August 1999
- On this page:
- Inc.-u-bation Stations
- Lone Star Inc.
- From our readers
- From the Comptroller: Small business, big impact
- Comptroller News
- On Page 2:
- What does government cost?
- School-Aid
- Rural Texas in transition
- No vacancies
- Texas stats -- Fiscal and economic data
Business incubators lend access to people and capitalInc.-u-bation Stations
Business incubators have been around for decades, helping new companies gather strength and experience before heading out on their own.First seen as a way to revive ailing local economies with the help of public money, incubators are increasingly becoming privately run and profit oriented. Even large companies seeking to harvest promising ideas for new products are seeding incubators with investment.
There are more than 600 incubators in the United States, up from a dozen in 1980. Texas has almost three dozen of its own in cities such as Houston and San Antonio and in smaller towns such as Marshall, Early and Pharr.
That growth, as well as figures from a national study and interviews with Texas incubators, indicate that incubators deliver on their promise of helping fledgling businesses succeed.
That's not entirely surprising. Incubators select member companies from long lists of applicants. Chosen companies must pass a rigorous set of evaluations and tests. In short, most incubators help companies that already have a good chance of making it.
What is a business incubator? The Bryan-College Station Research and Development Incubator offers this succinct definition in its mission statement: The Incubator provides a protected environment and support services necessary to increase the probability of success for the tenants while decreasing the overhead and risk.
As a practical matter, business incubators offer a built-in network of business advisers, below-market rent for office space and reduced prices on office services as well as access to investors.
Nationally, 73 percent of incubator-bred companies are still in business several years after graduation, according to a study conducted for the National Business Incubation Association (NBIA). The average incubator company creates 468 direct jobs and another 234 indirect jobs.
The cost per job created in relation to public grants is $1,109, according to the NBIA study. The cost per job of other economic development programs run three to six times higher.
Incubators return $4.96 in jobs and taxes to their communities for every $1 of public operating subsidies, according to the NBIA report. "The numbers make it clear that business incubators add considerable resources to--not take resources from--their communities," said Larry Molnar, a University of Michigan researcher who participated in conducting the study. Other participants were Ohio University, the Southern Technology Council and the NBIA.
The study did not break down statistics by state, but a sample of Texas incubators shows similar trends.
The Austin Technology Incubator (ATI), for example, says the survival rate of its graduates is 94 percent, and the Marshall Business Development Center says 80 percent of its graduates are still in business five years after leaving. The ATI's 48 graduate companies have created more than 1,500 jobs. Marshall's 78 graduates have generated more than 200 jobs.
There is no overall information on the amount of capital raised by companies that have graduated from incubators, but the ATI says its companies have raised more than $180 million in seed money and venture capital.
Nationally, the survival rate of companies in business for at least four years in 1997 was 51.3 percent, according to the U.S. Small Business Administration. In Texas, the rate of business failures increased 20.9 percent in 1997 from 1996, according to Dun & Bradstreet Corp.
The Texas Business Incubator Association is studying how efficient the state's incubators have been in creating jobs, but hasn't published the results, said C. Dean Kring, the association's assistant chairman. He's also the founder of the Entrepreneurial Development Center in Houston, the state's first and oldest incubator.
The incubator's role
Incubators became popular during recessions when communities sought to shore up sagging economies by supporting businesses that would create jobs. That's still the case in many areas, but in stronger economies, incubators are seen as a way to accelerate the growth of promising companies.Incubators get funding from communities seeking to generate jobs; private concerns seeking profits; universities seeking to turn research into commercial enterprises; and combinations of these.
"They are very affordable programs for communities'the cost-per-job created is low," said Sally Hayhow, director of publications for the national association. "A lot of people feel this is a no-lose situation."
The Marshall area was still feeling the effects of the 1980s oil-industry recession when it started the Business Development Center in 1990. Funding came from federal, state and local sources. Charlie Fletcher, the center's director, said it has received about $10,000 a year from the City of Marshall and operates at a break-even level.
"We offer management assistance and help put together business plans," Fletcher says. "We help them become bankable."
He says he's even travelled with incubator companies on sales calls.
"We encourage them to sell to outside markets so that we can create jobs here and bring in money from elsewhere."
The track record of the Business Development Center has led Marshall to start another incubator devoted to technology that should open in September. Fletcher is recruiting companies from across the state to set up shop in the new operation.
Transition
As the incubator busine's the way it should be, he says. If an incubator proves it can help companies become independent, they should be able to charge for their services."When you really can grow companies, you can charge fees to the companies you're growing once they are out on their own," he says.
The STARTech incubator in Richardson is an example of the new breed of incubators. It began in 1996 as a quasi-public entity, funded by the Richardson Chamber of Commerce. The incubator focuses on telecommunications companies as part of the area's Telecom Corridor.
Today, more than 25 high-tech, telecommunications equipment manufacturers and service providers are each contributing $25,000 to STARTech's operating budget. The investors, which include Ericsson, Nortel, Fujitsu and Sun Microsystems Corp., receive dividends.
STARTech startups also have access to a seed fund of more than $4 million put up by 11 venture capital companies.
The idea is that the big companies get a peek at the technology developed by the startups. That helps the bigger companies take advantage of the nimbleness and creativity of the entrepreneurial firms.
Entrance exams
Part of the success of incubators stems from the fact that their member companies have passed rigorous entry procedures. The ATI process, for example, is not for those whose idea is "just to do something cool on the Web," said Joel Wiggins, ATI's director of operations.The basic requirements for applying are a strong management team, potential for job growth, financial resources and a product that has a short time to market.
If those conditions are met, entrepreneurs must pass a series of evaluations. Their business plan is studied by a lead recruiter and two or three other ATI employees. Then the recruiter discusses the plan with ATI's director of operations. After that they sit down with the applicant to assess the entrepreneur's ability to articulate the plan and the chances for success.
In the next step, three outside reviewers--chosen with the entrepreneur's right of refusal--evaluate the plan's marketing, financial and technology aspects. When those evaluations are turned in, the people who have reviewed the application make a decision.
The ATI gets about 200 business plans a year, studies about half of those, gets more information on 25 and admits about 10-12 companies.
Seeking information about applying to ATI or any incubator is just a matter of calling, writing or e-mailing them.
Seasoned veterans
Once in, entrepreneurs get considerable assistance.Incubators have seasoned business veterans who help guide entrepreneurs through the risky early days of a venture when even a seemingly minor misstep could lead to major problems or collapse. Business people who have been through the startup process can help incubator members decide when a risk is worthwhile.
The ATI matches a member company with a mentor or adviser. The relationship usually begins on a pro-bono basis, but can result in the adviser becoming a board member or officer or taking an equity position.
"Early on, the companies typically don't have those relationships," said Wiggins. "That's how we can really add value to a company."
Todd Caven, vice president of current ATI member AIM Technologies Inc., said there's also a collegial atmosphere with give-and-take among the companies.
That's the kind of environment that Texas' newest incubator hopes to provide.
"We want to create a human network," said Martin Lindbergh, chairman of the Houston Technology Incubator. "We're bringing together people with expertise in accounting, finance, law and business management."
The incubator also has recruited executives, such as Compaq Computer Corp. founder Ron Canion, to provide advice.
Capital necessity
Many incubators have relationships with venture capital companies that can give startups a head start in raising investment capital.AIM Technologies gave some credit to the ATI for the $4 million in capital raised from Polaris Venture Partners of Waltham, Mass. AIM's Caven said that ATI helped attract investors--as well as employees--because of the "instant credibility" AIM had by being an ATI company.
Of course, the day-to-day amenities of reduced rent and office supplies and services are important. Such costs can eat up a young company's limited resources that could be better spent on developing its product.
Even something as basic as having a receptionist answer the phone with your business' name can make a difference for an unknown startup. "It makes it legitimate," says Elaine Salazar of Ampersand Art Supply, an ATI company.
Contributing to this article:
Roger RounsavilleIncubators help new businesses succeed, and generate jobs and paychecks, according to the National Business Incubator Association.
Four examples of incubators in Texas and some of their features are listed below.
Small Business Incubator Facility
WHERE: Early
FOUNDED: 1996
TYPE: Nonprofit
BUSINESS: Mixed
ANNUALBUDGET: $165,000
FUNDING SOURCES: Portion of Early sales tax for economic development and rent.
NUMBER OF COMPANIES: 8
WHAT THEY GET: Reduced rent, which includes utilities and maintenance, free office services; free legal and accounting advice; mentoring.
WEB SITE: www.earlytx.com/sbif/
StarTech
WHERE: Richardson
FOUNDED: 1997
TYPE: For-profit
BUSINESS: Telecommunications
ANNUALBUDGET: $650,000
FUNDING SOURCES: Corporations
NUMBER OF COMPANIES: 6
WHAT THEY GET: Reduced rent, office services; access to business advice; reduced fees for legal and accounting help; $100,000-$300,000 in seed money; advice from 13-member board of mentors; reduced rent and office services.
WEB SITE: www.startech.org
Austin Technology Incubator
WHERE: Austin
FOUNDED: 1989
TYPE: Nonprofit
BUSINESS: Technology
ANNUAL BUDGET: $500,000
FUNDING SOURCES: Rent from member companies; university, municipal and private contributions.
NUMBER OF COMPANIES: 18
WHAT THEY GET: Reduced rent, office services; access to business advice; reduced fees for on legal and accounting help; and use of University of Texas business students to conduct marketing and other studies.
WEB SITE: http://www.utexas.edu/depts/ic2/c2e/ati/
Dixie Cullen Interests Inc.
WHERE: Houston
FOUNDED: 1997
TYPE: Nonprofit
BUSINESS: Heavy industry
ANNUAL BUDGET: $300,000
FUNDING SOURCES: Rent
NUMBER OF COMPANIES: 6
WHAT THEY GET: Reduced rent; ability to expand and contract amount of space; payments for equipment on as-used basis; and business advice.
WEB SITE: www.dixiecullen.com
OTHER INCUBATOR SOURCES ON THE WEB:
National Business Incubator Association: www.nbia.org
Texas Business Incubator Association: www.tbia.org
From Our ReadersWe want to hear from you! Beginning with this issue of Fiscal Notes, we are printing comments, letters and e-mails from our readers.
To contact us, call 1-800-531-5441, ext. 3-4900; or 463-4900 in Austin, or write to P.O. Box 13528, Austin, Texas, 78711-3528. Internet users may send comments to fiscal.notes@cpa.state.tx.us.
Dear Comptroller Rylander:I have just read the May 1999 issue of Fiscal Notes. The piece on the Texas Youth Commission was very informative and particularly well done.
Cordially yours,
Dan Richard Beto
Director
Sam Houston State University
Correctional Management Institute of Texas
George J. Beto Criminal Justice Center
Dear Comptroller Rylander,
I want to thank you for a report for Texans which can be of value to all aspects and folks in our state.I would make sure that every school in our state receives a copy and use some tool to be certain students receive the value of the publication.
Sincerely,
Grant Jacobs
Red Oak
From the Comptroller:
Small business, big impactMore than 98 percent of Texas' 375,000 businesses are small businesses, according to the U.S. Small Business Administration. Small businesses help drive the economy and are laboratories for innovation and change. Small businesses develop better products and services and provide needed competition to corporate America and to government. They create paychecks and jobs.
Many, however, lack the resources for the long haul. In 1997, 83,384 businesses failed in United States, most of them small enterprises. Over the past quarter century, the failure rate has doubled--from 44 per 10,000 concerns in 1970 to 88 in 1997.
As a former small business owner myself, I understand just how tough it can be to own, operate and grow an enterprise. And that's one reason why I believe that the chief role of government in the economy is to create incentives for work, savings and investment.
One such incentive is business incubators, the subject of our cover story in this issue of Fiscal Notes. Incubators help companies reduce the chances of failure in the most critical early stages of development by providing support and experience. Nationally, 73 percent of incubator-bred companies are still in business several years after "graduation"; the Austin Technology Incubator says the survival rate of its graduates is 94 percent.
I am particularly encouraged to see that many new incubators are privately operated, depending less and less on government assistance. This country was built by the private sector, and if it is going to become better and stronger, it will be the private sector that does the work.
Starting a new business is a serious undertaking. Before you get started, check out the Texas Business Advisor section of the Comptroller's web site at www.window.state.tx.us/tba/index.html. It offers a variety of checklists for Texans with the entrepreneurial bug. It can help test the feasibility of starting a business, help write a business plan, identify sources of financing and more.
As Comptroller, I want individuals and businesses to keep more of the money they earn to provide more capital for savings and investment, and thus encourage job creation. And that's especially true for small businesses. Limited government and lower taxes spur economic growth.
Research has demonstrated that states with low tax burdens outperform their high-tax counterparts in economic growth and job creation.
In Texas, we can and must do a better job of creating an environment where all businesses--small and large--can thrive and prosper. Limiting the growth of government and encouraging the work of incubators is part of that effort.
-CAROLE KEETON RYLANDER
Texas Comptroller of Public Accounts
10 Principles for Texas
in the New Century* Develop a better-educated workforce
* Direct more of every education dollar into the classroom
* Raise the bar on student performance
* Cut taxes in Texas
* Introduce competition into Texas government
* Improve government performance and accountability
* Reduce the size of government
* Bring common sense to regulations
* Use technology to cut costs and increase quality
* Return control to communities and individuals
A shiny new window
Window on State Government, the Comptroller's Web site has a new look and new content. It is designed to be easier to get up-to-date information that Texans need concerning our state's economy and taxes when they want it.
"It is a more user-friendly Window on State Government," said Comptroller Carole Keeton Rylander. "It is bolder, more focused and, most important of all, it contains more information. It is our goal to offer a state-of-the-art web site that allows Texans quick access to the valuable reports and information that this agency produces.
"The site features state and local economic and demographic data, special reports on economic trends, performance reviews of schools and local governments and more. There's also more detailed information to assist taxpayers.
TSPR To Examine El Paso Community CollegeTexas Comptroller Carole Keeton Rylander has announced a Texas School Performance Review of El Paso Community College, the first conducted of a Texas community college.
The management and performance review, scheduled for completion in October, was requested by the college president, Dr. William J. Campion, and State Sen. Eliot Shapleigh. The performance review team has conducted a series of public forums in the area to obtain suggestions and ideas from faculty, students and taxpayers.
"I intend to help the college find ways to maximize its financial resources to increase the availability of basic courses and help meet local employers' training needs," Comptroller Rylander said.
The study will serve as a pilot project for other Texas community college performance reviews.
Texas' bond rating gets upgradeMoody's Investors Service has upgraded Texas' bond rating, making it cheaper for the state to borrow money. The state's rating rose from AA2 to AA1.
Moody's cited continued growth, economic diversity--including a reduced dependence on oil and gas--and the state's restrained use of debt as factors for the better rating.
"Texas lawmakers have put the state on a sound fiscal footing and, combined with extensive and accurate fiscal estimates and analysis from the Comptroller's office, the winners are Texas taxpayers," said Comptroller Carole Keeton Rylander. "The improved rating will help cities and counties, schools and ultimately, every Texan. People already holding Texas bonds also could see a gain in the value of their bonds because of this upgrade."
Auction items ready for actionThe state's auction on unclaimed property--from jewelry to coins to collectibles and curiosities--will be Oct. 2. About 90,000 items from abandoned safe deposit boxes will be sold to the highest bidders.
The auction was scheduled for July 2000, but the Comptroller's unclaimed property vault filled so fast that the earlier date was set.
The auction will be held in Austin at the Travis County Exposition Center, 7312 Decker Lane. The sale begins at 10 a.m. Bidders may preview the items from 11 a.m.-6 p.m. Sept. 30 and Oct. 1.
To obtain an auction catalog, which will be available in late August, send a check or money order for $5 to Comptroller of Public Accounts, Attn: Auction Catalog Sales, Room 223, 200 East 10th Street, Austin, Texas 78701. The catalog will be available in late August on the Comptroller's Web site.
