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Percolating Profits

A new generation of "virtual" business incubators is jump-starting start-ups nationwide.
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In theory, it all made perfect sense. Start-up entrepreneurs would set up shop in a single location -- the incubator. They'd get cheap rent and enjoy access to legal pros, business consultants, and investors who would help them overcome the obstacles that all new ventures face. Then, properly nurtured, they would be "hatched" into the real world as fully formed companies.

Incubators exploded into the mainstream in the late 1990s, as thousands of entrepreneurs flooded into high-tech hatcheries such as Idealab in Pasadena, Calif., and the Austin Technology Institute. Then the tech economy crashed. More than a quarter of the nation's business incubators closed their doors, according to the National Business Incubation Association.

You don't hear much about incubators these days, and it's tempting to dismiss the concept as a relic of the boom. In fact, some 1,100 business incubators remain open for business in the U.S. Many of them have been quietly reinventing the way they nurture start-ups and are now much more accessible to entrepreneurs looking for expert advice at bargain prices.

That's because incubators increasingly are going "virtual," no longer requiring companies to set up shop on-site. Instead they are focusing on connecting a wide swath of local entrepreneurs with top-notch experts and mentors. Virtual incubators have lower overhead, which often translates into cost savings for entrepreneurs. And since they offer exposure to a wider network of companies, they tend to attract more skilled experts.

That kind of arrangement is perfect for entrepreneurs like Christie Stone, co- founder of Ticobeans, a coffee distributor in New Orleans. When Stone launched the company last February, she was reluctant to join an incubator. She needed a warehouse to store her beans and wanted to keep her office near her inventory. Still, she needed help executing her business plan.

After asking a friend in the Louisiana governor's office for advice, Stone was pleased to learn that she could join one local incubator, Idea Village, without moving. Within a month, she was assigned a team of lawyers, accountants, and salespeople. "They took me in and assessed me with brutal honesty," she says. Tim Williamson, the incubator's president, along with several entrepreneurs, revamped Stone's business plan. Initially she had planned to sell Costa Rican beans in the U.S. at three price points. Instead, Williamson suggested that she focus on high-end markets. Ticobeans are now sold in 100 specialty shops, restaurants, and hotels throughout New Orleans.

The advice is nice. But the price tag is even better, Stone says. So far, she has paid just $3,000 for consulting and legal services that could have run some $30,000 if she had tried to purchase them herself. That steep discount, par for the course at many incubators these days, is thanks to increasing support from government agencies looking to spur employment growth. Idea Village, for one, receives subsidies from the city of New Orleans and the state of Louisiana. Williamson also keeps prices low by securing discounted services from lawyers and accountants eager to build their networks.

One thing remains the same about these new virtual incubators: They are still a good place for entrepreneurs to meet prospective investors. "They are still good hunting grounds for venture capitalists, even though they got a bad rap after the dot-com crash," says Mark Heesen, president of the National Venture Capital Association.

Where the last generation of incubators focused almost exclusively on technology businesses, the new breed -- which includes the Colorado Springs Technology Incubator and the Mason Enterprise Center in Fairfax, Va. -- is more likely to welcome a variety of companies. To locate an incubator in your community, visit the website for the National Business Incubation Association (www.nbia.org), which keeps a directory. The application process is still rigorous, usually involving an introductory meeting and a presentation before a panel of experts. But the chances of landing a spot are much better now than they were five years ago. Membership is generally free, though you'll have to pay for services as you go. But in most cases, once you're accepted, you're a member for life.

Stone, for her part, expects Ticobeans to bring in $1 million within the next five years. In 2005, she hopes to leverage her contacts at Idea Village to raise $500,000, which would help fund the rollout of new flavors and an expansion into other states. Stone says she owes her success, in large part, to the Idea Village team. "We have been overwhelmed by what they have done for us."

Last updated: Feb 1, 2005

DARREN DAHL

Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.




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