To Be or Not To Be: University Incubators

By Keith McDowell

From a whimper to a shout out! Such is the history of university business incubators over the past decade. From the existence of a countable few before the year 2000, universities, colleges, and even community colleges have “manned up” on the issue of creating incubators at every crossroad and in every community. It’s all about community engagement and prosperity through innovation and economic development. And as might be expected, the “incubators” come in so many varieties that they are no longer countable. Is it an incubator or an accelerator, virtual space or leased real estate, profitable or subsidized? It’s certainly a career path for those people who enjoy definitions and taxonomy!

For the moment, let’s pretend that we know what we mean by the term “university incubator” while using the adjective “university” to include any and all forms of educational institutions and the noun “incubator” to include business accelerators, but not the classic small business development centers at universities funded by the U.S. Department of Commerce. Should universities create, own, and operate an incubator? That is one of the most important questions to be addressed and answered by American universities in the era of global competition.

Some would argue that the explosive growth of university incubators over the past decade proves that the question has already been answered in the affirmative. I have one foot in that camp, but claim the situation is more fluid and complicated.  The fact that most incubators are not profit centers at universities and often exist in name only doesn’t augur well for their future existence as cost containment continues to remain the byword at universities and will likely do so for the next decade. But before we probe further and deconstruct what we mean by a university incubator and whether they should or should not exist, let’s quickly review the situation in Texas and, specifically, The University of Texas System.

The University of Texas System is comprised of nine academic institutions and six health institutions spanning the spectrum of size and location. In many ways, it is a microcosm and representative cross section of American public universities and their treatment of incubators. Thirteen of the institutions host “incubators” in one form or another. The list is provided below with hyperlinks to the appropriate webpage for the incubator.

The University of Texas at Arlington

The University of Texas at Austin

The University of Texas at Brownsville

The University of Texas at Dallas

The University of Texas at El Paso

The University of Texas at Pan American

The University of Texas at Permian Basin

The University of Texas at San Antonio

The University of Texas Health Science Center Houston

The University of Texas Health Science Center San Antonio

The University of Texas Medical Branch at Galveston

The University of Texas Southwestern Medical Center, Dallas

M. D. Anderson Cancer Center, Houston

For those interested, the State of Texas provides a directory of its business incubators including non-university ones. Unfortunately, it does not include all of the university incubators in Texas due to their rapid emergence.

The commercialization of university research and specifically the notion that universities should participate in the formation of startup companies as well as their incubation represents a dramatic change for most in Academe over the past decade, especially vice presidents for research. I still remember my first days in 2001 at UT Arlington as a newly minted vice president for research. One of the units reporting to me was technology transfer. Like most faculty members and university administrators at that time, technology transfer was something one understood mostly in the abstract. The broader concept of commercialization was unheard of and not part of the vernacular. Instead, such notions and concepts were swept into the basket known as classic economic development and housed under university vice presidents for community relations and other such titles.

In even more of a surprise, President Robert E. Witt informed me that I was supposed to work with the City of Arlington and the Chamber of Commerce to help bring in funding for an incubator project and get it up and running. I knew next to nothing about business incubation, much less did I have a clue about working with community leaders. But such has become the fate of university vice presidents for research in recent times. Subsequently, the incubator associated with UT Arlington was formed and has continued for nearly a decade. Witt later became President of The University of Alabama and together we created the Bama Technology Incubator. As Bob Dylan famously informed us, “the times they are a changin’.” Commercialization of research through the formation of local communities of innovation and the requisite engagement of universities in the communities is the mantra of our times. And at the heart of the innovation community is an incubator or accelerator, often owned and operated by a university.

So, what are the characteristics of university incubators? What defines the functions, resources, and services they provide? Here is my list keeping in mind that no one incubator has them all and incubators are regional phenomena having a variety of forms and structures. The list is not in rank order since ranking of the characteristics is a pointless exercise, nor is the list all inclusive.

Rental Space: Typically at below-market lease rates, the space can be part of a dedicated facility such as the Austin Technology Incubator or “virtual space” on the campus temporarily assigned as workspace for the company and often part of the laboratory of the inventor of the licensed intellectual property (IP).

Administrative and Infrastructure Resources: The possibilities are limitless including pooled clerical and secretarial support, common business facilities such as conference rooms, human resources and personnel management, and information technology services.

Mentoring: Professional staff members and a variety of university centers provide help to startup companies in activities such as the paperwork of company formation, hiring of a management team, creation of a business plan, evaluation of product(s) and market analysis, and marketing.

Outreach: Incubators serve to bridge the gap to public and private investors as well as grants (SBIR, for example) by serving as matchmakers.

Access: Universities provide access to high technology laboratory space – such as wet labs or a BSL-3 lab – and sophisticated equipment and technologies, engineering support, and experts across the spectrum of disciplines.

Relational Networking: Startup companies require innovation through the exchange of ideas among their peers in an incubator.

Potential Employees: Students and postdoctoral fellows, especially those serving as interns or those from an inventor’s laboratory, are an excellent source for employees.

Training: Entrepreneur “boot camps” and programs such as “Ideas on Fire” championed by Cathy Swain in El Paso, Texas, are key to accelerating startup growth and success.

One unexpected characteristic of university incubators in The University of Texas System deserves special attention. Over 80% of the startups housed in these incubators do not derive from IP of the associated university! For example, over 70 companies at the UT Brownsville incubator have been started since 2003, but none of them derive from university IP and none of them are reported in AUTM statistics. They don’t fit the tight AUTM definition of a university startup, even though the university clearly invested indirectly in their formation and mentoring. Furthermore, the companies are not high technology, so they don’t register on the innovation sex appeal meter.

So, why should universities own and operate incubators, especially if most of the companies don’t derive from their own IP and the incubators usually don’t have a positive balance sheet? There are many reasons and here are some of the most important ones:

• Twenty-First century universities must engage their local community as engines of innovation and partners in a regional innovation ecosystem.
• Universities have many unique resources required to sustain a startup environment.
• Commercialization of university research has become part of the mission space of universities and is expected by faculty.
• Incubators are a source of revenue both immediate and long-term including rental income, equity in the companies, partial ownership of new IP, royalty from successful companies, monetization of IP, downstream gifts, and many other mechanisms both direct and indirect.
• Practice-oriented education in the launch of startup companies – including early-stage student companies – and innovation must be a part of the modern university, similar in spirit to the vaunted hands-on research experience.
• Incubators are an increasingly important mechanism for knowledge transfer and dissemination from universities to industry. They serve to bridge the gap in the misalignment of cultures between Academe and industry.

Universities should approach business incubators with great care and planning recognizing that they are not sustainable under a real estate model and must be subsidized to achieve the larger mission of the university. But the risks and costs involved in managing an incubator or in supporting startup companies do not have to be borne solely by a university. For example, the incubators at UT Arlington and UT El Paso are joint ventures with the local community. In short, there is no one-size-fits-all best business model for a university incubator.

And there are other hidden issues that confront and confound university incubators. They include conflict of interest in the use of university laboratories as workspace for companies, conflict of interest and commitment for faculty entrepreneurs, abuse and mistreatment of students and postdoctoral fellows as de facto company employees, commitment of the company founders, selection process for companies entering the incubator and their length of stay, leasing of state property at a fair-market rental price in conformity to state law, research compliance, and stress on under-resourced offices of technology commercialization. These are but a few of the difficulties facing university incubators.

But the “times they are a changin’” as Academe jumps on the innovation bandwagon through startup company formation and incubation. Are we headed for an incubator bubble as recently suggested? Personally, I think American universities are in the midst of an exciting and important transformational phase in which incubators are being tested as a practical learning experience for students, as an instrument for the commercialization of university research, as a means to accelerate the successful formation and growth of startup companies, and as a tool for the broad engagement of universities in communities of innovation. Not everything happens on the East and West coasts of America. Maybe they’ve got a bubble; the rest of us don’t.