Buildings R Us, and that’s a problem: Incubators and Economic Development

I’ve been spending a fair amount of time lately in the entrepreneurship/incubator/accelerator space — in part because of some client projects and in part because of some things going on with my own business (more on that sometime soon). And I’m starting to think a bit about the challenges that face local governments and community nonprofits when it comes to trying to facilitate entrepreneurial growth in places that need help.

 

As I’ve watched communities start to venture into that space, it’s becoming clear to me that we need better guidance for communities that decide to take this on.  While entrepreneurial-focused approaches make a hell of a lot more sense for most of the communities I deal with than a heavy focus on recruitment, the path to Startup Nation isn’t an easy skip down a yellow brick road.  Growing entrepreneurship takes strategies that are profoundly different from what we have historically done, and we need to go into this with an acute awareness of being in a new type of environment.

series of chemistry flasks
Not a business incubator, but a yeast incubator. Sometimes we act like it’s the same thing. wikipedia.org

 

This essay actually started out as field notes – an exploration of the issues around a challenging initiative being undertaken by a particular  smallish city, one for which I have a hell of a lot of respect.  This is one of those places where an undersized, overworked, unbelievably determined staff is fighting to overcome decades of the kind of disinvestment and decay that old manufacturing towns know so well.  And while they have made amazing strides in a short time (the coffee shop that I’m writing this in qualifies as one of the small ones), there’s still a long, long road ahead.

 

As part of this little city staff’s determination to Make Things Happen, they recently took over management of a business incubator that has been operating out of an old office building for a couple of decades (The city owns the building, but the incubator is a separate nonprofit).  I’ve known at least one of the staffers for a long time, even mentored him a bit when he was in grad school.

 

And in my usual big sister sort of way, I walked away from a recent tour of the facility with a lot of worries about the future of this initiative, and about these people, who I want to see succeed.

 

Since they’re pushing so hard at such a tough job, I don’t want to say anything that might make the political aspects of their work any harder.  But at the same time, the issues I think they’re going to be facing need to be on their radar — and on the radar of all the hundreds of communities that are starting to turn to incubator/accelerator/entrepreneurship strategies to try to plug the holes in their economic development.  Chances are you know a few of those, as well.

 

Building-based in a virtual world

 

Traditional incubators were developed on the basis of a physical space assumption: small businesses, the logic went, need offices, receptionists, board rooms, kitchens, coffee makers, so on.  And new, small businesses can’t afford that stuff on their own.  So our incubator will hold those pieces in common, and the businesses in the little side offices will use them when they need them. Providing those central spaces is what we need to do to help them succeed.

 

That’s how the incubator that I toured was set up in the early 90s, and that’s how it, basically, continues to work.

 

A lot of other people have written about the shortcomings of this model of business incubation, so it doesn’t make sense for me to belabor that here.  If you’re not familiar with the unaddressed issues and unintended consequences of traditional business incubators, here’s the Cliff Notes version:

  • Maintaining the incubator building typically costs a whole lot more than the real estate expenses associated with the work.
  • The fact that the incubator has to carry a lot of overhead associated with the building means that there’s a lot of pressure on incubator management to keep occupancy rates as high as possible.
  • The pressure to keep occupancy rates high works against what is supposed to be the purpose of the incubator, which is to grow new businesses to the point where they can fledge into other spaces in the city, making room for the next new startup.  Incubators often end up with a lot of little businesses that enjoy the low rent, stay small and never leave.
  • The pressure to keep occupancy rates high also pushes many traditional incubators to accept pretty much any business that wants to go in.  That means that the incubator can end up subsidizing businesses that don’t add much to the economics of the community.

 

(Obligatory caveat: of course, a lot of great businesses have come out of traditional incubators, and lots of lovely businesses that do lots of nice things have ended up as long-term residents of incubators.  Don’t hate me.)

 

The incubator in this community has had a lot of these challenges.  There’s several businesses in it today that haven’t grown and haven’t changed over the years that they’ve been in that building, essentially having their operating expenses subsidized by the nonprofit and the City.  And since the former executive director was apparently evaluated based on the building’s occupancy, there was no reason to get picky about tenants – or set up anything to get them out.  Those tenant businesses have had had a pretty sweet deal.  Don’t blame ‘em for sticking around.

 

My friend, the interim executive director on loan from the City, is trying to change that – target recruitment, make occupancy time-limited and dependent on growth targets, etc.  But of course, that’s all easier said than done, especially when you have that kind of precedent (and a handful of lawyers among the old-line tenants.)

 

The bigger problem I worry about, though, is that the real estate part of the equation hasn’t gone away.  The City stepped in because they own the building… and they pay the utilities.  It’s logical under that arrangement that they will want to get the building’s (paying, even if cheap, still paying) occupancy as high as possible.  This ain’t a town that has money lying around.  They’re pounding on economic development because they need all the jobs and taxes they can get.

 

The problem is that the presence, the overhead, the cost of the building, hasn’t changed.  And the pressure to pay for the building may push the City back into the same situation that the incubator was in before.

 

The other building-related challenge stems from the building itself, and this is also pretty typical of community-based incubators: it’s in an old building that was built for a specific purpose.  In this case, the building was the old City Hall.  But it could just as well be a vacant department store, an old warehouse, and so on.  It’s something that someone was trying to repurpose.  Very common among incubators.

 

I have decent historic preservation cred, and I can say rather adamantly that I would not want this building torn down.  It’s a piece of Early Streamline style awesomeness that features terrazzo floors and murals and gleaming stair railings.

 

But that doesn’t mean that it’s right for an incubator.

 

What’s wrong with it?  The biggest problem that I can see is that the office spaces are just like you would imagine in an old city hall – small, separated, sometimes kind of dark.  The biggest problem is that this configuration isn’t very flexible.

 

I wrote a piece in the Local Economy Revolution book about the new, emerging types of businesses as being “ninja-like” in their flexibility.  Small businesses, start up or no, have a lot of disadvantages compared to big ones, but one of their assets is that they can shift their market, their perspective, their product, a whole lot faster than a big corporation with lots of approval layers.  And in an economy where change isn’t only fast, it’s accelerating, that turns out to be a big asset.

 

But flexibility in market strategy requires flexibility in operations as well.  We might need room for three employees today, 14 next month, five the month after that. We might need space for collaboration, for small private meetings, for private phone calls.  Are we fabricating our prototypes right here where we work, or do we (and can we) subcontract to someone else to make it? (Subcontracting costs money, and startups don’t tend to have a lot extra of that).   The space that a business occupies in the incubator needs to facilitate the work, not get in the way – small businesses like these operate so close to the bone that they can’t afford space inefficiency.

 

Old city hall offices aren’t exactly built for this kind of flex.  They have big heavy walls, thick doors, lots of the same size spaces.  Thinking about the startups I know working out of accelerators and co-working spaces across the country, I had a hard time picturing them operating out of these spaces.  The city has decided to target specific green industries in the space, and given the community’s unique assets, that appears to be the right match.  But for many small businesses, the spaces available in this building may fit pretty awkwardly with how and what they need to be doing.

 

The other problem with an old office building as a start-up space: old office buildings were designed for privacy, but start-ups need connection.  Brad Feld has talked about the need to build an entrepreneurship ecosystem; Tony Hsieh talks in terms of facilitating collisions.  Both are identifying the same fundamental need: startups that are trying to create something innovative desperately need to find fuel for that innovation outside of their own company.  Big businesses do this too – Fortune 500s do a lot of their innovating by buying smaller companies or licensing products invented by someone else – but a startup has to find new ideas, new products, new solutions, through its own network.  As I have noted in the writing that I have done about the Downtown Project in Las Vegas, the power of collisions is so important that the Downtown Project puts an enormous amount of thought and effort into creating ways for people to collide around new ideas. And I’ve written about places like Annapolis, Maryland, where the economic development agency holds a regular series of events designed to create opportunities for those kinds of collisions.

 

It’s hard to collide in a bunch of small offices separated by dim hallways.

 

None of this is to say that this city and this incubator cannot thrive and incubate great businesses that catalyze a new economy, like they are envisioning.  But it does mean that the limitations of the physical spaces will have to be addressed – both in terms of operations, and in terms of funding.

 

First, it’s going to be very important for this incubator to get picky.  They’ve started doing that with the decision to shift away from a host-anyone approach to a targeting based on a few industries where they already have community assets.  But they’re also going to have to spend some time with prospective businesses making sure that they understand how that business is going to operate – what their work processes will look like, how they will handle prototyping, etc.  And with true startups, they might have to help the businesses figure these things out themselves.  Not all startups are going to be able to succeed in this space – some may need much more of a workshop or an open plan or a micro-space (a lot of the newest accelerator spaces don’t provide much more than a work table).  It might make sense to figure out a Plan B for businesses that the city wants to support, but that can’t operate well in the confines of this particular building.
Second, the building won’t help collisions happen too readily, so they are going to have to put some thought into how to help generate opportunities for collisions. They’re planning on offering business classes in conjunction with the local Small Business Development Center, but this kind of basic training isn’t a collision-generator.  And collisions are not the same as the dreaded networking, either.

 

Enabling the kind of collisions that allow the tenants and potential tenants to see the value of being in this incubator will require a suite of events that get people thinking and talking around big, and new, ideas.  There’s a tendency to assume that technology-enabled businesses don’t need that face-to-face anymore, but connection and thought-fuelling events play a central role in every entrepreneurship ecosystem I know of (for a couple of good examples, check out the StartUp Grind and 1 Million Cups programs in cities nationwide).

 

Finally, the city and the nonprofit are going to have to come to terms with the fact that an incubator, even one with a full house, only addresses a tiny fraction of the entrepreneurship that a community like this one needs. It takes a lot of startups to make a change in a local economy – a lot will die or move, others won’t grow much.  An incubator alone isn’t going to move the needle – and since one of the driving motivations in starting a lot of incubators is to find a use for that big ol’ expensive building, it can become far too easy to focus on building operations and management.

 

To make a real difference, though, an incubator has to have an impact far beyond the businesses within its walls – it has to become the hub, the center of activity, for businesses across the city.  Every business that is trying to innovate, trying to grow, needs information, ideas, and those collisions.  An incubator that actually makes a difference has to reach well beyond its own walls and connect to the entire entrepreneur community.

 

I don’t know what is going to happen with the incubator that I’ve described here.  I hope that my colleagues there learn from their incubator’s history and address these challenges before they become a problem.  But we are, all of us as communities, at the very beginning of learning how to grow entrepreneurs.  We’ll all make lots more mistakes, but hopefully we can all learn together.

 

 

 

 

5 thoughts on “Buildings R Us, and that’s a problem: Incubators and Economic Development”

  1. I too have found myself in the starting up space of a startup ecosystem in our region for the sake of metro, economic development. The smallish town that I’m a resident of has not taken such a proactive step as the one you talk about here. Instead our small town seems to be more interested in “winning” new business as you talk about in your first sections of your Local Economy Revolution book. But I have been think a lot about the problems you mention here.

    You talk about flexibility and the need for space that can be easily reconfigured for the new agile types of businesses that the “new economy” is starting to foster. I would add one other aspect to that I think is important to the flexibility. The nature of manufacturing and product development is also becoming a lot more accessible to the new economy entrepreneurs. Pop up manufacturing and rapid prototyping because of computer assisted cutting and 3D printing need to be part of the kind of spaces where new companies are hatched. As you point out most “old economy” templates really only accommodate the office and marketing type facilities.

    Our little town has the perfect area and land available to create (if we had vision) a kind of “makers village.” Not a single shop with only one of two types of 3D printing but many different kinds of facilities to provide a full range of pop-up small scale manufacturing. Of course this would require changes in our euclidean zoning ordinances. It would also take an ability for planners and civic leader to envision how land use could be used as a tool for the purpose of economic development… having the vision then selling the vision to real estate brokers and commercial developers to help them to see how sharing in that vision would spare economic growth, and how various building could fit, (we are not in the rust belt so we don’t have many of those old cool red brick turn of he century buildings) and why it would be worth them investing time and money into that kind of mixed use makers village and how that would be a part of the economic ecosystem that would benefit them so many ways.

    I think I’m rambling on beyond the point of making sense… There is one last point I’d like to make. When I try to explain this to folks I get the “Oh that is just the old ‘Build it and they will come’ argument.” But in my defence I believe there is a difference between Build it and they will come, which I often associate with massive ball parks and convention centers and other stupid public mistakes, and the Build it and they will want to live here, which I think of as walkable city, enjoyable pubs and a cool place to make (and sell) stuff, on a streets designed for living.

  2. Hey Della– nice article! I’ve done some trainings for LISC trying to help CDC’s differentiate between incubators, accelerators, shared-use spaces, and multi-tenant spaces…. and that all share a focus on supporting small businesses, but in REALLY different ways from the perspective of operations…. and too many groups talk about business incubation when what they’re doing is just plain old shared space or multi-tenant office facilities that provide minimal real training or TA– and how important it is to understand the differences.

    For many under-resourced non-profits looking to creatively re-use old buildings, the multi-tenant option, focused on smaller spaces for smaller businesses, may be the better option….

  3. All great points — and an interesting twist on the Jane Jacobs line that new activities require old spaces. She meant (as I understand her writing) small cheap space near to where the entrepreneurs lived and sometimes worked at their “real” jobs. I read your column to emphasize the “nearness,” maybe even over the cheap.
    I would love to her your thoughts on “co-working spaces,” especially since my son-in-law (who lives in Austin but works full-time for a firm in Boulder) makes use of one, with his firm’s blessing and support, 2 or 3 days per week.
    The co-working spaces I know “get it.” They offer both the cheap and communal support, but also the exchange and flexibility that you stress. Indeed, the lead one in Austin (The Capital Factory) is famous for its parties and other activities to accelerate the exchange aspect of co-working.

    Rollie Cole, PhD, JD
    Founder, Fertile Ground for Startups, Small Firms, and Nonprofits

  4. Many decent and valid points; in many cities (particularly smaller/mid-sized places), the incubator was a rehab project and a money pit – but, in defense of the overall incubation industry (and no, I don’t hate you – you’re extremely accurate in most of this article!) – here’s some thoughts from an experienced consultant in the field:
    First, the comment of : “It’s something that someone was trying to repurpose. Very common among incubators” is not exactly true. In fact, in most municipalities and places around the world (in the more than 7,000+ incubators, co-working spaces, accelerators and other types of innovative incubation that’s now going on), most of us in the “feasibility study” business discourage “re-purposing” or trying to rehabilitate old sections of town. Having visited over 230+ incubators on-site myself, I would say less than 35% are “re-purposed buildings”; most are either new or at the least, totally changed to reflect the needs of the potential clients.
    Second, communities that DO repurpose old buildings, take on the utilities and overhead of them completely (as this town apparently did), and do not have clear criteria for entry and graduation DO end up exactly as you’ve stated – with long-term clients and disparate situations/no goals/few graduates. This is exactly why the NBIA (National Business Incubation Association) and most of us recommend a quality feasibility study to outline exactly what SHOULD/SHOULD NOT be done, how it should be done, and where it should it be done. You have to KNOW your potential deal flow/entrepreneurial ecosystem/money sources/etc. before you start.
    Third – the building is not the incubator; the PROGRAMS are the incubator. An incubator is support, mentoring, networks, and access to resources. Often, this can be accomplished without a building – or with “drop-in” space or hot-desk space, and less formality.
    I think you make an outstanding point that an incubator is only a PART of an entrepreneurial ecosystem – it is NOT “the answer” or the only answer. It should be, however, a vital part of the chain, and it should be vibrant and active. And, as noted, it should be “the hub of activity”, as well.
    There’s other points, as well, but I won’t belabor them here. You’re on the money to point out the limitations of physical space and money – i completely agree, there.
    I think you’ve made some excellent points; perhaps this incubator you describe can “pivot” and refocus; perhaps they can get some help, look at best practices, and become a “hub”.
    There’s still hope. There are plenty of good models out there – why not copy them?
    Thanks for your thoughts!

  5. Della, you’re right on in this article. My experience has been that the real estate is not necessarily an afterthought, but the community would take what they could get. Along the same line that not all small businesses are the same, the ability to have a facility that met the needs of the occupants is critical. The Ediface Complex is one of the greatest maladies of the good incubator or accelerator facility. And while I acknowledge that virtual businesses and connections have significantly changed the landscape, the downside is the inability to anchor the entrepreneur in the community. Face to face still appears to be the best generator of collaboration. Good and useful comments as well.

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