Incubating Business: Are Startups Accelerating Our Economy?

A growing trend in economic development is giving startups a boost through business incubators and accelerators
by RaeAnne Marsh

shutterstock_203335948Apple and Intel may capture the headlines, but entrepreneurs are the drivers of the economy. A focused effort to foster an entrepreneurial culture in Arizona, which has generated a tremendous number of business incubators and accelerators, has been building in just the past several years.

“State development folks realized we were overly dependent on defense, construction and service industries,” says Thomas Rainey, president of the Arizona Business Incubator Association, which was created in 2011 under the auspices of the Arizona Commerce Authority. The recent economic downturn created an environment where a lot of people were laid off by traditional employers and had to think about alternatives — and many, out of necessity, started their own business. And that, observes Rainey, is the silver lining because “it creates incentives for people to start their own business, and we become more diversified.”

Phil Bradstock, program manager with the City of Phoenix, oversees its Entrepreneur and Innovation Strategy, which he says became a focus in February 2014. “We want them [entrepreneurs] to stay in Phoenix, create jobs, rent bigger space and create a product that will sell,” he says. A business incubator can help those who come up with an idea but “aren’t sure what to do with it” by helping train them and introducing them to resources — equipment, mentors and, ultimately, investors. “It’s also a place to go to let an idea fail in a safe environment, and not pour your life savings into something that’s not going to work,” he adds.

Rainey dates the inception of the movement to the 1980s, relating it was more about cheap space and real estate than training and connections. “In the early days, economic development organizations that had space available offered great rent to startups.” The National Business Incubator Association — which is now international — was founded at that time, to enable incubators to learn from one another. Now, he says, there’s more attention paid to selecting the right companies.

In the continuum of the startup ecosystem, co-working spaces have emerged to offer entrepreneurs and small-businesses an opportunity to rent space in a professional work setting. They often foster collaboration among members. Business incubators provide more high-touch, hands-on assistance after accepting clients through an application process. Typically, an incubator supports first-level startup companies, with a technical assistance program tailored to each company in the program — putting a strategy in place to help the companies quickly develop, grow, establish all the best practices to everything from bookkeeping to marketing to following a business plan, and providing accountability to move them forward. Accelerators are generally the next step, helping companies raise funding and recruit the right kind of talent. Hank Marshall, economic development executive office with the City of Phoenix, says of accelerators, “It’s like strapping on a booster rocket to take the company to the next level.” A fourth kind of operation that startups may avail themselves of is maker space, which offers specialized tools and work space so the entrepreneur can prototype his product to show investors and potentially do a small-scale build of the product for sale, to show there’s a common use for it.

Incubators and Accelerators as Economic Boost

Co-working spaces and maker spaces offer more self-guided opportunity for the businessperson; our focus here is on incubators and accelerators that provide directed assistance to those companies accepted into their program.

Incubators and accelerators are a relatively new phenomenon, so there is no track record. “We have several years to go before we can gauge how well they succeed,” Marshall observes. At the same time, he gives an “unequivocal yes; they are creating economic value and prosperity” when asked if they are benefiting the economy.

Among the earliest is ASU’s SkySong, which has been ranked as one of the top 20 university incubators in the world. Created in 2003, it reports it has launched and assisted 65 ASU spin-off companies and raised more than $350 million in venture capital and private funding. Another early entry is Northern Arizona Center for Entrepreneurship and Technology (NACET), which Rainey developed in 2007 after conducting a feasibility study at the behest of the City of Flagstaff; NACET and its earlier incarnation, Northern Arizona Technology Business Incubator, have spun off 32 programs since 2004, helped raise $150 million in private investments, and created more than 150 jobs in the community at an average salary of $65,000.

Says Rainey, “Incubators and accelerators help grow your economy organically, so you don’t have to constantly try to recruit someone from somewhere else, creating a fertile ecosystem for startups from within.” MaryAnn Guerra, CEO of accelerator BioAccel, notes also, “It’s important to employ the graduates coming out of [engineering] programs. We’re helping to create the pipeline of new, innovative companies in growth industries that will help diversify our economy and will be the high-paying jobs of the future that will bring all of Arizona to a higher level from an economic development perspective.”

WebPT, Infusionsoft and Appointments Plus are frequently cited as great examples of what can be built right here. In fact, Bradstock notes that seeing WebPT grow from one person to more than 260 employees made him and his colleagues in economic development realize “we were focusing on the larger companies.” The need, he emphasizes, is to focus on the small companies that have the ability to become the larger companies.

And that will likely also result in the companies’ headquarters being here. “Versus trying to attract companies from elsewhere with a lot of incentives, and possibly disrupt the existing ecosystem,” observes Henry Dauphin, whose company, The Refinery — which includes co-working space as well as incubator and accelerator platforms — is expanding to Phoenix from its successful operations in Montreal and Toronto.

After a year-long process of analyzing U.S. cities, Dauphin says, “Phoenix won handily over the other markets we’d analyzed.” Critical elements included our much-vaunted quality of life, but also a market that is ripe for innovation, with the right kind of ideas and entrepreneurs and a high potential for collaboration and connectivity between all participants. Naming the Greater Phoenix Economic Council, Arizona Commerce Authority, Arizona Technology Council, CO+HOOTS, SEED SPOT and BioAccel, among others, Dauphin says, “We were blown away by all these participants.”

“It starts with, ‘Where is the deal flow?” Rainey says, explaining the term refers to potential for talent and spinning off new businesses. Graduates from education institutions are one part of this, but evidence of entrepreneurial culture also includes people being laid off and needing to create their own job or wanting to leave a large company to do something on their own. “It’s a fertile ecosystem attracting a lot of attention,” he says, expressing optimism regarding Phoenix as a national center for incubators and accelerators. “There’s a tremendous amount of activity for a city of our size.”

Different Profit Motives

Incubators and accelerators, themselves, come in a variety of business models. There are for-profit and not-for-profit enterprises; some concentrate on a particular type of business; and there is wide variation on the fees charged to participants.

“We’re the purest sense of incubator; we take no equity in our clients’ companies,” says Jeff Saville, executive director of the Center for Entrepreneurial Innovation, relating CEI exists solely to create jobs for the region. Explaining, “It takes eight to 12 months to get an incubator program up and running to experience good efficiencies and output,” Saville says the program — three years old this month — has graduated three companies, which have created 114 jobs at an average salary of $56,000.

The facility, which is located on the campus of Gateway Community College, was funded by a grant from the federal Economic Development Administration matched by the community college district CEI sits under, with some additional funding by the City of Phoenix. “It’s a wonderful fit to have CEI integrated into the community college district,” Saville says, observing that the community colleges “do a great job of training people to enter the work force.”

Opened in March 2012, the 18,000-square-foot facility includes eight wet labs and six manufacturing labs. CEI is mostly focused on technology, medical devices, biotech, software development and clean energy. Eighty-five to 90 percent of its clients are pre-revenue, and Saville says the intention of the program is to allow them to enter into the first revenue stage. “Then they can hire employees and create jobs.” Regarding the potential that new businesses may compete with existing businesses, Saville says CEI looks for differentiators so both can exist in the ecosystem. “We’re the 6th-largest city in America; chances are good that we can have multiple companies exist.”

AZ TechCelerator, another incubator, was created by the City of Surprise in 2010 to help jump start companies that can create high-quality jobs for community members. Noting that a huge portion of the city’s residents leave the city every day to go to work, TechCelerator manager Julie Neal says, “We want to create those jobs here that are head-of-family income.”

Its focus is on technology, innovation and entrepreneurship, and Neal says, “We urge anybody with a great idea or one they think is innovative to apply.” With its community orientation, its evaluation of potential clients also includes looking at whether the new company would compete with other businesses in the local commercial market as well as whether it could service businesses that are thriving in the community. The program graduated its first company this past November — MD24 House Call, founded by Linh C. Nguyen, M.D., M.M.M., which has taken 10,000 square feet of space in the city and hired more than 100 people.

Cash-neutral and self-sustaining thanks to owning the real estate it occupies, TechCelerator “puts no undue pressure on the city budget,” Neal says. With facility maintenance the only ongoing investment, Neal says TechCelerator only charges rent to its clients while providing mentors, business coaches, and panels and education workshops created for particular needs. If a client will be pitching to investors, for instance, the incubator will create a pitching panel to help him prepare. Mentors and business coaches come from throughout the Valley, and Neal says, “It’s amazing, the support system for entrepreneurs — people wanting to really help businesses.” It’s also a relationship-building opportunity for the mentoring business, and Neal notes that business professionals today understand that creating a trust and a relationship is vital. “The way they are able to do that is to really get in there and work with some of these companies. In the long run, if the company is successful, who are they going to go to?”

Citing collaboration as one of TechCelerator’s most important resources, Neal says its clients learn from other companies what has worked and what hasn’t. Not all are successful, of course. “Some ideas are great but are not ready for the next step, or the entrepreneur is not ready.” And, she adds, “Entrepreneurs learn from mistakes; they have to fall down sometimes before they make it right.”

SEED SPOT, opened in 2012 and now recognized as the No. 1 incubator in the state, also takes no equity in its members’ company. Offering two different types of opportunity — full-time (14 weeks, for $3,500, requiring the entrepreneur to give 40 hours a week to his or her venture) and evening (12 weeks, for $750, requiring just a few hours a week) — it serves entrepreneurs at different stages of development, but all must meet the requirement of being social entrepreneurs who care about improving human lives or the community at large as well as making a profit. Co-founder Courtney Klein reports that, of the graduates, 88 percent are still operating and 93 percent of those are still in Arizona — and this has resulted in 160 jobs and $2 million in capital raised.

An accelerator, BioAccel provides a five-year program of investment funding, discounted rent, and business and technical services at no cost. Developed with the purpose of driving economic development, the nonprofit focuses on companies in the bio area, with an emphasis on medical devices. Observing that health, high-tech and bio are the growth industries around the world, CEO MaryAnn Guerra notes that medical devices is second only to IT in attracting venture funding.

BioAccel’s application process is simple, Guerra says, because “we want to have a low barrier to folks coming in and asking for help.” But the diligence process to evaluate the company or technology is rigorous. Even those not accepted gain from the experience. “They leave with good information on how to better build a business or get funding. And we may invite them to come back,” Guerra says.

With its external advisors that include social ventures, angels, device manufacturers and industry leaders, BioAccel first looks at the technology — has it been validated, does it have intellectual property surrounding it, is there competing intellectual property elsewhere in the world that could bump its intellectual property? Other factors include evaluating market potential. Noting the importance of talking to the customer and finding out if he or she will buy the product, Guerra says, “Many times, we find out that who they think the customer is, is not the customer. And they’ve never even talked to who they thought the customer was, let alone who the real customer is.”

Another factor is the manufacturing potential, Guerra says, “to bring manufacturing here.”

Companies have the opportunity to get the usually hard-to-get early-stage investment funding. And along with extensive business and technical expertise, BioAccel will not only help companies write SBIR, Flinn Foundation and other grants, it will stand in as management to back up the company’s application.

A for-profit company founded in Canada in 2013, The Refinery expects to open a 14,000-square-foot facility in Downtown Phoenix in early fall this year. Its program starts with its co-working space. Accepting as many as 60, it strives for a diverse set of entrepreneurs and companies that represent a microcosm of the region. The intent, explains Dauphin, The Refinery’s business development engineer, is to create a community, centered on innovation, that fosters a lot of interaction and knowledge transfer among its members. From this pool, The Refinery identifies the 10 companies it is interested in for its incubator and accelerator platforms that starts with four to six weeks of analysis and assessment for a roadmap and the involvement of The Refinery in implementing that strategy. This includes determining milestones that would trigger an equity plan.

Another economic development company is Tallwave, which founder and CEO Jeff Pruitt describes as “accelerator-ish.” “We provide great products and services through the continuum, to help change early-venture outcome to get more startups to actual buildups,” he says. The impetus for its founding in 2009, he says, was his belief that “Arizona had as good of ideas as Silicon Valley but not the ecosystem to move companies from idea to validation to finding the product/market fit and actually commercialize the business.” In addition to being a consulting firm — working with such established enterprises as PayPal and Microsoft to help build software and serve as the production shop and help deploy the new product to market — Tallwave has a $13-million seed fund for software as a service (SaaS).

SandCastle is one of its programs, which enables a company to build a prototype through an app on a phone to validate its concept and use as an asset to sell to investors, employees and customers. Its other product, Springboard, is a concentrated sales training program. The accelerator aspect usually lasts three to nine months; on the funding side, Pruitt says, “It’s usually three to eight years before it has exit value — to be acquired or for private equity or IPO.”

Raising the profile of innovation in Arizona, one of Pruitt’s goals, he sees as important in attracting attention from investors outside the state. He cites ShelfSpace as one client that now has venture funding from Santa Monica, California. “Fifty percent of Tallwave business is out of state,” he says, noting his focus on “how well-connected we are as an innovative community” and relating he is seeing the effort paying off “in the calls we’re getting from outside the community.”

The broad interest in incubating businesses and accelerating startup development is evidenced in the range of member organizations in the Arizona Business Incubator Association: economic development organizations and community colleges as well as co-working spaces, incubators and accelerators. Incubators and accelerators become a filter for the investment community, and businesses are more likely to succeed and grow because of access to capital, Rainey observes. But, ultimately, it’s the entrepreneur who deserves the credit for successes. As CEI’s Saville expresses it, “They are the ones taking all the risk and creating all the jobs.”

The Client’s Viewpoint – Traklight

Traklight is software-as-a-service (SaaS) platform to help entrepreneurs and inventors identify, manage, monetize and protect their intangible assets, including intellectual property.

CEI provided more than just an office space for Traklight. I started there over two years ago without any contractors or employees and little knowledge about marketing or sales. The connections and expertise provided by CEI and its mentors were instrumental to our success.

Over the past two years, we have hired over 10 contractors for various projects and have had up to six employees working full-time. We raised $435,000 in angel funding in early 2014. —Mary Juetten, Founder and CEO.

The Client’s Viewpoint – KEASY

KEASY is a keyless, digital lock designed to provide real estate professionals safe and efficient access to properties they want to show.

When I came to SEED SPOT, we were more than an idea because we had a working prototype, but I didn’t feel like KEASY was a company yet. Fourteen weeks later, I had identified our target customer, was confident in our value proposition, had three property management companies on board for beta testing and committed to our first 300 locks. We also had a team of advisors/mentors/fans rooting for KEASY and going out of their way to open doors and help us succeed. It was absolutely the best use of my time and resources.

We just opened our seed round and have had an incredible response. Currently in development for our first beta test locks/app, we are still pre-revenue but have purchase commitments from our beta test clients and are accepting pre-orders on our website. We want to create a community with our early adopters and build what they need, not what we think that they need. —Meghan Martinez, Founder

The Client’s Viewpoint – Pinnacle Transplant Technologies

Pinnacle Transplant Technologies is a regenerative medical company that operates a human tissue bank.

CEI has contributed to our business success in a number of ways. First and foremost is introductions to key businesspeople to help advise our business. We utilized this group to help build our advisory board, which we established last fall. CEI also provides “Lunch and Learn” sessions covering relevant business topics, monthly group client networking sessions and assistance with everything from developing our first SBIR to assisting with hiring.

We have created 63 jobs in the last 3½ years, with over 30 created in the last 14 months, and project another 40 by the end of this year to put us over 100 associates. We have attracted $3 million in investment and generated $11 million in revenues in 2014, a 47-percent increase over 2013.

Additionally, although we have our own 25,000-square-foot facility, we are currently maxed out. We have a research lab at CEI and are planning on utilizing the bio 3-D printers CEI recently installed. —Russ Yelton, CEO.

Speak Your Mind