Nurturing Business

Business incubators have survived the recession, but not before making a few adjustments.

Sarah Hole can look out her window at the Madison Enterprise Center, a business incubator on Madison’s east side, and see several success stories. There is Shopbop, which “graduated” from Main Street Industries several years ago, moved to Rimrock Road, and then back to the east side last year. There is EVP Coffee, whose business has benefitted from the presence of Shopbop, and there are the four MEC graduates that recently leased their own space at the intersection of Baldwin and East Washington.

As Hole notes, that’s the whole idea behind business incubators – getting young companies off to a good start and then having them go out into the community to grow, prosper, and create jobs. Hole, facilities director at MEC and Main Street Industries, another business incubator, refers to business incubators as “wonderful entrepreneurial communities” and points with pride to the level of business-level pomp and circumstance. “That kind of captures what business incubation is all about,” she said. 

Wisconsin’s low ranking in new business start ups isn’t really due to a lack of business incubators. With 35 such facilities statewide, including several in the state’s largest metro areas, there is space for young companies to grow in preparation for “graduation” to the real world. 

The biggest issue these facilities faced during the recession was the need for tenants to “right-size” into smaller space, and for their incubation period to last longer than first envisioned. In Madison, mismanagement of the Genesis Enterprise Center on Madison’s south side led to the resignation of the facility manager and impacted its financial health, but overall Madison incubators have served as nurturing entrepreneurial communities. 

The function of a business incubator, a facility where start-up companies can share space and equipment and receive practical business assistance and even financing, hasn’t changed much in the past decade. However, facility managers have more services to offer thanks to advances in technology. 

Incubators come in many forms. Some cater to a mix of office and light manufacturing, others cater to life science and information technology, but they all feature flexible leasing and space. 

The tenant mix at Madison Enterprise Center differs from the mix at Main Street Industries, and their services reflect the type of tenant. Whereas the MEC is considered a stage-one incubator with classrooms in addition to high-speed Internet, MSI is a stage-two incubator with fiber-optic communications and loading docks. Video conferencing now is every bit a part of their service menu as copying machines and conference space. 

Elsewhere, the MGE Innovation Center, located in University Research Park (URP), provides a space for UW-Madison spinoffs – biotech and software enterprises – to get started in the requisite office or lab space, complete with services like high-speed data and shipping. Meanwhile, URP’s Metro Innovation Center, situated at East Washington and Baldwin, serves student IT, software, and engineering entrepreneurs with a dedicated connection to the UW.

Despite a rocky decade economically, not much has changed since MEC opened in 1999. “What has changed for us, as a mixed-use incubator, is that we can accommodate a wider variety of businesses,” Hole said, “so as different industries ebb and flow, we can accommodate them. What we’ve seen is a change in our tenant mix, not so much a change in incubation. I still believe it’s a very effective tool for giving start ups a good start.”

With bank financing an uphill climb for new businesses, especially since 2007, a number of Wisconsin incubators have loan funds to serve tenants. In addition to sharing common equipment like copiers, MEC tenants can borrow up to $20,000 at 5% interest to purchase equipment or vehicles germane to their business, and the facility’s Business Development Committee – comprised of an attorney, a bank loan officer, a CPA, and a financial manager – serves as a loan committee.

Greg Hyer, associate director of University Research Park, which includes the MGE Innovation Center and the Metro Innovation Center, said incubators haven’t changed much in terms of biotech clients, which require specialized lab facilities, but the incubation model for software companies, which can get product to market much faster, has shifted. 

“Some models for software have more open, shared working spaces that are emerging,” Hyer noted. “Some of those are sponsored by investors who are looking to accelerate certain software innovations. That model was also done probably 10 years ago in Silicon Valley. There are a lot of investors who were actually building facilities and trying to then bring companies in and start all kinds of companies.” 

The Metro Innovation Center, he added, was always geared to computationally intensive companies, which could include software companies. It’s more aligned with the biotech model of MGE Innovation Center, which features small amounts of individual spaces and high-speed bandwidth connections. “That has worked for a few companies,” he stated. “It’s not the model that all of them are looking for. Some companies, again, are looking for this open, shared-space arrangement, and you certainly see a couple of those models emerging. We’ll see how they do over time.”

Recession concession

During the recession, several incubator tenants had to downsize, which required facility managers to be even more flexible with space and lease conditions. Some simply could not graduate in the prescribed time period, usually between three and five years. 

“I’ve been here 16 years, and I’ve never seen anything like the most recent recession in terms of pain it caused existing businesses and the compete slowdown of any new business activity,” Hole said. “As an incubator, our goal is to graduate businesses out into the community, but there are a number of companies that we allowed to stay on just because they needed to have occupancy.”

At MEC, businesses have to graduate within a certain time period, generally five years or even sooner. When they reach three years, facility managers meet with business owners to see how they are doing in terms of creating jobs “or progressing in the way we’d like to see them progress,” Hole explained. “We evaluate whether it’s time for them to leave. Otherwise we stay pretty close to the five-year mark, but we stretched that because of the recession.”

Main Street Industries does not require companies to graduate, but they generally leave when they are ready to make a big leap. At the moment, it’s home to several food and beverage production companies. “The reason we started MSI was that our whole goal was to keep small companies, if we could, in our neighborhood,” Hole explained. “At the time when they’d graduate, they would have no place to go.”

Hyer said MGE has always encouraged people to move out at the proper time, but also has to be mindful of a company’s business development cycle, especially with regard to biotech. A company like Stratatech Corp., which is involved in clinical trials to develop its regenerative medicine products, might require a 10-year cycle rather than a three- to five-year cycle.

“A lot of the companies have hung in there well during the recession, but they have been careful about holding the capital they have for as long as they could because they either weren’t making the progress or getting additional rounds [of financing] to accelerate their growth,” Hyer noted. “They have been in a stabilize, hunker-down mode until they could see some light. We’re beginning to see some of these folks expand a bit and get some additional capital. It certainly feels better now than it did three years ago.”

A few years ago, there was talk about creating more mid-level incubators so that more companies had a place to graduate to. While there are a variety of incubators serving different niches, Hole sees a need for more “graduation space” along East Washington, a corridor the city is trying to more fully develop. “I think it comes up, but the issue is affordability,” she said. “We are hoping some developers will choose to put in some light manufacturing space that will be affordable to tenants.”

Hyer does not sense a great unmet need, but there is one request he hears over and over. “We get the comment that the closer to campus, particularly the software type activities could be, the better. I don’t know if any of the models we have are as close to campus as people would like them to be. That is more of a physical approximation, but you’re getting a range of choice now, which I think you need in the market to have enough support for people who are starting these types of companies.” 

Hyer also sees the telecommuting trend impacting MGE Innovation Center more than Hole sees it impacting MEC. “We certainly saw that with some of the student award winners on campus because they can get fairly far along and even operate a business out of a dorm room or even a bedroom in their apartment,” Hyer noted. “It’s really when I think they are trying to make it a more official business with employees, as opposed to their friends, that they are seeing the need to move into a facility.

“But the ability now with the computing and the virtual servers and the cost of these servers and the speed of the Internet access they can get, either on their phone or in their house, just makes it a lot easier for these folks to start right out of their houses.”

Lease on life

Young companies that want to consider an incubator lease should know that just as different landlords operate differently, so do different incubators. At the MEC, tenants sign one-year leases, which provides flexibility on both ends. Rents start at $8 per square foot and then gradually rise because the facility eventually wants to bring rents up toward market rates. “After three years, you should be paying about $8.50 per square foot,” Hole said.

Before tenants graduate, the facilities also require that they provide information on job creation and finances, so that progress can be recorded. 

At MSI, tenants sign longer leases of up to five years with variable lease rates, depending on the space. At this second-stage incubator, lease rates start at $9 per square foot and rise from there.

“We have an application process, and applicants need to present a current business plan,” Hole explained. “I work with them to get it in good shape to present to the Business Development Committee, and they meet with that committee. We are looking at things like job creation potential, business idea, and good credit history.”

Hyer noted that incubators can make available small increments of space, with flexible lease terms and affordable security deposits. “You’ve got either a lease that you can cancel relatively quickly, in 30 to 60 days, or year to year,” he explained. “The flexibility is important in terms of the amount of space and lease terms. You look at all of your costs and make a comprehensive, single payment, and you understand all your little incremental payments and the variety of service, depending on the way it’s structured. There are 15 different ways, if not more, to structure these arrangements, so you just need to understand the objectives of the group that is operating the facility.”

The lease rates usually are dependent on the number of services required. “Either all of the services that you have are available as part of a standard lease payment, or they are delivered a la carte, where you would pay for the use of a conference room or use of the Internet, or pay for copier charges, or the strategic business advisor, but you have to understand what is being offered, what is included, and what is extra.”

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