to distressed communities or to urban or 
rural or technology or any other industry sector, but instead 
focus on the programs that exhibit best practices and can 
create the greatest potential impacts.
    Second, I suggest that a series of targeted programs be 
developed that result in collaborations between business 
incubation programs and our nation's universities and colleges. 
In doing so we can foster experiential learning among students 
who represent our next generation of entrepreneurs and 
dramatically improve the technology transfer capacity among our 
nation's faculty.
    In addition, I propose that programs be developed to 
benefit statewide or regional incubator networks which will 
result in enhanced collaboration and synergy at the local level 
and sharing of best practices.
    Third, we need to create new programs for entrepreneurial 
client companies. We need to target, identify, attract and 
retain existing and potential gazelle companies which are 
responsible for the majority of the total net new jobs to 
maximize their potential for success by nurturing them with our 
incubator resource networks.
    In addition, we need to provide a mechanism for increased 
access to risk capital for entrepreneurial companies that show 
strong potential for business success. Federal funding that 
supports business incubators will yield a significant return on 
investment and result in enhanced regional economies across our 
nation.
    Thank you very much. I would be happy to answer any 
questions you may have and participate in any further 
discussions over the weeks and months ahead.
    [The prepared statement of Mr. Cooperhouse is included in 
the appendix.]

    Chairwoman Velazquez. Thank you, Mr. Cooperhouse.
    Our next witness is Dr. David Lewis. He is an Assistant 
Professor in the Department of Geography and Planning at SUNY 
Albany in New York. Dr. Lewis has taught economic development 
planning, regional economic development, and metropolitan 
structures and function for nearly a decade. Dr. Lewis has also 
conducted over 12 years of research on business incubation.
    Welcome.

     STATEMENT OF DR. DAVID A. LEWIS, ASSISTANT PROFESSOR, 
       DEPARTMENT OF GEOGRAPHY AND PLANNING, SUNY ALBANY

    Dr. Lewis. Thank you, Chairman Velazquez and the other 
distinguished members of the Committee.
    I am honored to share with you my experiences and knowledge 
that I have gained from 15 years of research and my public 
interest in research has been I went to the School of Planning 
because I was interested in helping communities to effective 
invest their scarce resources in creating sustainable 
economies.
    My work has guided policy from the local level, including 
the Rutgers Business Incubator, as well as working with the 
State of New Jersey, as well as the Ministry of Economic Trade 
and Industry in Japan on developing technology business 
incubation policy.
    My testimony today will work on five interrelated themes. 
We have already heard some definition about what a business 
incubator is. I am going to link that to the theory of why they 
work, and then talk about what best practices are available, 
then think about the efficacy. Do we have any evidence that 
they really do work? We have heard pretty good numbers on that. 
A little bit about the gaps in the research, and I would like 
to support the policy recommendations that have already been 
made by Lou and David ahead of me.
    So in thinking about what a business incubator is, there is 
really a distinction between a business incubator and a 
business incubation program. In my view, and the research has 
always defined a business incubator as a multi-tenant facility 
with on-site management that delivers an array of 
entrepreneurial services to clients that are collocated in that 
facility.
    Incubation is a broader definition which includes clients 
that may not be located in the facility but may be known as the 
virtual incubation or incubation without walls, and where their 
clients are not collocated and they receive services indirectly 
that way.
    From the reason to the point of view of talking about why 
small businesses have such difficulty in remaining in business, 
the literature on business suggests that it is three primary 
reasons. One is the lack of access to capital. One is that they 
lack managerial skills, and the third is that they lack 
knowledge about how to estimate their markets and to gauge 
growth and potential, business basics essentially.
    Incubators are the only economic development tool that I 
know that specifically address these three issues. They do this 
through the best practices program, and I will talk a little 
bit about that now.
    And so the consensus opinion in the literature is that 
successful incubation programs have capable staffing, have 
program stability, and policies and procedures and things such 
as entrance and exit criteria.
    But what really happens is the delivery of entrepreneurial 
services, as Lou has suggested. It is the periodic meetings 
with the manager and the client. It is also the peer-to-peer 
relationships that develop within the incubator, the delivery 
of basic services such as how do you actually incorporate a 
business; what are my legal issues; how do you do intellectual 
property protection; how do you do basic accounting and cash 
flow; how do you do business presentations. Those kinds of 
skills are what are transmitted as part of the incubation 
process.
    In this there is also significant cost savings for 
businesses, the things that economists refer to as transaction 
costs. The cost of the time, money and effort to locate the 
correct services for your business is actually helped through 
the management in sort of identifying the problems that small 
business has and then also identifying the service provider 
that can help them meet their needs.
    This also results and many of these services are provided 
at either reduced cost or no cost at all to that business. We 
have heard before another thing about getting capital, is that 
the evidence within the academic literature is that incubator 
clients actually have been successful in attracting venture and 
in-fill capital relative to other non-incubated firms.
    And so with that in mind, another thing is that the reduced 
cost for rent, the shared services are, again, a capital 
savings for these small businesses.
    In terms of efficacy, we have heard some great numbers. A 
range of literature has suggested that there is a very low 
public sector cost per job created in investment in a business 
incubator, roughly between $144 per job to 11,000. Relative to 
the State of New Jersey, their industrial recruitment and 
retention program was costing about $44,000 per job that was 
created. This was work that I did with my colleague Sea 
DiGiovanna.
    EVA research was already mentioned. We mentioned how these 
business incubators anchored their businesses in their local 
communities. This means a really high return on investment for 
the local community in terms of the taxes paid by the firms, by 
the client firms, and their employees. It ranges from about one 
dollar to 1.2 returned in tax investment to one dollar to seven 
dollars returned in tax payments.
    I would also say that based on the limited research, and 
this is one of the gaps in our knowledge, they do compare quite 
favorably to other economic development investments that we 
have made.
    Still we do have some gaps in our knowledge which I will be 
more than happy to talk about in the question and answer 
period, and the one piece of policy that I would like to also 
mention is that any kind of public support needs to be linked 
to the implementation of best practices as well as the 
collection of outcome data, which has been a gap in our 
knowledge.
    Thank you for your time.
    [The prepared statement of Dr. Lewis is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Dr. Lewis.
    Our next witness is Mr. Timothy Early. He is the President 
and CEO of Hampton Roads Technology Council in Hampton, 
Virginia. Hampton Roads Technology Council is the technology 
center for the Southeastern Region of Virginia in Hampton 
Roads. This not- for-profit is dedicated to fostering growth, 
education and communication within the region's high tech 
community.
    Welcome.

STATEMENT OF TIMOTHY J. EARLY, PRESIDENT AND CEO, HAMPTON ROADS 
                       TECHNOLOGY COUNCIL

    Mr. Early. Thank you, Chairwoman Velazquez and other 
distinguished members of the Committee, for the opportunity to 
appear before you.
    My colleagues noted a number of the things that I intended 
to mention. So I will skip forward to save time and talk 
specifically about our incubator. The Hampton Roads Technology 
Incubator System was started in 1998. It's a division of the 
Tech Council. It was a three- year NASA grant requiring 
matching funds.
    We have graduated 27 clients, resulting in 35 companies, 
and advised over 400 others. Typically it takes three to six 
years for a client to graduate, and that depends on whether 
they have certain federal regulations to hurdle. Existing 
clients and graduates have annual revenues in excess of $200 
million with over 650 employees. Of our current clients, 60 
percent are minorities, 20 percent are disabled vets, and 33 
percent are women-owned. It just happens that way. It's not 
something we focus on.
    Others have already talked about what Incubators do. So I 
won't go through that, but I will add what perhaps is most 
important we try to prevent companies from needless spending. 
Only in incubator environment can entrepreneurs get this vast 
array of services customized from one client to the next, from 
one organization that is truly invested in their success.
    The Hampton Roads Technology Incubator System each year 
creates the following tax impacts: for Hampton Roads, $1.5 
million; for the State of Virginia, $6 million; and for the 
federal government, $18 million. Yet our only investor is the 
City of Hampton. Fortunately, they are very forward thinking. 
We run the incubator on an annual budget of $185,000 when it 
usually takes around 400,000. This can only be done because of 
our association with the Hampton Roads Tech Council.
    Could we do more with more money? Absolutely. Our plans, 
however, are to be self- funded one day through the 
establishment of a for-profit. We have tried everything else, 
and incubators are just not sustainable without some sort of 
government subsidy.
    Should you wish I would be happy to answer any questions 
you might have on incubators or their associated programs.
    Thank you very much.
    [The prepared statement of Mr. Early is included in the 
appendix.]

    Chairwoman Velazquez. Thank you.
    Our next witness, Dr. Robert Strom. He is the Director of 
Research and Policy at the Ewing Marion Kauffman Foundation, 
located in Kansas City, Missouri. This foundation promoted 
innovation and research and awards grants to advance 
entrepreneurship and improve youth education.
    Welcome, sir.

STATEMENT OF DR. ROBERT STROM, DIRECTOR OF RESEARCH AND POLICY, 
              THE EWING MARION KAUFFMAN FOUNDATION

    Dr. Strom. Thank you, Chairwoman Velazquez, and thank you 
for the opportunity to testify to this Committee on the role 
that small businesses, entrepreneurs, and business incubators 
play in job creation.
    If there is a silver lining to the economic crisis our 
country faces, it is the tremendous attention now paid to job 
creation and economic growth from policy makers and academics 
as well as everyday citizens. For far too long the sources of 
job creation in our economy have been taken for granted. The 
Ewing Marion Kauffman Foundation has been interested in these 
questions for many years, and we welcome the renewed focus on 
the issue of job creation.
    Today's conversation is particularly exciting to us because 
it moves the discussion of job creation to the level of new 
firms. Much of the debate regarding job creation in the past 
has focused on large, mature firms, but young, growing firms 
actually create the vast majority of jobs in this country.
    The Kauffman Foundation research has found that young 
firms, less than five years old are responsible for virtually 
all net new jobs. Absent start-ups, net job creation would have 
been negative for 22 of the 29 years between 1977 and 2005. 
When start-ups are included there are only three years of net 
job loss.
    Entrepreneurs alone cannot lead us out of our current 
economic problems, but economic recovery and job creation will 
not happen without them. In fact, a minority of firms generate 
a majority of new jobs in this country. The top five percent of 
companies is measured by employment growth, create two-thirds 
of the new jobs. Even more impressive, the top one percent of 
companies generate 40 percent of new jobs. Most of these 
companies are young firms, less than five years old.
    It is true that new businesses have higher failure rates 
than older firms, contributing significantly to job destruction 
and churning of jobs and businesses. While this churning does 
lead to a great deal of turbulence in the economy, it is also 
very important to the health and productivity of the overall 
economy. Less productive businesses fail, leaving strong 
businesses with the greatest potential for future growth. The 
firms that survive and growth more than make up for the 
companies that fail.
    But how are young, small, and growing firms created? 
Economists have elucidated a great deal about firm and industry 
dynamics. That is how firms and industries are born, grow and 
die. Incubators provide one important way that young, small 
firms may be born and start to grow.
    Others on this panel have first-hand experience in dealing 
with incubators. So I am going to not comment a great deal 
about the business incubators and the business incubation 
process, except to say that it is critically important in the 
early stages of a firm's life.
    What I do want to do though in conclusion is to say that it 
is important to remember that as important as incubators are, 
they were one piece of the entrepreneurship and job creation 
puzzle, albeit a very important piece of that puzzle. There are 
many ways that firms start and grow, and institutions and 
public policies that support entrepreneurship are vitally 
important to the young, small, growing firms within incubators, 
as well as the much larger group of new businesses growing 
outside of incubators.
    Among others, these policies include immigration policies 
that welcome talented, potential entrepreneurs and even favor 
those immigrants who plan to start innovative, new business in 
the U.S.: regulatory frameworks that do not impose onerous 
compliance requirements on small businesses; intellectual 
property laws that strike the right balance between giving 
sufficient incentives to inventors and imposing legal 
roadblocks to new entrants; bankruptcy protection that 
mitigates the risk of business failure; antitrust laws that 
allow for healthy competition; marginal income tax rates that 
do not discourage entrepreneurial endeavors by minimizing their 
economic rewards; and finally, and very importantly as we have 
talked about already, financial systems that offer access to 
both debt and equity capital for new firms. Policies in these 
arenas and others can work together to create environment that 
is conducive to the birth and growth of new companies and will 
help incubators, accelerators, and other organizations be even 
more successful in their work.
    Thank you.
    [The prepared statement of Dr. Strom is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Dr. Strom.
    Our next witness, Mr. Peter Linder. He is the Chair of the 
Mid-Atlantic Angel Group Fund and a Board Member of the Angel 
Capital Education Foundation in Malvern, Pennsylvania. Mr. 
Linder has invested his own capital in numerous start-up 
companies, has been a limited partner in 15 private equity 
funds, and has been a director of several start-up companies.
    Welcome.

  STATEMENT OF PETER LINDER, CHAIR, MID-ATLANTIC ANGEL GROUP 
     FUND; BOARD MEMBER, ANGEL CAPITAL EDUCATION FOUNDATION

    Mr. Linder. Thank you, Chairwoman Velazquez, Ranking Member 
Graves and all of the members of the Committee. Thank you very 
much for holding this hearing on business incubators and their 
role in job creation.
    I am please to discuss for a few minutes how Angel 
investors support innovator start-up companies, many of which 
got their start in business incubators and accelerators. I am a 
long-term Angel investor in the Philadelphia area. I have 
invested in 17 start-up companies as an individual and 14 
companies through my Mid-Atlantic Angel Group Fund, which in 
itself brings together 90 Angels investors.
    I am also a member of the foundation of ACF's sister 
organization, the Angel Capital Association, which is a 
professional alliance of 150 Angel groups in 44 states, 
representing about 1,600 active Angel investors.
    Innovative, high growth, start-up companies are critical 
for job growth and economic vitality in any year, and even more 
so during this bad economic times. A 2009 Census Bureau study 
funded by the Kauffman Foundation found that start-up companies 
create new jobs at a higher rate than all other companies as a 
whole. On other words, if you excluded the new jobs each year 
in a normal years from small business start-ups, overall 
employment in this country would probably be negative.
    I know from my own investment and mentoring activity in 
Pennsylvania that the entrepreneurs that will create jobs, 
innovations and companies in our future need support from a 
large community of experts and organizations, and clearly, the 
services and facilities of incubators and private accelerators 
are very, very helpful to the start-up and growth of these 
businesses.
    Let me share a few examples of incubators and companies 
that came out of incubators in Pennsylvania. In Pittsburgh, 
Carnegie Speech, a developer of spoken language assessment and 
training software, was incubated at the Language Technology 
Institute at CMU. My Angel Investment Fund, the Mid-Atlantic 
Group, made two investments in that company. I am personally 
active with the company providing business advice and attending 
board meetings, and Carnegie Speech is a healthy, young 
business that employs 17 people and has been growing.
    Morphotek, a Philadelphia company that develops therapeutic 
antibodies for treatment of cancer, began at the University 
City Sinai Center incubator, received capital from local 
economic development organization and later from Angel 
investors. The company now employs 130 people, is building a 
60,000 square foot plant.
    From my personal standpoint, I have used my own background 
to help companies that I have invested in. Of the 31 Angel 
investments that I have been involved in, I have served on the 
boards of seven of those companies. The CEOs of those companies 
appreciate the fact that I have been through what they have 
been through since I built two companies of my own, and that is 
the kind of advice they generally look for.
    In the seven companies where I serve of boards or have 
served, I work with the CEO or his team usually once a month 
over a three to five-year period and we tackle many problems, 
many issues, from detailed planning to cash shortages when 
sales are slower than forecast, and insuring the right 
leadership that was on the board to help the company and the 
community to grow.
    I would like to take just a minute to point out some issues 
of public policy that are of great concern to the Angel 
community in the United States. Specifically, there are threats 
to the health of Angel investment in the Senate Financial 
Reform Bill. Specifically, the bill calls for increases in the 
requirements to be an accredited investor, which is not 
necessary and which could significantly reduce the number of 
Angel investors in this country.
    In addition, the bill opens the door to the elimination of 
federal regulation of the accredited investor rules to states, 
potentially meaning that different states could have different 
rules, and it would impede cross-state business deals.
    I want to thank you for the opportunity to describe the 
unique role and the significant impact that Angel investors 
have in our economy supporting the innovative start-ups that 
create important new jobs in this country. Angel investors 
enjoy being part of the ecosystem for these companies, along 
with incubators, accelerators, and other private partners. 
Angel investors are very, very passionate about helping build 
great new companies in their own communities.
    I would be happy to answer any questions you have, and I 
thank the Chair for the invitation to appear today.
    [The prepared statement of Mr. Linder is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. Linder.
    Dr. Lewis, the number one challenge that we have today is 
job creation, and we know that if we want to get this economy 
growing again, job creation is a very important component for 
that. In preparing myself for this hearing, I was just 
impressed by the Commerce Department report that found that 
they need between $144 dollars and $216 to create one job. This 
is in terms of incubators.
    Compared to infrastructure projects that cost up to close 
to $6,000 per job, can you discuss how these facilities create 
jobs so efficiently?
    Dr. Lewis. I think that in part, as we know, small 
businesses tend to grow a little bit faster than larger 
businesses. This is partly just a relative game in terms of if 
you have two employees and you add two, then they have 100 
percent growth.
    But in aggregate jobs, they actually do add quite a few 
jobs to the economy as a whole. The efficiency is because, I 
believe, that in the design of best practices that tailor 
services to individual companies, they really are addressing 
what the academic business literature says are the reasons for 
business failure.
    So SBDCs cover one part of it, and often SBDCs are a large 
part of the incubation programs. That is where entrepreneurial 
services as through an SBDC, and they are joint, and it 
optimizes the SBDC investment as well.
    I do think that it is the collocation that is also very 
important. Entrepreneurs, I mean, it is sort of like going to 
college. You do not just learn from your instructors. You learn 
from your peers. You form study groups, and for me I sort of 
think of the incubation period as being a period of we talk 
about graduates. They have learned; they have internalized 
these lessons; and so when they go out and they hit the stiff 
market forces in the real world, they are better able to adapt 
to changing economic environments due to the lessons that they 
have learned while they were in the incubation program.
    This also explains their high survival rate. The SBA has 
estimated that roughly about 51 percent of firms survive after 
five years. Relative to incubator firms that number reaches in 
some regions up to 86 percent of them are surviving after 
graduation.
    Chairwoman Velazquez. Thank you.
    Dr. Strom, during economic expansion employment rates from 
business incubators have been high, and in 2005, some of you 
mentioned 100,000 jobs were created through incubators, and in 
the last year and a half what we have seen is the economy has 
contracted and has only recently begun to recover.
    Can you discuss how effective incubators are at creating 
jobs? Do you have any data in terms of the type of job creation 
during this economic downturn?
    Dr. Strom. Certainly. All excellent questions, and I will 
try to summarize and address all of the points.
    Yes, job creation is vital, and the key thing is young, 
growing firms. Most firms that start, the majority will fail 
within five years. Of those that succeed, most of those will 
employ a few people, but not many. The minority of firms that 
grow rapidly are the ones that account for most of the job 
growth.
    And the reason is that those firms are able to either reach 
a new market or be more productive than existing firms in 
industry and, therefore, out compete those firms. And to the 
extent that incubators could assist those firms in 
understanding the markets and in enhancing their productivity, 
incubators will then enhance job growth.
    The focus though, I believe, needs to be on potentially if 
the key is job creation rather than firm creation, the focus 
needs to be on firms that are in those industries or with the 
kinds of technologies or with the kinds of innovative processes 
that are potentially high growth firms. So focusing more 
narrowly on the high growth firms will pay rewards in job 
creation.
    Chairwoman Velazquez. Thank you.
    Mr. Cooperhouse, incubators like the one that you run at 
Rutgers are increasingly specialized in specific industries. 
What are the benefits and the drawbacks of this type of 
specialization?
    Mr. Cooperhouse. An excellent question as well. Correct. 
Historically there have been quite a few mixed use incubators 
that provide a variety of services to a diversity of industry 
sectors. I think we are, in fact, now seeing more and more 
specialization; whether the sector is life science, 
telecommunications, biotechnology, food and agriculture or, 
particularly today, environmental technologies.
    The advantages of focusing on a specific sector are that we 
can provide much more specific services to clientele. In our 
case, as I mentioned, we can also provide a cluster opportunity 
to really aggregate all of the elements of a particular 
industry together, the whole value chain, as well as aggregate 
resources that could provide the expertise that is needed, 
whether it is business marketing, production development, 
quality assurance, technology, and so forth to really meet the 
need of small businesses.
    So in terms of service, what has been quite evident in our 
discussions today is that best practices are all about service, 
not about space. Providing services to clients is critical to 
an incubator's success in their model of excellence. So, in 
fact, a sector-based program does, in fact, enable that to 
occur.
    On the other hand, mixed use incubators are certainly very 
powerful in many parts of the country where there is not a 
particular sector that is as well defined as might be in a 
particular region.
    Chairwoman Velazquez. Okay. Mr. Monkman, you mentioned that 
SBA does not have a specific incubator program, or I do not 
recall, but I think that you were the one who mentioned it. 
However, there are some who might say that SBA provides 
support, and that there are different program that could fill 
the basis of an incubator program.
    What is your views on that? And if Congress were to 
establish a national incubator program, how would it differ 
from the services already being provided by SBA?
    Mr. Monkman. I think that is a very good question and one 
that is worth exploring in detail. SBA does have some 
interesting small business development support that is offered 
through such programs as SCORE and the Small Business 
Development Centers. That network, the SBDC network, is 
extensive, and I believe that it extends into over 1,000 or 
maybe even 1,100 points of presence around the country.
    The difference between what business incubation is about 
perhaps and what SBDCs are about is SBDCs provide episodic 
support in a very equal way to people who come choosing to 
avail the services. It can be a very light type of 
intervention. It can be more comprehensive than that, but SBDCs 
are measured in terms of their effectiveness on how much 
outreach they have accomplished, how many people they have 
served.
    Business incubation is a longer programmed approach. It is 
something that extends over a period of two and in some 
industries maybe seven years, where an incubator manager is 
packaging technical assistance and networking assistance as it 
is required by the clients that are being served.
    I think that there is still a very important role for SCORE 
programs and SBDCs and, indeed, many incubators are making use 
of them today. However, I think we need to look at incubators 
to provide more concentrated, comprehensive, tailored support 
that is packaged. That is where I would say the distinction is 
at.
    Chairwoman Velazquez. Thank you.
    Mr. Graves.
    Mr. Graves. Dr. Strom, you mentioned as far as job 
creation, obviously focusing on those high growth areas or 
those areas, I guess, that are going to explode, for lack of a 
better term, what sectors right now if you can?
    Dr. Strom. Picking winners is always a dangerous job.
    Mr. Graves. Yes.
    Dr. Strom. You know, but certainly the--
    Chairwoman Velazquez. Especially around here.
    Dr. Strom. Yes, yes, yes.
    [Laughter.]
    Dr. Strom. But certainly the high technology sectors, the 
life sciences, the biological sciences are the key areas where 
there is potential for high growth. Those also require a much 
longer gestation period in many cases, and much more 
concentrated research, and kind of combining the kind of 
scientific research that goes on in the academic community with 
the kind of entrepreneurial and commercialization capabilities 
that many organizations have, including some incubators and 
other organizations as well.
    So the key is really the industries and in some cases 
geographic clusters as well as industries. So those are 
probably the two most important factors.
    Mr. Graves. And all of those areas obviously take a lot of 
capital, too.
    Dr. Strom. Yes, yes, both human intellectual capital and 
financial capital.
    Mr. Graves. Mr. Linder, I am fascinated by the whole Angel 
investor idea. Is it normal practice--and I am just asking out 
of curiosity--is it normal practice to always sit on the board?
    Obviously if your firm has a stake in it, you want to have 
some--I mean, are there firms out there or companies out there 
that you see that you just give funding to or do you always 
provide mentoring, I guess you might say, or help or kind of 
oversee everything sitting on the board and kind of moving 
forward?
    I also would by very curious on how you pick and, you know, 
what goes into that process because you are risking dollars. 
You obviously want to try to pick the winners, anyway, the ones 
that have the most potential.
    Mr. Linder. Thank you very much, Congressman, for asking me 
that question.
    First of all, I think the straight out answer is we never 
make an investment from our fund, from our Angel fund where we 
do not either take a seat on the board or act as an observer to 
the board. Some of our members do not want the liability of 
board seats, but there is never a case where we make the 
investment and do not do that.
    Some of our members are more active; some are less active, 
depending on the strength of the board itself.
    I want to point out, too, that this year, which was a bad 
economic year for everybody, we did not really miss a beat in 
our Angel investing. We have invested in as many deals this 
year as we did in any year. So I think our field is very, very 
healthy at this point in time.
    I do not think I addressed your second question. What was, 
that Congressman Graves?
    Mr. Graves. Just as far as making the determination. I 
mean, do they come at you with obviously a very detailed 
business plan? You probably want that. I mean, I am just 
curious on how that works.
    Mr. Linder. Yes, in a way sometimes it is a mixed bag. They 
things come with very detailed business plans. Sometimes they 
come with a couple of pages worth of summary. We never read 
more than a summary anyway.
    I think the key for us usually in a presentation by an 
entrepreneur is very subjective. It is our view of how we feel 
we can relate to this entrepreneur because everybody has got a 
great idea. Everybody is looking for money. And if I could pick 
one point out that we were discussing earlier before the 
hearing started, that was many of our people try to look and 
see if we believe the entrepreneur is coachable because if 
everything is going fine, it is not a problem. But if the 
business gets in trouble, will they listen?
    So I think that is the first thing we look for in reviewing 
a business plan, talking to the entrepreneur.
    Mr. Graves. Well, I love the idea that this is, you know, 
obviously in a time when it is hard to find capital in many 
cases, and particularly with the regulators requiring more of 
the banks, which means the banks have got to require more of 
the folks that are looking for capital, but I think this is 
fantastic. I mean, you have got a good idea and you work hard 
at it. You are going to be able to find investment dollars out 
there or capital to work with.
    Out of curiosity, what is your success approximately?
    Mr. Linder. I never measure it, sir.
    [Laughter.]
    Mr. Linder. It is very hard because I think I would say 
that in the 15 years I have been doing it, all I will say to 
you is that I am cash flow positive, and cash flow positive 
enough for my family not to rise up against me. But it is very 
hard because a lot of the deals really just get lost along the 
way. I do not do it for fun, but it is really hard to measure 
the ROI sometimes.
    Thank you for asking that question.
    Mr. Graves. That says a lot, absolutely.
    Chairwoman Velazquez. Mr. Bright.
    Mr. Bright. Yes, ma'am. Thank you, Madam Chairman.
    Let me commend you on having this hearing today and also 
thank the gentlemen for being part of the panel. You have been 
very informative for me.
    You know, I come from an old vintage point as being a mayor 
of some of the cities out there. So I am very familiar with 
your small business incubators.
    Dr. Lewis, you mentioned something that really threw me. 
What is a gazelle company? Did you mention that or Mr. 
Cooperhouse? What is a gazelle company? I had never heard that 
before.
    Mr. Cooperhouse. Perhaps the best answer should come from 
Dr. Strom from Kauffman Foundation, but a gazelle company is 
what he referred to as the high growth company. I will briefly 
respond to that in that all incubator managers, as they look at 
companies, do the same thing that an Angel network might do. 
They are measuring their success by impacts. They are looking 
for the most qualified company that can, in fact, become a 
gazelle. They are looking for companies where there is a strong 
management team, strong financial backing, a great idea, a 
differentiated business concept, and a strong potential for 
success.
    And those gazelle companies statistically are generating 
the majority of the net new jobs in this country.
    Mr. Bright. Good. Thank you very much.
    Dr. Strom, anything?
    Dr. Strom. As far as a narrower definition, it is typically 
companies that grow at a rate of 20 percent or more, three or 
four successive years.
    Chairwoman Velazquez. By 20 percent?
    Dr. Strom. About 20 percent a year.
    Mr. Bright. Twenty percent. Thank you very much. That just 
caught my attention, and I had not heard that terminology.
    Let me ask you something, and the incubators are really key 
in success as far as starting up companies. We found that they 
were so successful that we many times had difficulty deciding 
who could be asked to leave the incubators. In fact, some of 
the smaller businesses become so attached that they are so 
dependent on the incubator that they never want to terminate 
that support.
    How do you determine when a small business or a business is 
ready to turn out into the real world? Mr. Monkman, you look 
like you want to answer that. So go ahead.
    Mr. Monkman. It is actually difficult. It is difficult for 
incubator managers often to come to closure on a relationship 
that they have had for some time, especially in successful 
instances where a company is continuing to grow.
    But at some point a very successful company actually begins 
to antagonize an incubator's performance because it is taking 
space away from another organization that needs to be there. 
And in most instances, incubators are nonprofit organizations. 
Maybe 85 to 90 percent of them are nonprofit organizations. It 
is important to make sure that you are spreading the wealth, 
making sure that you are making equal access to as many people 
as you can at the time.
    Mr. Bright. Sure.
    Mr. Monkman. So a lot of it has to do with the absorption 
capacity of the local community to provide graduate spaces. 
Indeed, one of the types of policy recommendations that we 
would make is making provisions for graduate spaces.
    Mr. Bright. Good. That has been a major issue in our small 
business incubator, and I just did not know if you all had a 
standard practice throughout the industry that you know of.
    Let me thank you for what you are doing. You are key into 
our economic recovery in what you are doing out there. Continue 
your good work. There is a tremendous number of success stories 
out here and not just from you, but from other people who are 
doing what you are doing out there.
    So thank you very much, and Madam Chairman, I yield back my 
time.
    Chairwoman Velazquez. Thank you.
    Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chairlady.
    Thank you, gentlemen, for being here today.
    Just a quick question. I know that in going through the 
reading materials here on the issue of the day here, I was 
struck by the for-profit and the not-for-profit incubators. Can 
you give me a little insight as to the benefits, the pluses and 
minuses of each one of those?
    Mr. Monkman. If you do not mind, may I?
    Mr. Luetkemeyer. It seemed Mr. Monkman was going to answer 
that questions as the association man.
    Mr. Monkman. There was a time during the late 1990s, during 
the dot.com period, when there was a large growth in for profit 
incubators. I think at one point they became as great as maybe 
25 or so percent of the number of incubators operating in the 
states.
    I think you might want to think about it from the 
entrepreneur's perspective. An entrepreneur does not have 
access to deep pots for them to be making great investments in 
education, though they would like to as much as they can afford 
dynamic programs. So almost by definition, much of the 
incubation process is to try and make the cost of residency and 
participation as practical as possible.
    So what might happen is you might have a relationship with 
a local sponsor that may have provided at a discount or for 
free a building that is available for collocation, that space 
that entrepreneurs can share. But to fund programs, incubators 
might look to charge market rates for the space, and those 
rates are going to, in large part, pay for the services that 
are offered.
    We do not want to give the information and the support away 
for free to the entrepreneur. They need to have some skin in 
the game. But I think that we are seeing that there is probably 
only so far for profit incubators can go before they run into 
long term problems because the incubation process tends to be 
longer, two years, three years, in some instances five years.
    That is a lot of time to carry support to an incubatee 
client.
    Mr. Luetkemeyer. Just very quickly, would you define your 
business as an incubator or more of an investor into existing 
businesses that you see have already gone past this incubation 
stage?
    Mr. Linder. Yes, we are clearly an investor that usually 
sees deals that in many cases have been through incubators and 
have been through a friends and family fund raise. They look a 
little more like a company before we see them.
    Mr. Luetkemeyer. I have another quick question for you. Do 
you maintain an interest in the business forever or do you get 
rid of it after a certain period of time? Is there a structured 
agreement so that you will stay until they get, you know, a 
certain amount of revenues or certain amount of assets?
    How do you do that?
    Mr. Linder. Well, usually three or four seconds after we 
cut the check we ask them what the exit strategy is.
    [Laughter.]
    Mr. Linder. That is as partial answer.
    I think on the average if it is a good deal, we are in the 
deal five, six years before either a venture capital for larger 
dollars comes about and takes us out, or there is an 
acquisition.
    Mr. Luetkemeyer. Your intention, though, was not to own the 
business forever or be a part of it forever.
    Mr. Linder. Oh, no.
    Mr. Luetkemeyer. Your intention is to get them off the 
ground and be able to get in and get out?
    Mr. Linder. One hundred percent.
    Mr. Luetkemeyer. Okay.
    Dr. Lewis. Can I comment or follow up a question?
    Mr. Luetkemeyer. Yes.
    Dr. Lewis. Two of the Angel investors in my fund in 
Philadelphia have actually started what is called an 
accelerator, and I hope nobody asks me the difference between 
an incubator and an accelerator. I will let the faculty members 
do that.
    But in any case, to respond to the earlier question about 
how long in an incubator, this group has decided that the 
entrepreneur will have a four-month window with a lot of 
resources applied, kind of high, intense resources, and at the 
end of the four months, the entrepreneur either has an 
opportunity to present to Angel Investment or they are out.
    We will see how the experiment works, but I wanted to 
respond to the other side of the coin.
    Mr. Luetkemeyer. Okay. Dr. Lewis, did you have a comment a 
minute ago?
    Dr. Lewis. In terms of the differences between the public 
or the for-profit incubators is that the goals are really 
different. A for profit incubator really has an interest in 
exercising the business for their own profit, where a not for 
profit incubator is interested in growing a local economy.
    And so from the point of view of a public sector investment 
in terms of what it means for local jobs, if you acquire a 
company through venture firms, you might sell and license that 
technology to Japan or South Korea and Americans might never 
enjoy the benefit of that, and their time line for success is 
much shorter, and this is what I believe has led to the failure 
of so many of the for profits that grew up in the late 1990s, 
is that they were anticipating profits in, you know, six to 18 
months. It takes three years to incubate a firm on average, and 
so they were unreasonable in their expectation.
    Mr. Luetkemeyer. So you are telling me that there are very, 
very few for-profits left out there right now?
    Dr. Lewis. Roughly about ten percent is out there at this 
point.
    Mr. Luetkemeyer. I understand. Okay. Very good.
    Thank you, gentlemen. Thank you, Madam Chairman.
    Chairwoman Velazquez. Thank you.
    I do have some other questions. Mr. Early, we have not seen 
in recent memory a downturn like the one that we are witnessing 
in terms of the difficulty of small businesses accessing 
credit, capital. How has this downturn affected the decision--
and this will be for Mr. Linder, yes--the decisions of Angel 
investors?
    Mr. Linder. Thank you for letting me answer that question. 
Truthfully, we have not witnessed the downturn in Angel 
investing. At least I can speak certainly for eastern 
Pennsylvania. We are investing at the rate of in my group three 
or four deals a year. That did not change throughout 2009. I 
guess we were all hoping that we would have recovery at some 
point because we will not be able to exit if we do not, but I 
can tell you the industry right now is very, very healthy and 
has not really seen the disastrous effect as other people in 
the country are seeing.
    Chairwoman Velazquez. And can you comment on the 
differences between businesses developed in an incubator versus 
those that are not?
    Mr. Linder. The truth of the matter is I am not the best to 
comment on that because I do not really keep track of that. In 
fact, preparing for this hearing actually made me go back and 
look and realize that I saw a lot of incubator deals that we 
invested in, but I wasn't really giving them that name at the 
time because there was usually some other small investment 
round ahead of it and between us and the incubator. So I am 
sorry I cannot answer that question more accurately for you.
    Chairwoman Velazquez. Anyone who would like to comment on 
that question?
    Dr. Lewis. Again, statistically there is research that 
suggests that business incubated firms actually get higher 
investment rates from Angel and venture capital. In part it is 
because they have received much of that managerial training. 
They have had the ability to develop business presentation 
skills, and they have learned how to be coached, which is 
something that venture and Angel capital firms are interested 
in.
    And it is that bridge money between I am self-investing to 
I am going to be an IPO and need $20 billion to build a 
factory; it is that Angel Fund; it is those kinds of seed 
investments that really make the difference for the 
entrepreneurial firms.
    Anecdotally, looking at state seed fund capital in New 
Jersey and Michigan, those people who have the responsibility 
for selecting clients have given testimony to that. Incubator 
clients that they are managers serve as the first round of 
evaluation that managers tend to be, and that gives them a leg 
up on firms that have not had that kind of association with the 
training and managerial skills, and so they see that as a big 
benefit and tend to invest in them more.
    Chairwoman Velazquez. Okay. Thank you.
    Yes, Mr. Early.
    Mr. Early. Yes. In our community we do not have a known 
Angel network. They are not publicized. They are hidden. They 
do come to me to find out what deals are available out there, 
and the reason we probably have a higher percentage is because 
I have vetted them pretty carefully. It is my reputation on the 
line, and I cannot waste their time.
    Chairwoman Velazquez. Okay. Mr. Early, transaction costs 
often determine whether small businesses survive in a down 
economy, and in terms of their operational costs and 
productivity, how do incubators make small businesses more 
competitive during this time?
    Mr. Early. I do not think that we actually make them any 
more competitive during this time or good times. An incubator 
client is at the beginning of their life. They cannot go out 
and get bank loans. No conventional lenders are going to cover 
them. You have to go Angel investors, and they are just not at 
that point.
    But we do things. We do their bookkeeping. We do accounting 
for them. We take a lot of that stuff off of them. We want them 
to focus, since we are technology, on their technology and 
improving it and sales. We will handle everything else for 
them.
    Chairwoman Velazquez. Yes, Mr. Cooperhouse.
    Mr. Cooperhouse. Just to add to that comment, as I stated, 
incubators do not necessarily make your company more 
competitive, but an incubator team is really skilled at 
identifying what it takes to be successful, and many 
entrepreneurs do not know what they do not know, and the 
incubator staff's role is to really make them aware of what it 
takes to be successful, how to have a really differentiated, 
unique selling proposition for their business and stand out and 
really provide value to their customers.
    So in doing so, we are making them more competitive by 
really opening their eyes, and frankly, we all measure our 
impacts by our successes, but we also do something that is not 
measured. We also, frankly, tell a lot of people in a nice way 
that maybe their idea is not necessarily the greatest. It is 
not really special enough, and perhaps they should not make 
that investment just yet and really do a little more research.
    So there is an awful lot that goes on behind the scenes for 
the many, many entrepreneurs that we serve. In many cases, we 
actually save them money by not having them expend it to an 
idea that really is not proven.
    Chairwoman Velazquez. Thank you.
    Dr. Lewis, I believe that you were the one who mentioned 
how in Germany and England--
    Dr. Lewis. U. K.
    Chairwoman Velazquez. --the U. K., 45 percent of the number 
of incubators compared to the United States. What is it that 
they are doing differently compared to us?
    Mr. Monkman. Well, I have been in both Britain and Germany. 
I have talked to the head of the German Business Incubation 
Association. I think that part of their approach is they are a 
bit more centralized.
    We have conceived of a business incubation community based 
on a bottom-up, grassroots approach. There is a lot of 
individualization and tailoring of an incubation program to 
serve the community in which it was conceived. We could have an 
arts incubator program, for example, that is about getting 90, 
artists together, and it will help to feature and showcase the 
art they produce.
    There, there is a lot more standard national level 
programming, like let's have a large biotech or an aerospace 
incubator. We are a lot more organic in our approach. I think 
that is part of it.
    Also, by nature, there is a different funding model in 
European countries than we have here, but there is a far 
greater role the larger states play in programming business 
incubation.
    Chairwoman Velazquez. Obviously, we know that here you can 
access some type of grant from EDA and USDA, and of course, 
that will in some way affect the number of incubators and 
incubation created in this country. So how does this type of 
funding, you believe, impact the incubators?
    Mr. Monkman. You are referring specifically about the EDA 
support that is currently offered?
    Chairwoman Velazquez. EDA and USDA. I believe that USDA 
also provides some type of funding.
    Mr. Monkman. I cannot speak about the USDA program in any 
detail. Perhaps others can, but in terms of the funding support 
that is currently offered through EDA, right now it is offered 
to distressed communities, and there is a very particular type 
of location that qualifies for economic funding from EDA for 
brick and mortar investments.
    I think one of the opportunities for us is to look at an 
initiative that is being promoted by Tim Ryan in the House. 
Also, Senator Sherrod Brown has introduced a Business Incubator 
Promotion Act that is looking to, in the reauthorization of 
EDA, widen EDA's scope of support. So that it is looking at 
more programmatic opportunity, as we have discussed earlier.
    I would like to hear what USDA can do.
    Chairwoman Velazquez. yes, Mr. Cooperhouse.
    Mr. Cooperhouse. If I can add on both fronts, our center 
has actually received funding from both USEDA and the USDA. And 
to add on to Mr. Monkman's testimony, the EDA funding through 
the public works infrastructure program particularly provides 
some tremendous funding opportunities for newly established 
programs for bricks and mortar. However, incubator funding is 
very limited in the scheme of the EDA's total budget. It is a 
tremendous program, but it is very limited in the amount of new 
incubators that can be created.
    Fortunately, we were a recipient of EDA funding. In 
addition, the USDA has programs that support business 
incubators, actually about half a dozen programs, that support 
various activities and with operations grants.
    There was actually a one time USDA program that awarded one 
million dollars to ten different programs throughout the 
country called the USDA Rural Development Agricultural 
Innovation Center Demonstration Grant Program. We were the 
recipient of one of those ten grants as well.
    However, it was a one time program, all meant to be spent 
in one year with no ongoing support. So it was not necessarily 
designed for long-term sustainability of a program. 
Fortunately, it was really the seed funding that enabled us to 
then leverage that and receive in total about $14 million in 
grants since then.
    But what is really lacking today is operating funding to 
any incubator program. So what we have instead is limited 
funding for new programs. What is really needed is a tremendous 
amount of funding to really subsidize the incubator programs 
around the country today that rely heavily on their sponsor and 
who, in turn, is heavily funded through the state. As states 
are providing cutbacks, it is having effect to all incubators 
across the country, and we are quite concerned about what June 
30th of this year might bring to the number of incubators 
around our country that might have some funding in jeopardy.
    Chairwoman Velazquez. Since you have been lucky since you 
have gotten grants from both USDA and EDA, I just would like 
for you to share with us if you sense that there is 
coordination or do you feel that there is a lack of 
coordination between the existing federal resources that exist 
today and a lack of strategy in terms of long-term strategy 
regarding the purpose of promoting incubators?
    Mr. Cooperhouse. I cannot necessarily speak to how much the 
two agencies interrelate. To the best of my knowledge, they are 
operating independently to satisfy their particular objectives. 
As was mentioned, this includes the USEDA focusing particularly 
on revitalization of distressed economies, and the USDA funding 
in particular rural development. So each has identified a 
particular bar, if you will, that needs to be met in order for 
funding to be in place.
    So, again, we have very limited funding and very 
restrictive funding. In our case, we are in a distressed 
community and in a rural area. We are the second poorest city 
of 566 in New Jersey in the city of Bridgeton and have the 
lowest per capita income by counties as well. So we are in a 
federal empowerment zone, and it made a lot of sense in our 
case to fund our particular program.
    But those who are in urban areas and in other areas that do 
not meet these criteria, they are not qualifying.
    Chairwoman Velazquez. Mr. Monkman.
    Mr. Monkman. I would like to add that in addition to USDA 
and the SBA and EDA and the types of organizations that 
indirectly play a role in business incubation, there is even 
the Federal Labs Consortium. Federal Labs across the country 
are developing technologies that could be, for example, 
licensed to entrepreneurs, who operate businesses in EDA-funded 
incubators to improve the opportunities for entrepreneurs in a 
particular community.
    And I know that right now, the FLC is looking at ways to 
improve linkages to organizations like ours. The Association of 
University Research Parks and the like are entering into 
memoranda of understanding with FLC.
    But I think there needs to be a lot more integration and a 
lot more coordination between organizations.
    Chairwoman Velazquez. Thank you.
    Mr. Graves, any more questions?
    Mr. Graves. No, Madam Chair.
    Chairwoman Velazquez. Well, again, thank you very much. We 
will continue to study the issue of incubators in our country 
and how can the federal government best assist the work that 
you do.
    With that I ask unanimous consent that members will have 
five days to submit a statement and supporting materials for 
the record. Without objection, so ordered.
    This hearing is now adjourned. Thanks.
    [Whereupon, at 2:21 p.m., the Committee hearing was 
adjourned.]

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