The business factory.

SMALL BUSINESS INCUBATORS ARE VITAL TO CREATING THRIVING NEW ENTERPRISES. HERE'S HOW URBAN COMMUNITIES CAN BAND TOGETHER TO BUILD THEIR OWN.

DELLA L. CLARK COMPARES THE WEST Philadelphia Enterprise Center (WPEC) to major league baseball's farm system, where promising players play and train at various levels of the minor leagues. In this analogy, the center's executive director and staff play the role of manager and assistant coaches. Their mission is to produce America's next power-hitting business leaders.

"In terms of development, businesses grow at different rates--infancy, adolescence and maturity," explains Clark, WPEC's president. "Therefore, they require different levels of assistance to move up to the next level."

WPEC is among more than 600 business incubators in North America, and one of 30 targeting women- and minority-owned enterprises. Business incubators provide clients access to rental space and flexible leases, shared basic services and equipment, technology support, professional services and management guidance. The main goal of incubators is to produce successful firms that leave the program financially viable and freestanding.

But business incubators are more than training camps for entrepreneurs. They're a sign of inner-city renewal. Many local community and economic development groups are building business incubators in distressed areas as a means to create jobs and strengthen local economies. Moreover, several colleges and universities see business incubators as a way to develop entrepreneurs who can commercialize critical new technologies.

Although two-thirds of all business incubators are located in urban communities, there's a great deal of room for new facilities. "There's a huge disparity in the number of minority-owned businesses compared to the number of African Americans living in major cities like Philadelphia, Detroit, Los Angeles, Washington, D.C., Atlanta and New York," says Clark. "Those areas have to look closely at what they're doing in terms of business formation."

"Typically, inner-city entrepreneurs have three obstacles: cash reserves are limited, collateralization is minimal or nonexistent and [they have] a lack of real business experience," says Clark, who chairs the board of directors of the National Business Incubation Association (NBIA), an Athens, Ohio-based membership trade group.

Clark is attempting to resuscitate Philadelphia's Market Street corridor--a 10-block stretch of abandoned buildings and factories. A year ago, she purchased the vacant building across the street from WPEC, a former television station that was once the home of Dick Clark's American Bandstand. WPEC was awarded $1 million from the Department of Commerce's Economic Development Administration just one week prior to the death of Commerce Secretary Ron Brown. WPEC's new headquarters, which was renamed the Ronald H. Brown Entrepreneurial Center, services 18 in-house clients and another 10 affiliates and member clients (businesses that are not housed in the incubator but access its services).

When business incubation is done properly in low-income urban and rural areas, it's extremely valuable, says Dinah Adkins, NBIA's executive director. "Housing and access to healthcare alone are not a panacea for the problems that ail inner-city neighborhoods."

A recent study conducted jointly by NBIA, the University of Michigan, Ohio University and the Southern Technology Council proved that business incubation is a vital economic development tool that helps grow new businesses and creates new jobs in a community. For example, the study found that the average firm's sales increased by more than 400% from the time it entered until it left the incubator. (Firms leave with an average of $239,535 in annual sales.) Also, there's a greater survival rate among companies that started out in incubators. Roughly 87% of graduate companies stay in business, compared to 20% for start-up firms in the traditional business environment.

NBIA recently formed an alliance with the Washington, D.C.-based National Congress for Community Economic Development to do some marketing and outreach to inner cities and rural communities. "Business incubation programs treat entrepreneurial companies as important community resources," says Adkins. "Our study should convince communities that if they don't already have a business incubation program, they ought to start thinking about one."

DEVELOPING AN A-RATED INCUBATION SYSTEM

Business incubation became a full-fledged industry in the early 1980s when government entities, namely the Small Business Administration and the Department of Housing and Urban Development, began promoting and funding incubators. By the 1990s, large numbers of technology incubators were appearing. They fostered the growth of emerging technologies (e.g., biotechnology, biomedical, robotics and instrumentation). An increasing number of other industry-specific incubators (e.g. creative arts and multimedia) have also been created. However, most are mixed-use incubators. They cater to manufacturing, service or high-tech companies. According to NBIA, roughly 51% of all incubators in North America are sponsored by government and nonprofit organizations, 27% are affiliated with colleges and universities, 16% are the result of hybrid or joint government, nonprofit and private efforts, 8% are financed by investment groups or real estate developers and 5% are sponsored by a variety of nonconventional sources, including church groups and chambers of commerce. (Due to overlapping, numbers don't total 100%.)

Anyone looking to open an incubator in his or her neighborhood should look first to regional SBA directors and local community development corps. NBIA (740-5934331) has a host of resources and information on model incubation systems. And WPEC's Clark has created a turnkey licensing program for business incubation, called Cities Beyond (215-895-4000), consisting of set services, policies and procedures.

Developing a business incubator is an enormous process. It could take two years alone to conduct a feasibility study, write a business plan (with realistic revenue and expenditure projections), put together a board of directors and locate the building. There are at least four key considerations in starting an incubator: the facilities, funding, comprehensive assistance programs and tenants.

The facility: Since most incubators build or buy their own facilities, the acquisition of property and real estate development is a major part of the process. The typical incubator has about 32,000 sq. ft. of space that it leases to an average of 15 tenants.

Many incubators secure state and local community development block grants. The main federal agency sources for brick-and-mortar funding are the Department of Housing and Urban Development, the Economic Development Administration, the Office of Community Services and the Department of Agriculture.

For the past 30 years, New Community Corp. has worked to restore housing and employment in the impoverished urban neighborhoods of Newark, New Jersey. Thanks to more than $10 million in grants from such groups as the State of New Jersey Economic Development Authority and the U.S. Department of Health and Human Services, it purchased a six-acre site and revitalized an abandoned three-story, 115,000-sq.-ft. building to create the Enterprise Growth Center, an incubator that will house 30 businesses.

The Enterprise Growth Center is working in conjunction with the New Community Development Loan Corp., which is financed by eight banks, including Chase, Fleet, First Union and City National (a BE 100s bank). The New Community Development Loan Corp. has $1 million in capitalization and provides small business loans of up to $100,000. "Over the years, we have worked with small businesses as a lender," says New Community Corp. Development Director Raymond M. Codey. "We have financed a laundromat, a day-care center and a youth employment agency. The next logical step for us was to provide a facility that could help grow minority businesses."

Funding. Few incubators are self-sustaining. Most receive operating subsidies (grants) from corporations, federal agencies, state funds, academic institutions and local/national foundations. On average, incubators have an annual operating budget of between $200,000 and $500,000. Each year, incubator managers must raise funds for building maintenance and operating expenses, salaries and program resources.

Whether they're for profit or 501(c)3 nonprofit organizations, all incubators rely on cash donations and in-kind services, as well as the rent and service fees of clients. In order to be successful, managers must develop an accounting and collection system for rents and fees. Equally important, management information systems must be put in place. "This includes developing a process for tracking services provided to businesses, evaluating the development of businesses and time frames for graduation, setting up technical systems and creating curricula for business planning workshops and business development seminars," explains Clark.

During her six-year tenure, Clark, who is a former corporate account executive and entrepreneur, has raised more than $3 million for WPEC, which was founded by the Wharton Small Business Development Center in 1989. She has received investment dollars and corporate sponsorship from such companies as Bell Atlantic, Microsoft, Compaq and Philadelphia-based Safeguard Scientifics, and has also formed partnerships with several major banks.

Comprehensive assistance program: Incubators are not in the business of providing space, but are designed to offer a supportive environment--an incubator is only as good as the programs and resources it offers. The best of the best provide business plan review and preparation, technical advice on product design and production, marketing and sales support, training seminars and assistance in obtaining financing and procurement contracts. Moreover, entrepreneurs should have access to a talent bank of professionals--accountants, lawyers and management consultants--who work pro bono or for reduced rates.

The Houston Small Business Development Corp. is a one-stop capital shop designated by the SBA and the city of Houston. "The idea was to create critical mass so that all necessary business resources are consolidated under one roof," says Executive Director Marion Mitchell, a former loan officer.

Thus, the Houston incubator leases single- and multi-office suites and provides office amenities (e.g., conference room, fax, copier, answering service, computers and a library). In addition, tenants have access to representatives from federal agencies,, including the SBA and General Services Administration, who can address government contracting opportunities. There's also an on-site commercial lender, Southwest Bank of Texas.

Like most incubators, the goal of Houston Small Business Development Corp. is to graduate businesses that have mastered leadership, and technical, managerial, financial and business savvy.

Tenants: The key to an incubator's success is the skill with which it screens prospective tenants. "Not everyone who applies is automatically accepted into the incubator," says Napoleon Britt, executive director of the Oakland Small Business Growth Center, which provides 18,000 sq. ft. of office space and up to 55,000 sq. ft. of warehouse space to eight businesses.

Britt says incubators are like venture capitalists in that they look for people with good business ideas who are committed to growing their companies. However, unlike venture capitalists, incubators do not have a financial stake in their clients' businesses. "We have our applicants fill out a questionnaire," says Britt. "We look at their financial statements and business plans; we talk to the landlord if they've rented space in the past." The biggest mistake new incubator managers can make, he says, is to lease space to tenants who don't exhibit the qualities necessary to develop sustainable and profitable businesses.

DEVELOPING FUTURE ENTREPRENEURS

According to Inc. magazine, the number of U.S. colleges and universities offering one or more courses in entrepreneurship has grown from 150 in 1979 to approximately 400 in 1997. Also, 600 community colleges now' offer entrepreneurial courses.

"Entrepreneurship has to be considered as a career option for the 21st century," says WPEC's Clark, noting that those colleges--particularly the HBCUs (historically black colleges and universities) that currently aren't introducing entrepreneurship in their business schools--are going to be left behind. At least three black colleges in the midst of developing entrepreneurship programs are Bowie State, Norfolk State and Hampton University.

The Business Development Incubator sponsored by the Temple University Small Business Development Center targets youth 15-22 years of age who are operating individual or group businesses. Clients pay $25 per month to cover desk and file space, a computer, phone and fax. They also receive one-on-one counseling and attend regular meetings and workshops.

"Our incubator is an interim step for a young person before they go into a full-fledged incubator," says Sandra Sowell-Scott, state director of youth entrepreneurial training in Pennsylvania. "Young people need a transitional period. You can't just take a person out of a classroom setting and say, `OK, now start a business.'"

Clients can remain in the incubator for up to a year, with access to all of the center's services and resources. "We understand that because our clients are young, this may not be the business they keep for the rest of their lives," says Sowell-Scott. "The strategy is to teach them at an early age about contributing to the community by starting a business or by supporting the businesses in their neighborhoods."

RELATED ARTICLE: BUSINESS OPPORTUNITIES

Taking the Next Step in Business

The publishers of Next Step magazine are taking full advantage of the resources and contacts at the West Philadelphia Enterprise Center (WPEC). "Even though we [WPEC tenants] are all in different stages of growth, we still learn from each other," says Keith Ellison, chief editor and co-publisher of the quarterly magazine that addresses diversity and other issues in the workplace and society. "Being a part of the Enterprise Center gave us the ability to appear larger than we actually were. We were also able to draw on the center's contacts to raise outside capital."

Last year, Next Step had a public, nontrading offering, selling shares of common stock to the general public at $1 per share; it hopes to raise $1 million. The magazine, which generated total revenues of $180,000 in 1997, is presently distributed to 500 bookstores, 285 colleges and universities, and 300 corporations across the country.

Next Step, originally conceived as a recruitment magazine, was founded in 1995 by Ellison, who created it from his graduate studies project at the Wharton School of Business. The Philadelphia native called on Norman Bond to help him run it. (The pair were former IBM marketing and sales representatives as well as fraternity brothers.)

Ellison, 33, went to work on a business plan and feasibility study in the spring of 1994, working out of his home office before moving into the incubator in 1997 (for $165 per month). The entrepreneurs had to pass WPEC's scoring system--an interview and application process the incubator uses to weigh the different characteristics it seeks in potential tenants, including experience and commitment.

Next Step snared mostly recruitment ads from such companies as Nike, the Campbell Soup Co. and Philip Morris. The entrepreneurs' initial print costs were $30,000, with a first print run of 20,000 copies. "We shipped copies of the publication to placement officers at colleges and universities throughout the country, and human resources directors at 500 companies," says Bond, 35. Next Step, which has a circulation of 50,000, has tackled such topics as the Texaco discrimination case and President Clinton's race initiative.