Business incubators provide support for businesses in the earliest stages of their existence. They provide space for ideas and inventions (the beginning of the business lifecycle) and access to working capital through pooled funds provided by banks, micro-credit financiers, venture capitalists, grants, and guaranteed loan programs. Wisconsin’s StartingBlock Madison and the Start Garden in Grand Rapids, Mich., are two incubators that have created an ecosystem conducive to research and development.
Development work at StartingBlock Madison began in 2014 and it launched in 2017 after completing a $10 million funding drive. The organization’s stated goal is to “cultivate entrepreneurs and build innovative companies,” and to create jobs and stimulate the regional economy. In other words, it’s an entrepreneurial hub and an ecosystem, and it’s situated directly across the street from Wisconsin’s capitol.
Chandra Miller Fienen, director of operations and programs, said StartingBlock Madison and its partners have a strong commitment to diversity and inclusion, social justice, and giving back to the community. That community includes social entrepreneurs as well as scalable start-ups. Jorge Gonzalez, executive director of the Start Garden, like Miller Fienen, finds advantage in aggregating the contributions from banks. It is beneficial to the Start Garden to have created “evergreen funding” instead of one-time contributions; it helps assure access to year-after-year funding.
For StartingBlock Madison, aggregation is found in part by its partnership with the Madison Development Corporation. The MDC, which was initially structured like a public bank (with $500,000 in federal community development block grant funds approved by the city council), began in 1977 with the directive: Use This and Do Good. In retrospect, there was an “access to funding” problem. The creation of the MDC provides alternatives to bank financing, which operates under regulatory constraint even when factoring in CRA investments.
Both Miller Fienen and Gonzalez said partnering banks should get CRA credit for these solutions.
Twelve financial institutions (community banks and super-regionals) currently partner with MDC, and the aggregation of funds helps spread the risk so that no single bank bears the risk for non-performance. Obtaining commitment from banks to participate in these programs would be easier “if they could fully benefit from CRA credit” Miller Fienen suggested. The incubator seeks to attract start-ups that have the potential to offer well-paying technology jobs that help build the local economy, Miller Fienen said. “We intend to be an IT center of excellence, but not to the exclusion of social entrepreneurship.”
The Start Garden’s program description acknowledges what is widely known: The start-up phase can be a trying time for the entrepreneur. The Start Garden and its 12 partner banks recognize this and solicit businesses on an annual schedule hoping to help them become bankable.
The Start Garden disburses funds from a pool (more than $300,000 in 2018) to infuse immediate and short-term liquidity to its members on a pay-for-performance competitive basis. It also provides intellectual and social capital through wrap-around services such as SWOT analysis, legal advice, marketing and product packaging; and it provides access to lenders, thus creating the network that will provide incremental capital as companies grow.
Gonzalez grins while pointing out that the Start Garden’s mailing address in the heart of the Grand Rapids’ financial district is often the first business address for these new business owners.
When the Start Garden issued its call for business ideas this year, 621 idea-applications were received, of which 44 percent came from women and 53 percent came from persons of color. Of the 621 applications received, 100 were selected to receive a $1,000 stipend to move their incubation ideas forward into the idea validation phase. During idea validation, Start Garden assists incubating businesses in obtaining free or reduced fee services from a number of the participating coalition of incubator mentors, including a banking advisor associated with the program.
The entrepreneurs who remain after idea validation, pitch their businesses to Start Garden executives on Demo Day, where they reveal markets, production strategies, business structure and plans, and phased capital needs in order to demonstrate that the business is viable in the marketplace. Final business incubation occurs with the selection of 10 businesses each awarded $20,000 to move toward launch.
In the final stages of incubation, their stage three, Start Garden executives and partners determine which businesses will be eligible to borrow up to $50,000 to finalize launch. Business acceleration activities are now fully focused on development and begin on, or near the company launch on the lifecycle model. This phase lasts approximately one fiscal quarter and is characterized by launch, production, inventory creation and sales activities.
Continued mentored successes at stage three makes the business eligible to work closely with executive staff to accelerate and remove obstacles from early success as the business enters its growth stage. This stage is characterized by a close working relationship between the expert development partners to enable, monitor, and evaluate the launch; but more importantly, the business qualifies for an additional micro-loan of up to $100,000 and a network that predicts direct lending by banks. Goal realized: The business is bankable.
Editor’s Note: This article was originally published in the December 2018 issue.