Tuesday, September 20, 2011

Anatomy of a University Incubator


Keith McDowell

University incubators for startup companies are popping up all around the United States with many pundits and bloggers suggesting that we have unsustainable bubbles, both in number of incubators and number of companies being incubated. We’ve saturated the market goes the litany. Maybe so, but I doubt it.

More relevant to many in the commercialization of university research community is the issue of how one creates a university incubator. What are the steps and, in particular, how much does it cost and how does one pay for it? Having personally created two such incubators and having watched the creation of numerous others, I have a simple message to relay: there is no bottom line and no single formula for creation, let alone success. Indeed, even teasing out the costs of forming and sustaining an incubator is difficult and often inextricably tied to other activities. Two examples prove my case.

The University of Texas at Brownsville paid approximately $3 million for a defunct 600,000 square-foot shopping mall and converted part of that space into an incubator. Obviously, the mall was purchased to expand university space, not to build an incubator. On the other hand, The University of Texas at Arlington (UTA) worked with the Arlington Chamber of Commerce and obtained a grant for approximately $1.8 million from the Economic Development Administration of the U.S. Department of Commerce to purchase a building next to the campus specifically to be used as a university incubator. The university provided matching funds of several hundred thousand dollars as part of the grant fully expecting to move the Office of Sponsored Projects from expensive rental space into the facility, thereby converting a recurring cost into a one-time cost and a long-term cost savings. So how much was spent in these two cases on the incubator and over what time period? Only an accountant wearing a green eyeshade and using a sharpened pencil would attempt to answer that question.

Having dispelled the notion of a simple formula, I hasten to point out that there are key factors that play into the creation and maintenance of university incubators. Such factors are best understood not in the aggregate, but by appeal to case studies of individual incubators and how these studies can inform both the general practice of university incubation and the specific instance of creating an incubator. In that spirit, I review in this article the anatomy of a single incubator: the Bama Technology Incubator.

The story begins with Robert E. Witt, former President of UTA and currently President of The University of Alabama (UA). Visionary in his leadership, Witt recognized in the late 1990s the need for a new model on how universities engaged economic development in their local communities. The incubator at UTA was a direct result. Upon assuming the presidency of UA in the spring of 2003, Witt determined that a similar effort was required in Alabama and I happily joined his transformational team in November of 2003 as the first vice president for research at UA.

The situation at UA in 2003 was similar to many universities at the time. There was an associate vice provost for research and a sponsored projects office with a director reporting to him. Grant accounting reported to the business office. Technology transfer was sporadic and commercialization of university research mostly didn’t exist. No one was to blame. Such activity simply wasn’t a part of the general culture of academe at the time, although the commercialization tsunami was rapidly taking hold and about to burst onto the American scene. Witt took the most important step needed to transform UA. He created a new budget line of approximately $2 million for my office and challenged everyone to get the job done to the highest standards. Second best was unacceptable to Witt.

We needed a team of the very best people who understood the integrated and symbiotic nature of research, research administration, technology transfer, commercialization of university research, and – yes! – innovation. Dr. Marianne Woods, a national leader in research administration and subsequently a member of the COGR Board, was the first onboard in the spring of 2004 as an associate vice president for research. Under her leadership, grant accounting was brought into the Office of Sponsored Programs under a new director, Cindy Hope. Cindy is nationally known for her knowledge and training programs in grant accounting through NCURA. In today’s marketplace, such seasoned leadership requires a minimum salary of $200,000 while going as high as $250,000 or more in some cases.

With respect to the creation of an incubator, UA had a most unusual advantage in 2004. It was called the AIME building. A 50,000-square-foot facility completed in the year 2000 and paid for by a $9.3 million grant from the Department of Energy, AIME housed the Alabama Institute for Manufacturing Excellence. The building was multi-purpose with space and utilities for wet labs (several labs not yet built out), a large high-bay facility, a giant projection screen capability, state-of-the-art IT infrastructure, classrooms, conference rooms, and an administrative wing. It was the perfect facility for an incubator. And, furthermore, the original AIME program had died away quickly leaving the facility with no identifiable occupant in 2004 other than general usage by various colleges. Witt rectified that situation and permitted its use as an incubator.

But there was much more to the equation than merely creating an incubator in the AIME building. After much brainstorming, the concept for an innovation center coupled to the incubator emerged. Although “proof of concept” was an essential ingredient of such a center, the UA team recognized that the full panoply of functionality for the commercialization of university research would be required in order to take UA research from the lab to the marketplace, particularly as a startup company. We would need a UA Office for Techology Transfer, the Bama Technology Incubator, and the new innovation center, all reporting to the Office of Research.

As part of the brainstorming, we listed all possible functions and activities that might be required across the spectrum including entrepreneurship and the engagement of students, both for training as entrepreneurs and as innovators. The new innovation center was named the Alabama Innovation and Mentoring of Entrepreneurs (AIME) Center. [As a humorous side note, we chose to keep the acronym AIME. What can I say? The letters were chiseled in stone on the front of the building!] Rather than enumerate herein all the functionalities reviewed and exactly how they were broken out among the four entities, I defer to two annual reports at the end of the creation period for the details – OTT 2007 Annual Report and AIME annual report for 2007 – and the websites hyperlinked above for the four offices. An Alabama news release also contains useful information. I’ve also addressed the issue of innovation centers in a previous article.

With respect to staffing levels for the new UA infrastructure, the Office of Technology Transfer has a director, a licensing specialist, and an administrative assistant. AIME has a director, a staff research engineer, a staff research scientist, and an administrative assistant. Postdoctoral fellowships are also offered by AIME. The AIME director serves as the director of BTI since AIME and BTI are integrated into the AIME building. Although AIME sponsors and pays for “proof of concept,” developmental, and innovative research directed toward university intellectual property (IP), partially with revenue return from all university IP, a principal source of funding is direct industrial funding with support from a number of international companies. Such funding requires flexible IP policies and a willingness to negotiate and build trust relationships with industry.  Startup companies located in BTI also pay a rental fee, although as always with university incubators, the deal structure can be very complex and involve equity in the company.

An important ingredient in forming the UA model and in coalescing the team dynamics was the incorporation of one of the UA attorneys onto the team by paying for one-half of their salary. The attorney was involved at all times in the decision-making and made a real member of the “commercialization team.”

The UA model didn’t stop with people and infrastructure. Activities such as the formation of an online research magazine and the creation of the Alabama Launchpad in collaboration with the Economic Development Partnership of Alabama took place. Alabama venture capital and angel investors were brought on board. Every conceivable function or activity that could be used to accelerate the commercialization of university research was reviewed and added as appropriate.

In summary, the Bama Technology Incubator was created as part of an integrated whole built from existing infrastructure and facilities. How much did it cost to create it? How much does it cost to maintain it? These questions are not easily answered when one understands the full commercialization structure at UA or the history of the program. For example, how does one separate out the cost of AIME from BTI? Should one divide the energy costs for the AIME building among all the users including the colleges that use the classrooms? When student entrepreneurs work with the startup companies in BTI, is that a cost for BTI or part of the general education budget? These are all difficult questions, but ones that must addressed by a university when forming an incubator. Of course, each case is different and that’s my essential point. How many universities have an AIME building sitting and waiting to be used as an incubator?

But there are some lessons to be drawn from the BTI story. First, visionary leadership at the top from people such as President Robert E. Witt is critical. Second, always shoot for the highest standards and always hire the best people, no matter the costs. The return on that investment is almost incalculable. Third, it helps to have a budget line, but more important is to have a flexible budget line. Fourth, rigid IP policies and, more broadly, rigid policies to manage the incubator are problematic in the modern age of reduced funding for universities. One can’t engage industry easily with such policies. And fifth, university incubators divorced from the bigger picture of innovation are dead on arrival from my perspective.

The anatomy of BTI is only one story and likely not one widely realized in other situations. But it is one of many stories that need to be told as we attempt as a society to understand the role of university incubators in the age of global competition.

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