When it comes to incubating business you need a lot more than a light bulb in a box to help clients succeed. What works for chicken eggs is too bare-bones for fledgling start-ups.
A pre-seed fund, a pool of skilled consultants and a handful of other business accelerator tools are the elements that make a business incubator thrive, says Michael Finney, president and CEO of Ann Arbor SPARK.
Incubators provide a security blanket for new companies: office and meeting space, business services (copier, fax, wireless network), business guidance from mentors and consultants, networking and more, all aimed at helping the company achieve enough revenue to stand on its own or get financing from investors.
It can take as long as three years, but Ann Arbor SPARK, for one, writes leases for one year with potential for renewal, Finney adds. Not every company that applies gets in. The ones that do focus on technology.
"It's a question of reasonable fit. We make an assessment. Does the company have a management team that appears coachable? Is it a real business? Does it have a business plan? We try to select the ones with the highest probability of success," he explains.
The goal is to get companies ready to exit out into the community. Hopefully into Wayne or Washtenaw Counties, but anywhere in Michigan would be OK."
A growing trend
SPARK offers three incubators in Washtenaw and Wayne Counties: SPARK Central in downtown Ann Arbor, SPARK East in Ypsilanti, and the Michigan Life Science Innovation Center (MLSIC), a wet-lab incubator in Plymouth Township. SPARK East and MLSIC are new. Traverwood, an existing wet lab incubator in Ann Arbor, will phase out as MLSIC comes on line.
Similar incubators operate in downtown Detroit at Wayne State University's Tech Town, in Rochester Hills at OU Inc. through Oakland University and the newest, Sterling Heights' Smart Zone incubator developed by Macomb County Office of Economic Development and Oakland University.
The stagnant Michigan economy is both a plus and minus for these incubators. Many would-be entrepreneurs find themselves at liberty to test ideas nurtured during corporate tenures. But they need the services incubators provide. Some are looking for low-cost space. While the glut of available commercial real estate means they have cost-effective alternatives, none offer the business development services that incubators offer.
Such services can be extremely useful.
"We provide consultants to help early-stage companies refine business plans, forecasts and pitches for capital investment. We're finding that the customized consulting support prepares them for the many questions and information needs that investors direct to the companies as they seek capital," says David Spencer, executive director of Oakland University's OU Inc. incubator and an organizer of the Macomb incubator.
"We are seeing a lot of interest - people saying 'We'd like to be part of your incubator,'" saysSteve Cassin, Macomb County executive director of planning and economic development.
Those prospects are following through on the services side. More than 250 companies signed up for a mid-February workshop on alternative energy, with 80 more on a waiting list, Cassin says. A similar event on the defense sector is planned.
The Sterling Heights incubator focuses on five economic sectors: advanced automotive technology, advanced manufacturing, alternate energy, defense and homeland security, and medical research and healthcare. One of the largest incubators in the area, it boasts 80,000 square feet with room for 30-40 companies.
Tech Town, Wayne State University's incubator is no slouch, however, when it comes to size. It focuses on high tech start-ups, especially those owned by women or based in Detroit, and its sprawling 43-acre campus is home to more than 40 companies. Tech Town just received a $750,000 construction grant from the Wayne County Land Bank to build out its 10,000-square-foot third floor to accomodate six more tenants.
A sturdy foundation
An anchor tenant is a key element of an incubator, and not just because it occupies a significant chunk of space. The Michigan Life Science Innovation Center is anchored by Esperion Therapeutics, Inc. and Lycera Corp.
"I get calls all the time from people who want to network with (Esperion's charismatic president and CEO) Roger Newton. Our (MLSIC) clients get that every day that he isn't traveling. He's not a competitor, and he's interested in their success," Finney says.
Most incubators operate on a subsidized model. They depend on recurring funding sources. MLSIC is set up as a hybrid, including some tenants who can pay market rates, Finney said. If it works, the hybrid model has the potential to change the way incubators are run.
"We've asked our anchor tenants to help in other ways, too – to mentor and advise smaller tenants, share their contacts, introduce them to investors and VCs, and participate in our Entrepreneur Boot Camp. The other thing they offer is brand recognition," Finney continues.
Macomb's Smart Zone incubator will run on taxes captured from businesses within a geographic district. That means it needs to find early money – from the state and the feds, as it turned out – until the tax district starts throwing off enough funding to stand alone, Cassin said. Negotiations for an anchor tenant there are nearing completion.
Funding the start-ups themselves is also challenging, to say the least. Investment capital continues to be available through the Smart Zone Pre-Seed Investment Fund, administered by Ann Arbor SPARK, Spencer says.
"MEDC has been very supportive of the Smart Zone network in providing early-stage capital investment to companies around the state. In other cases, we see angel investor groups working hard to evaluate early-stage companies' capital needs. Unfortunately, there are many more opportunities than investment resources available to meet those needs," Spencer explains.
Given the tough economy, have incubators become more elastic in their criteria? Do they entertain companies that fall outside of preferred industry sectors? Or companies that are just a bit shakier than the incubators might have considered in better times? Organizers say no.
"We have not changed our criteria and due diligence for our early-stage companies. We look closely at business plans and capital needs. We're also looking at the strategies and capabilities of each company's management teams," Spencer says.
Finney concurrs. Ann Arbor SPARK looks at the "coachability" of the executive team, rather than whether they are seasoned. He calls it "taking a bet on the person."
At SPARK East, the offer of a year's free rent drew 18 applicant companies – the winner of that contest drawing is currently being vetted. The other 17 companies are in triage to guide them to the most suitable setting, possibly in Spark East, albeit as paying tenants, Finney offers.
Incubators across the state also supply services to off-site start-up companies, known as virtual clients, as well as to their residents.
The state continues to focus its emerging sector interests on technology companies in alternate energy, life sciences, homeland defense and advanced manufacturing. Federal and state support (of new companies in those sectors) will continue to diversify our economy and create new jobs, Spencer explains.
For now, Ann Arbor provides more than 50% of the entire incubator applicant flow for the state. Other geographic areas such as Grand Rapids or Kalamazoo could focus on other types of start-ups, but those areas may lack a large enough pool of consultants.
Does Michigan's fledgling film industry siphon off investor dollars that would otherwise go to incubator or business accelerator clients?
Finney says we have to take a long-term view and put enough resources into every sector that holds a promise of success. If we do, the result will be a transformed Michigan economy.
Detroit Metro Incubators
1. Macomb-Oakland University Incubator
, Sterling Heights
6555 15 Mile Road, Sterling Heights.
Part of the new Macomb Technology Advancement Smart Zone.
Website in development
2. Michigan Life Sciences Innovation Center, Plymouth Township
46701 Commerce Center Drive, Plymouth
Info: email Lori Emerson or call 734.527.9153
Operated by Ann Arbor SPARK
3. OU Inc Smart Zone Business Incubator, Rochester Hills
Oakland University, Golf View Lane, OU campus.
Info: email David Spencer or call 248.364.6194
4. SPARK Central, Ann Arbor
330 East Liberty, Ann Arbor
Info: email Lori Emerson or call 734.527.9153
5. SPARK East, Ypsilanti
211 West Michigan Avenue, Ypsilanti.
Info: email Lori Emerson or call 734.527.9153
Operated by Ann Arbor SPARK and Eastern Michigan University
6. Tech Town, Detroit
440 Burroughs Street, Detroit
Operated by Wayne State University
Constance Crump is an Ann Arbor writer whose work has appeared in Crain's Detroit Business, The Ann Arbor News, The Detroit Free Press and Billboard Magazine. She is a regular contributor to Concentrate. Her previous article was 48 Hours In Northville And Plymouth.
- Think Tank at Oakland University
- Diane Van Buren Jones in front of WARM Training
- Michael Finney, president and CEO of Ann Arbor SPARK.
- David Spencer, executive director of Oakland University's OU Inc. incubator
- Oakland Universities Engineering Lab
Unless noted, All photographs by Detroit Photographer Marvin Shaouni Marvin Shaouni is the Managing Photographer for Metromode & Model D.