[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
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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
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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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