- The Washington Times - Monday, April 17, 2000

The party to celebrate Venturehouse Group's move to the District packed about 200 high-tech executives, government officials and downtown business people into the firm's future home, a vacant former bank office at 509 Seventh St. NW.
A jazz band jammed and guests helped themselves from platters heaped with crab cakes as Venturehouse founder Mark Ein played host in the Spartan surroundings he plans to transform into a place where young companies can grow and prosper a business incubator.
"It just kind of hit me there was an unprecedented opportunity to create really valuable companies in really short periods of time," said Mr. Ein, a Bethesda native who recently left the D.C.-based venture firm Carlyle Group.
The idea to lease the three floors across from the MCI Center hit one day as he was driving past the empty bank offices. The building and the neighborhood seemed perfect for the kind of collaborative and creative environment he wanted to establish for his start-up companies.
Long poor cousins in the family of economic development projects, business incubators have become hot. In the past nine months, 100 new incubators have opened, bringing the total to 800 in North America, according to the National Business Incubation Association, based in Athens, Ohio.
Nearly all were started by venture capitalists, who have devoted millions to staking and starting Internet companies and hope to capitalize on the explosive stock values of Web and electronic-commerce companies. They buy equity stakes worth 20 percent to 60 percent of their charges, move them along and aim to sell the newly minted businesses in as little as six months.
The Washington area is no different. Since last summer, at least 10 private and public groups from Reston to Columbia, Md., have started or proposed incubators with a high-tech focus. Urban locations like the District or Ballston or Silver Spring have been the most popular for sites lately.
That's quite different from earlier incubators, which have been established since the early 1980s for a variety of industries and public purposes, such as revitalizing neighborhoods, commercializing technologies, empowering minorities. The vast majority are nonprofits, and about a quarter are affiliated with colleges and universities.
"In the past no one would ever say, 'you want to make money? Let's start an incubator,' " said Dinah Adkins, executive director of NBIA. The newest ones "are dependent entirely on the market."
Typically, incubators have consisted of a set of shared offices under a nonprofit manager. They have negotiated royalties or equity stakes, but at lower rates than the new incubators. Some have been better organized or better funded than others, but all provide services and expect their tenants to move out someday, otherwise they are only office suites, said Sally Linder, NBIA spokeswoman.

Big money

With huge amounts of money, and new ideas about how and where to help start businesses, venture capitalists are raising the stakes for all incubators. Some observers think they're bringing positive change. But let the entrepreneur beware, because there are also new trade-offs, Ms. Adkins said.
Incubator officials and their graduates agree: Incubators work.
From 1980 to 1991, North American incubators created almost 19,000 companies still in business and more than 245,000 jobs, according to a 1997 NBIA study. More importantly, these businesses accounted for about 87 percent of the incubators' graduates representing a far higher survival rate than for businesses that start on their own.
The Washington region's oldest incubator, the Technology Advancement Program, demonstrates this, said Director Ed Sybert. Located in the University of Maryland at College Park and founded in 1984, TAP claims an 80 percent survival rate for its 35 graduate companies. They have created 600 jobs and raised $250 million worth of investments.
The proportion is exactly the opposite for businesses that start on their own: About 80 percent fail in their first two years, Mr. Sybert said.
"Incubators do well helping companies survive where they provide assistance in the critical stage of early development," Mr. Sybert said.
One incubator graduate, Visual Networks, grew so rapidly that it displaced the incubator that housed it, forcing the Maryland Technology Development Center to move elsewhere in Rockville. Even intangible benefits make a difference, such as the moral support of huddling with other fledgling companies, said the company's founder and president, Scott Stouffer.

Variations

The incubator concept has its variations. The Morino building at 11600 Sunrise Valley Drive in Reston was converted from a printing plant in 1997. High-tech start-ups like Proxicom and VistraNet Communications and venture capital firms like Friedman Billings Ramsey were recruited for the purpose of creating a highly collaborative environment to stimulate technology innovation and business growth.
The building's landlord and tenant, the nonprofit Morino Institute, created the building to advance its goal of promoting the "new economy." It doesn't organize any programs besides get-togethers like parties and basketball tournaments. But it expects tenants to grow and move out.
"We're about making a technology community," said Liz Wainger, Morino's spokeswoman. Instead of using the word incubator, "We refer to ourselves as a knowledge cluster," she said. But business people continue to call it an incubator.
One thing that makes a big difference for business success doesn't come from an incubator, however.
"We require companies to have a business plan," Mr. Sybert said.
Even if entrepreneurs still neglect business plans, they are increasingly common. More and more applicants are bringing them to TAP and other incubators. Over the last nine months TAP's applicant pool has grown from about 10 to more than 30, Mr. Sybert said.
Economic development agencies in Fairfax, Montgomery, Prince George's and Howard counties have all responded to the demand, hoping to generate new businesses within their counties.
Because of the waiting list 12 companies on its existing incubator, Montgomery County economic development officials hope to build a new 25,000-square-foot incubator in Silver Spring, said spokeswoman Amy Finan. This would be in conjunction with a $16 million building to be raised by JBG Cos. at East-West Highway and Blair Mill Road.
Requesting authority from the state to issue a $1.5 million bond, the county must find new funding before it proceeds with the Silver Spring Innovation Center, she said.
Venture capitalists have been active in this area as well. Besides Mark Ein, former America Online executive Bill Smith plans to open Vector Development in Ballston; Howard County natives Brian and Alex Meshkin plan to open Incubank in a 50,000-square-foot space in the District, and Justin Abernathy plans to open iXOL in the District.
"The level of entrepreneurship in this region is staggering. We're seeing five to 10 business plans a day," Mr. Ein said.
Venturehouse is typical. Mr. Ein plans to start companies that do "business-to-business" electronic commerce, which analysts say is an industry with more growth potential than the better-known consumer-oriented Internet business. He has raised about $75 million of the $100 million he wants for the company, he said.
The company would buy up to 40 percent of the equity in its clients. The entrepreneurs would receive financing and the help of a team of advisers in a variety of areas, including financing, marketing, business planning, recruiting, accounting, legal issues and even creating a corporate identity.
Money, space and connections may be a lot to offer, but entrepreneurs ought to wonder if the price of sharing ownership is too high, said NBIA's Ms. Adkins.
"Not all are in the same league," she said.
As an article in the current Forbes magazine pointed out, some people have started incubators even when they couldn't keep their own ventures in business.
The price wasn't too high to Wayne Miller, founder of Admine.com, newly moved out of Venturehouse's nest in McLean but still under Mr. Ein's wing.
"It's necessary if we're going to move with the speed we want. Time is the enemy," especially when competitors can use delays to put your ideas to use faster, he said.
Still, entrepreneurs can be picky, he said.
"There's plenty of money out there. The question is, how do I find smart money that will help us gain access to people who will help us grow?" he said.

Business-to-business

Venturehouse is typical. Mr. Ein plans to start companies that do "business-to-business" electronic commerce, which analysts say is an industry with more growth potential than the better-known consumer-oriented Internet business. He has raised about $75 million of the $100 million he wants for the company, he said.
The company would buy up to 40 percent of the equity in its clients. The entrepreneurs would receive financing and the help of a team of advisers in a variety of areas, including financing, marketing, business planning, recruiting, accounting, legal issues and even creating a corporate identity.
Money, space and connections may be a lot to offer, but entrepreneurs ought to wonder if the price of sharing ownership is too high, said NBIA's Ms. Adkins.
"Not all are in the same league," she said.
As an article in the current Forbes magazine pointed out, some people have started incubators even when they couldn't keep their own ventures in business.
The price wasn't too high to Wayne Miller, founder of Admine.com, newly moved out of Venturehouse's nest in McLean but still under Mr. Ein's wing.
"It's necessary if we're going to move with the speed we want. Time is the enemy," especially when competitors can use delays to put your ideas to use faster, he said.
Still, entrepreneurs can be picky, he said.
"There's plenty of money out there. The question is, how do I find smart money that will help us gain access to people who will help us grow?" he said.

Raising the stakes

Putting down money raises the stakes for both investor and entrepreneur, said Phillip Singerman, president of the Maryland Technology Development Corp., which promotes technology development in the state. That's one finding from a study of incubators around the world, conducted by his organization and NBIA.
It's one reason public incubators have begun to take equity stakes in their tenants and upgrade the services they provide, but there's more they can learn from the private incubators, he said.
"It's a model that's influencing the market," Mr. Singerman said.
The venture capital model has its limits, however. While this method is great for starting Internet companies, it won't work with biotech companies, he said. Internet investors, looking for returns in 12 to 18 months at most, won't wait out the years of research and clinical testing that biotech firms undergo before they strike it rich.
The approach has another deficiency, according to one incubator operator. To take a company from incubation to a successful sale takes a carefully structured program, said Eric Dahler, president of E Incubator Inc.
E Incubator has run a for-profit incubator in Baltimore since December 1998 and was recently chosen by the Fairfax County Economic Development Authority to run an incubator in Falls Church at 6066 Leesburg Pike. It wants to start a third in Vancouver, he said.
Although the firm does invest in its tenants, putting up stakes of 10 percent to 30 percent, "We're not a venture capital fund in incubator clothes," Mr. Dahler said. "The venture capital model focuses more on the money and contacts and space. We're putting together a comprehensive curriculum."
Their program includes "modules" on six subjects, from laying strategy to product launch, aimed at bringing the company to an initial public offering or a private sale. They expect to move their companies in and out of their quarters within six months.
Space isn't necessary, either, according to Mr. Dahler. One company they "incubate" is RBS Network.com, an Internet company in Gaithersburg that has created a Web site that brings together small-home builders and consumers looking for advice and contractors. E Incubator serves RBS with the same modules and is introducing it to service providers like the communications company PSInet and the law firm Greenberg Traurig.
Within a month, E Incubator plans to break out of physical space completely by opening an Internet-based incubator, Mr. Dahler said. It would provide the same advice, information, modules and connections, as well as give clients a place to share information with each other and the E Incubator staff.
That stretches the definition of an incubator past Ms. Linder's definition, but it shows how incubators are changing. The question is, when will the current wave of incubators crest and fall?
According to Mr. Ein, "It's a timely question, given what's been happening in the stock market," where tech stocks have taken a beating lately, making investors wonder how long the stocks' fabulous gains will continue.
He sees two more years of opportunity to create companies. Mr. Dahler also thinks there still is time to start companies.
Ms. Adkins expects that some of the incubators starting now won't be here a few years from now. She believes that even in a "new economy," Internet stocks ultimately need to be valued on a traditional basis, she said.
"It's really so dependent on the market," she said. "The rapid proliferation of incubators could end within six months."

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