[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 ---------- U.S. GOVERNMENT PRINTING OFFICE 55-460 PDF WASHINGTON : 2010 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 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.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]