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Non-Profit Business Incubators

Burst high-tech bubble pushes nonprofit incubators to the fore

By Christine Winter
Business Writer

August 18, 2002

When Scott Adams started Hiway Technologies, a Web-hosting company, in 1995, he was on the cutting edge.

But his timing wasn't so impeccable when he and fellow investors started Cenetec Ventures LLC, a high technology incubator, in March 2000, just as the dot-com bubble was starting to deflate.

Adams is the closest thing to a high-tech superstar that South Florida has, after turning his tiny start-up into the world's largest Web-hosting company and then selling it for more than $300 million in 1998. But even technology pioneers can't always buck the tide of a downturn that drags down their own industry, as well as the whole economy.

In recent months, Cenetec, like so many other private incubators, has quietly laid off employees -- its last seven employees, down from a high of about 40 -- closed the doors at its rambling office in the T-Rex technology park in Boca Raton, and ceased operations in its Gainesville spinoff.

"We changed our focus," Adams said. "We are not investing in any new companies, and will just manage our portfolio companies of the last two and a half years. But we are working harder than ever with those companies that we think will make it."

Cenetec fulfilled its obligations to provide space and services to the last of its 13 clients earlier this year, he added. Going forward, it will operate as an investment company, while the partners try to raise capital to start a venture fund.

It has become almost impossible for the private for-profit incubator model, many born during the dot-com boom, to survive during this era of tight venture capital purses and even scarcer ways to reap a return on their investments, as blockbuster IPOs have dried up and high price-tag acquisitions are rare.

Industry observers feel it is the less flashy nonprofit facilities, which have been linked to universities and economic development agencies for years, that are most likely to survive today's hard times.

"Our current situation is the result of the marketplace, it is as simple as that," Adams said. "Who would have guessed the availability of capital would have dropped to this level?"

Adams funded Cenetec along with several silent partners and venture capital firms that had hoped to take Cenetec itself public at some point. The original plan was to offer seed money, physical space and services, as well as an entr´e to venture funding from sources outside Cenetec to young entrepreneurs, in return for an equity stake in their fledgling companies. They coined the term "accelerator" for the company, because the idea was to support clients for just six months before setting them up with venture capitalists and sending them on their way.

Aware of mistakes

Adams said he can see now some of the mistakes Cenetec partners made: they took on too many clients at once, and tried to push them out the door too quickly. Some of the start-ups were simply too needy, with little more than an idea behind them.

"We really needed the capacity within our organization to provide real funding for several rounds of financing, too much time was wasted on raising funds," he said. By the time Cenetec tried to change its model earlier this year to a more venture capital-like operation, it was too difficult to raise capital, but the partners are not giving up on that plan.

Of the 13 start-ups that passed through its doors, Cenetec has not cashed out on any of them yet. Two have failed, one's status is up in the air, but Adams and his partners are still heavily involved with the other 10, which still face frequent bouts of fund raising.

When it comes to timing, however, Christopher Fleck, chairman and founder of OmniCluster Technologies Inc., a Boca Raton-based technology company, was right on track.

His start-up firm was one of the first companies in early 2000 to join Cenetec. Omnicluster, which makes server cards that provide the power of a full computer on a single card, currently has several products on the market.

"It really worked out well for us," Fleck recalled, though it took his firm a year to move into its own office in Boca Raton.

"We didn't have to worry about any of the distractions of setting up an infrastructure, and all their HR and legal resources were just down the hall for us. We could concentrate on developing our business. It's unfortunate that support for that model is going away," he said.

Today's entrepreneurs will have a harder time finding the same kind of nurturing environment that Fleck enjoyed, because the nonprofit incubator must charge at least nominal fees for rent and services.

Dinah Adkins, president and chief executive of the National Business Incubation Association, an industry trade group based in Athens, Ohio, called the rise and fall of the private for-profit incubators "shocking."

She estimates there were at least 350 such incubators in operation in North America during the high-tech heyday, and at one point they were opening at the rate of four a month.

"Now there are fewer than 100, and we think there are far fewer than that still operating as incubators," she said.

"However, the not-for-profit incubators are chugging along just fine," she said.

More appealing model

That model is more appealing to some young business owners who are loath to give up a substantial chunk of equity. Instead, they turned to these smaller operations, even though they often must come up with the rents and fees out of their own pockets.

"I want to see a building with my name on it that I can turn over to my kids, I am not looking for a big IPO," said Marni Robins, CEO of software start-up Gardenia Systems, one of the 14 companies renting space in the Technology Business Incubator set up by the Florida Atlantic Research and Development Authority, which is affiliated with Florida Atlantic University.

The incubator rents and fees are subsidized by the authority, and companies are expected to develop a relationship with the university, either using FAU labs and equipment or perhaps hiring professors when they need consultants, said Scott Ellington, executive director of FARDA.

The Technology Business Incubator is managed by the Enterprise Development Corp., a nonprofit public/private partnership, supported by corporate memberships and public grants. EDC also provides a free separate mentoring service for emerging science and technology companies -- about 100 are currently on its roster.

Adams is on the board of EDC, and says now these public/private partnerships are in a better position to assume the early risks of start-up companies than a private incubator that depends on the quick success of its clients. The goal of the EDC-run incubator is very different from that of a privately held one.

"We are all about job creation, diversifying the local economy and increasing the tax base," said Jane Teague, CEO of EDC, which provides the proteges in its mentoring program with networking leads, workshops and help with business plans and investor presentations.

Adams admits he doesn't know how many of his high profile accelerator's companies will survive, though he adds he does not consider Cenetec a failure.

"We provided tremendous value to a majority of the companies we helped," he said. "Only time will tell about the success of Cenetec. We could turn out two companies that hit a home run, and then we will wish we had never quit."

Christine Winter can be reached at cwinter@sun-sentinel.com or 954-356-4664

Copyright © 2002, South Florida Sun-Sentinel

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