Investing in Incubator Companies: The How and The Why

He’s brought incubation advisement to Russia.

He’s helped Washington University rank first nationally in the number of licensed technologies.

He’s greased the wheels for tech collaborations and business incubation development throughout the state of Indiana.

And he’s acted on behalf of the National Business Incubation Association (NBIA) and presented an intensive training program to incubation professionals in China and Malaysia.

He’s Mark Long, former president and CEO of both Indiana University Research and Technology Corporation (IURTC) and Indiana University Emerging Technologies Center (IUETC), a life sciences incubator.

With over 3 decades of experience under his belt, Long is now the man behind Long Performance Advisors (LPA), a consulting firm specialized in business incubation, technology transfer, and business and economic development.

If you’re interested in founding an incubation facility or are keen on investing in incubator companies as part of your angel investing strategy, you’ll want to hear what Long has to say.

* Edited interview

Long’s Story

VH: How did you get into the incubation field? What’s your story?

ML: I’ve been in the medical diagnostics/device business quite a while, in a private company and in a division of a larger company. So, I’ve seen the “technical side” of business and have observed new technologies being taken to market.

As the former Director of Technology Transfer at Washington University in St. Louis, I worked closely with the incubators there (the Center for Emerging Technologies and the Nidus Center) and saw the positive economic impact incubators could have on a community/state.

At Indiana University, I had the chance to build an incubator from the ground up and build new startups to put in that incubator – the best of both worlds. It was a great experience, and I learned even more about how incubators positively affect the local economy.

VH: Throughout the years of operating and helping others in the incubation industry, which favorite anecdote can you recall?

ML: Well, we’ve all had the “chickens” story – which really did happen. When the news release went out about the start of our facility, we received a phone call asking if we wanted to purchase heaters for our eggs…

Mark Long "The King"!

But my favorite story happened on one Halloween night. The fire/burglar alarm at our building kept going off for “no good reason.” (It turned out that there was a short in the wires.) I had to drive back to the building to enter the code number, shut it off, and check the building for safety.

Remember, it was Halloween, and I was in “full costume.” It was about 8pm, and some of the scientists were still there in their labs. You can imagine the confusion on their faces when “Elvis Presley” suddenly popped up in the building, walking around, checking all the stations for fire and glass breakage while asking if everyone was okay. Good thing the police didn’t show up!

Working with Incubators / Investing in Incubator Companies

VH: Both angel investors and incubators invest at the earliest stages of a company. Can you give some examples as to how angels can benefit from working closely with an incubator?

ML: The true benefit of working with an incubator for angels is “pre-screening.” When an angel investor works with an incubator, that investor has the advantage of knowing the candidates in that facility have been “pre-screened” for selection into that incubator.

Most facilities have a rigorous entrance qualification. The company’s financials, management team, and business plan have all been carefully examined before the company is approved for admission into the facility. This spares the angel investor some due diligence and gives some assurance that the company is legitimate or it’d not have been admitted in the first place.

This may not be true everywhere, but a quick review of the facility’s admissions criteria will help the angel investor determine the degree of diligence that’s already been performed.

VH: Are there any criteria that angels must satisfy before the incubator would partner with them? Or is money the only concern?

ML: Money can never be the only concern. Investors must be “qualified” investors. They must have an interest in the true mission of the incubator and its clients, and they must understand the process of incubation.

My favorite quote about incubation is “It’s an incubator, not a microwave.” In other words, it takes time. Investors who don’t understand the incubator’s mission and how an incubator works won’t be satisfied with investing in incubator companies.

VH: How should an angel evaluate an incubator to determine whether it’s worthwhile?

ML: Typical metrics include the incubator’s –

• mission
• pipeline
• graduation rates
• management team
• history or track record
• focus or types of companies it services, e.g. mixed use, biotech, hi-tech, kitchen, cleantech, information tech

VH: What’s the process of working with an incubator? What should the angel expect?

ML: Many incubators don’t have a formal, structured process or agreement for working with angels. Rather, they serve as a “conduit” or type of “marriage broker” who connects the angels with suitable companies that need funding.

The primary mission of most incubators is to “do what it takes” to ensure the success of their clients. In most cases, that typically includes assisting clients to find proper funding. Therefore, terms, process, investment structure, etc. will vary from deal-to-deal.

Join Venture Hype next week as the rock star imparts his expertise in founding an incubation facility — an interview not to be missed for those who are serious about this option.

* VH: Special thanks to Sandra Cochrane for recommending Mark “Elvis” Long.

Link:

• Long Performance Advisors