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B-HED: Cultivating Commerce: Getting the Best from Biotech Incubators
SUBHED: Your community’s program could help you commercialize your discovery
By Susan Warner
Like hopeful young mothers, state and local governments in partnership with universities,
foundations, and local industry are hovering over new life-science incubators where they expect
to nurture biotech startups. Business incubators have been around for more than 20 years,
mainly to stimulate struggling urban and rural economies. In the 1990s information technology
incubators became trendy with the rise of the Internet, but they quickly fell from favor during the
dot-com crash.
Now the focus is on life sciences. Even though this type of incubator space is expensive
to build and operate, governments increasingly are willing to plunge into high-risk biotechnology
development with hopes it will pay off in new marquee companies and high-paying jobs. “We’ve
seen an explosion of bioscience incubators in the last five years,” says Walt Plosila, vice
president of public technology management at Battelle Memorial Institute, Columbus, Ohio.
Last year Plosila conducted a survey for the Biotechnology Industry Organization (BIO),
which that found 41 states had biotechnology initiatives, including 15 with biotech incubators and
another 19 with general-technology incubators that included wet labs.1 [JM, I (bs) found the
reference] North America houses at least 63 biotech incubators, according to the National
Business Incubation Association. Europe also has launched a multitude of biotech business
starters in its quest to be more competitive in the life sciences.
The boom in incubators is due, in part, to an increasing desire by academic researchers
to commercialize their products. But researchers’ startups can be so small, often just one or a
pair of scientists, that venture capitalists are reluctant to back them. Incubators can help new
entrepreneurs raise funds to outfit expensive labs. Meanwhile, states and cities eager to spur new
economic growth are financing incubators to generate new jobs and tax-paying companies.
But these biotech rookeries, like the companies that inhabit them, are risky, and critics
contend that government should not be in the business of bankrolling new businesses.
“Government has never been very good at choosing what will work best,” says Ken Anderson,
editor of VentureWire, in New York. He questions the viability of publicly created biotech
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companies. “If the goal is employment then I suppose it’s better to have a company go out of
business in five years rather than one year.”
INCUBATOR DIMENSIONS While each incubator is structured differently, it typically
provides wet-lab space with high-tech equipment that would quickly devour a startup’s initial
capital. Biotech incubators can cost up to double what other technology or business incubators
do, according to Plosila. Incubators also provide discounted professional services from local
accounting and law firms that hope to build long-term relationships with potential home-run
companies. Voluntary advisory boards provide kitchen-cabinet counsel to newcomers who may
be world-class scientists but business neophytes.
In return, scientists usually pay below-market rent and assign equity to the incubator to
subsidize future startups. “The good thing is you can move in and get on with your life almost
instantaneously,” says Chris Copple, who five years ago founded Neurostem
Biopharmaceuticals through the Technology Advancement Program, a state incubator in College
Park, Md. “There’s a double advantage because you don’t have to spend your seed capital on
equipment.”
The incubators can also save fledgling entrepreneurs time better spent seeking funds
than looking for a lab. “When you’re a startup you always have to do a couple of impossible
things: One of them is find lab space,” says Robert Puskas, president of BioProfile, a company
housed at the Center for Emerging Technologies in St. Louis.
Incubators are usually near a university or medical center with academic researchers
ready to try their hand at commercializing ideas. “It used to be that commercial work was looked
down upon—that all the interesting science was being done in academia or in the federal labs.
That’s not the case anymore,” says Phillip Singerman, executive director of the Maryland
Technology Development Corp., which oversees technology programs in the state, including six
incubators.
Incubators close to campus give faculty and graduate students a chance to work on risky
commercial projects for brief periods without giving up their hard-won academic posts. “The
conflict of interest is a big issue on the university side,” says Carol Frankenstein, president of
BIO/START, a public-private incubator in Cincinnati, which estimates it has saved companies
$200,000 (US) in capital costs. “They want their employees to support the mission of the
university first.”
Balancing academia and business can be challenging. “When these guys are spun out of
the universities they are used to being coddled.” says Matt McDevitt, president of McDevitt Real
Estate Services, a Maryland firm specializing in biotech leasing. “When they come out into the
real world they need a transition period. The incubator is perfect for that.”
But beyond providing a roof and chemical hoods over scientists’ heads, incubators also
try to link tenants with sources of capital, particularly in the early seed and preseed stages too
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risky even for venture capital investment. “There has always been a stage where basic research
ends and before venture kicks in. What’s happened over the last 10 years is that gap has
widened,” Singerman says. “It used to be that most venture capitalists wouldn’t invest in
companies that were so early you could only productively deploy $250,000. Now that’s more like
$2.5 million.”
As a
result, government, universities, and others with an interest in building regional biotech firms have
stepped in to help subsidize the early startups. David Webster, a pharmaceutical industry
consultant in Bethlehem, Pa., says public money gives new companies more stability than they
might achieve with purely private investment. “Biotech gets hot for a couple years and the money
flows in, but these companies need longer-term commitments,” says Webster. “When the market
goes cold these companies are left high and dry.” Webster says governments, with the goal of
creating new companies and jobs, can afford to be more patient than can venture capitalists.
McDevitt adds that most incubators charge below-market rates for space.
At the Port of Technology, a $23 million incubator that opened in Philadelphia last year,
rents range from $24,000 per month and 5% of the company’s equity, to $116,400 per month for
a company that wants sophisticated lab space while retaining all of its equity. McDevitt says the
market price on the East Coast comes to about $70,000 per year for basic lab space.
BIOTECH BLUES Sometimes, it is difficult to get the right rent and operating-cost
formula. Andrew Salzman, who founded Inotek Pharmaceuticals at BIO/START in Cincinnati,
says when the incubator was running low on operating funds, it began to squeeze its fledgling
tenants.
He says he was billed for discounted services whether he used them or not. His rent
jumped from $25 per square foot to $40 per square foot. And when Inotek moved out, it had to
come up with a payment of $110,000 or hand over 5% to 7% of the company’s equity. “They were
chronically underfunded,” Salzman says. “They were trying to raise money vigorously, but they
also saw the tenants’ cash flow as a critical component of their overall solvency. There was a bit
of a landlord mentality. There’s nothing wrong with that, but you may be killing the goose.”
Salzman says the Cincinnati incubator had another problem: Cincinnati. “The venture
community in Cincinnati is parochial and very oriented toward manufacturing or maybe local
services and consumer products,” says Salzman, who moved his company to Massachusetts. “I
don’t think there was a single VC [venture capitalist] in the city who had made a significant
commitment, and certainly none of them had transitioned a company to the public markets.”
Carol Frankenstein of BIO/START says a growing community of Midwestern venture
capitalists also want to partner and work out small deals with Ohio companies. “The biggest hits
on our Web site are coming from investors on the West Coast and the East Coast who are not
finding everything in their own backyard,” she adds.
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Webster says the Internet and other communications tools give science greater mobility,
but states and regions hoping to nurture biotech companies still need an existing infrastructure
that includes academia, private medical companies, and venture investors to be successful with
the rush of incubators cropping up. “Biotech is growing fast, but I’m not sure its growing that fast,”
he says.
Plosila says there is still tremendous opportunity for startups in the still relatively new field
of biotechnology. But to prevent a glut of vacant incubators, regions need to specialize within the
broader definition of “biotech” in areas such as bioinformatics or medical devices, he says. “There
are various niches,” says Plosila, “if everyone was out there doing the same thing, it would be a
problem.” Webster says incubators, like their startup tenants, are evolving. “In the ‘old days’ there
were sort of sweetheart deals with real estate developers,” he says. “But now it has really gotten
serious.”
Dinah Adkins, chief executive of the National Business Incubation Association, says
only recently have executives with experience in biotech helped cities and states with incubator
programs. “People who are coming in to run these incubators now are not the traditional
economic development types,” says Adkins. “It’s not the Chamber of Commerce executive in the
old-boy network who plays golf.”
PERMANENT PUBLIC PAYER But despite an injection of private-sector experience, the
incubator model remains dependent on public funding, though usually in combination with private
investment and philanthropy. Plosila’s study found that 16 states had already planned to tap their
federal tobacco settlement funds to finance biotech. In Pennsylvania $100 million in tobacco
funds will go to three “greenhouses” for life-science development.
At the Port of Technology in Philadelphia, that funding would go largely to financial
ventures since the building is already in place, says David Noteware, director of the Port, which
received $6 million in government funds for capital development and another $1.5 million in
operating assistance. Pennsylvania is also planning to create a $60 million fund, to be matched
by an additional $60 million in private financing, to support life-science firms in the state.
Noteware says that funds have increasingly taken advantage of the Small Business
Administration’s Small Business Investment Company program, which provides government
leverage of as much as 300% for qualifying funds.
Another key source of incubator funding is the Small Business Innovation Research
(SBIR) program that sets aside funding from the National Institutes of Health and other federal
agencies for small businesses doing commercial work. The program funded $411 million in grants
last year through NIH. The companion Small Business Technology Transfer program allotted $24
million in NIH funds. The grants come in two phases, with as much as $100,000 to start and as
much as $500,000 in Phase II.
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Jim Leyda, president of Emerging Concepts, a financial company in the BIO/START
incubator, says about 80% of the companies in the incubator obtained their first money through
the SBIR program. BIO/START owns 15% of Emerging Concepts. Singerman, of the Maryland
Technology Development Corp., says there are advantages to giving firms visibility with funds
located in or affiliated with incubators. But he says there are also dangers if a fund operated by
the incubator finances a failing tenant to maintain its rental stream. “The difficulty [occurs] if there
is a conflict between your role as investor and role as real estate manager,” he says.
Peter Sepp, vice president for communications at the National Taxpayers Union, says
government ventures are insulated from failure, which he argues is important to technology
development. “Biotech, information technology, and pharmaceutical development are
characterized by a cycle of innovation built on many failures and a few successes,” Sepp says.
“The successes are profitable enough to outweigh the losses induced by failures.” The costs to
taxpayers are often obscured, he adds. “State and local development authorities may brag about
bringing millions of dollars of economic activity to their areas, without acknowledging the lost jobs,
opportunities, and finance they took from others to achieve their goal,” Sepp contends.
But Steve Ray, of the Pennsylvania Economy League, a research organization, says
government has always played a part in technology development. “Remember, computers and
electronics were seeded by NASA and investment in the public sector,” says Ray, deputy director
of the League’s eastern division. “Here’s an opportunity to help fuel biotech early in the
application of the technology.”
Susan Warner (swarner@comcast.net) is a freelance writer in Philadelphia.
References
1. “Biosciences and State Government Economic Development Trends Across the US” available
online at
216.239.39.100/search?q=cache:f8FOmmejM34C:www.ebtc.org/plosila.ppt+BIO+survey+Pl
osila+2001&hl=en
[box]
Incubator Intelligence
Incubators can’t guarantee the success of a startup. Each depends on the right mix of belowmarket rents, assistance with equipment costs, seed capital, and business-advisory talent. Before
you sign on to an incubator make sure it:
[bullet] has a university or research community nearby with many other inventors to keep it full of
companies and make it easier for you to find workers as your company grows;
[bullet] gathers public- and private-sector advisers to help scientists learn to run a business;
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[bullet] offers flexible laboratory space at competitive rents to conserve precious startup capital.
Watch out for surprise exit or success fees and later equity contributions;
[bullet] has a network of local venture and angel investors to seed early-stage projects;
[bullet] is developing expertise in a biotech specialty that will set the incubator apart from the
many springing up around the world.
[end box]
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