A better way to create jobs

Nurturing start-ups works even better than infrastructure projects.

Bridgeton, N.J. — Chef Hymie Grande stares intently as his bottles of barbecue sauce – the product of years of cooking, tasting, and tinkering – slide along a conveyor belt toward a roll of custom-made holographic labels. This is it, he says, the birth of his small-business dream.

“Nobody else can say they have a sauce that is just like mine,” says Chef Grande (aka Jamie Faitelson), his face beaming. “This is the first time it’s real.”

The road to a business launch hasn’t been easy for the former luxury-watch salesman. With his business too small for commercial bottlers, who demand huge minimum orders, and too ambitious to work out of his home, Mr. Faitelson was stuck. One company he approached wouldn’t consider producing anything less than 35,000 bottles – a massive investment for a bootstrap entrepreneur.

Salvation came in the form of the Rutgers Food Innovation Center, a business incubator that nurtures young food entrepreneurs by giving them advice, a place to work, and, critically, access to a giant professional food production facility – complete with a labeling machine – to get their ideas off the ground.

“A small business like mine could never go to the big producers,” Faitelson says. Without professional guidance, he adds, he’s not sure he would be able to move forward. He now plans to enter his specialty sauce – which contains no high- fructose corn syrup, his chief selling point – at food shows and try to get noticed.

Interest in business incubators has exploded in the United States as recession-hit communities from New York City to Youngstown, Ohio, search for ways to revive their moribund economies. Already, well over 1,000 of these typically nonprofit organizations (more than 7,000 globally) shepherd local entrepreneurs through the beginning stages of business development with resources and services in the hope they’ll one day create local jobs.

They may be onto something. A 2008 study by the Economic Development Administration (EDA) found that, per dollar invested, incubators created more jobs than any other economic-development efforts – more than industrial parks and 10 times more than highway and other transportation projects (see chart). But not all incubators are created equal. As cities rush to embrace this hot economic-development strategy, they run the risk, economic-development experts say, of wasting lots of money.

“An incubator is only as successful as the labor market around it,” says Amy Glasmeier of the urban studies and planning department at the Massachusetts Institute of Technology in Cambridge. “If it doesn’t have a connection to the local economy, it’s just cheap real estate.”

So what makes a successful incubator? It starts with the ability to meet the many varied needs of entrepreneurs.

Debby Mitchell, a professor at the University of Central Florida in Orlando, came to the entrepreneurial world a complete novice. Her company, GeoMotion, combines education and fitness with such products as fitness mats and an integrated curriculum called Learnercise. Her company set up shop in the University of Central Florida Business Incubation Program three years ago.

“I moved my office into the incubator, and through them was able to find an investor a few years ago, and now I’m living the dream,” Dr. Mitchell says. Recession has trimmed her sales 20 percent, she says, but through a support group of fellow CEOs set up by the incubator, she has figured out how to ride out tough times.

“You’re getting basically free information,” Mitchell says of the contact she’s had with other entrepreneurs and a series of public relations, accounting, and legal professionals who work with incubated companies in the hopes that they’ll be clients one day. “I don’t have a business degree or a business background. For me to make that big a jump would have been tough without other support.”

Unlike Faitelson, who needed to find production capacity, Mitchell needed full-scale business support, from setting up a business plan to finding an investor.

Just as entrepreneurs have varied needs, incubators go about supporting them in different ways. They have flourished in unlikely places like Youngstown and Toledo, Ohio, by focusing very narrowly. (Youngstown, for example, only incubates business-to-business technology firms.) Other cities, like Boulder, Colo., have nurtured successful companies, only to see them leave town because of a lack of long-term strategy, says Dinah Adkins, president of the National Business Incubation Association (NBIA).

The Food Innovation Center, winner of the 2007 Incubator of the Year award from the NBIA, takes a novel approach. Concentrated exclusively on the food industry, it started life solely as a center for advice – reviewing business plans, connecting producers with suppliers, and contacting investors. Physical space, the usual hallmark of incubators, didn’t arrive until much later, well after networks had been established to support new companies.

“We are an economic development center, not a research center,” says Lou Cooperhouse, who runs the incubator. “We want to be so service-oriented that we forget about our four walls.”

Incubators have come a long way since 1980, when a dozen or so facilities dotted the landscape. “Thirty years ago, nobody paid attention to start-ups,” says Ms. Adkins. “It’s huge now.”

During his campaign, President Obama pledged $250 million a year to establish a nationwide network of incubators. That promise shrank to $50 million in his proposed budget. But Adkins says it’s still a big step up from the average $30 million a year that the EDA doled out.

Whether companies like Chef Hymie Grande and GeoMotion can actually thrive on their own remains an open question. The Small Business Administration estimates that 44 percent of all new businesses last at least four years, which means, of course, that 56 percent do not. Companies that graduated from incubation programs seemed to do better in 1997, when the NBIA found that about 87 percent of them made it past that four-year point. But no current study exists and even the decade-old data are unclear, mostly because individual incubators rarely track the long-term success of the companies they hatch.

This lack of clarity, along with the extreme difficulty of launching new businesses, as well as the high failure rates associated with entrepreneurship, even in good times, should give communities and universities pause before they latch onto an incubation program as a foolproof economic engine, incubator experts say.

“We’re seeing every community, no matter what their population, wanting their own incubator,” says Karl LaPan, president of the Northeast Indiana Innovation Center in Fort Wayne. The danger is that communities rush to set up incubators and end up losing money, he adds.

One solution is to focus on incubator networks to ensure that the biotech dreams of one community don’t destroy those of another, Mr. LaPan says. “In an environment like this, competing county by county is not a way to success.”

States are moving slowly toward incubator networks. Maryland, in particular, has worked to link its 20 main business incubators. But the landscape remains competitive, especially in a recession that has left many programs scrambling for funding. This new spirit of cooperation means that the Food Innovation Center regularly trades firms with other incubators that can better serve the needs of clients, including Faitelson, who hopes to begin his conquest of New Jersey’s food world.

Meanwhile, he can dream. “Now it’s trial and error – and fate,” he says.