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Wednesday, 04 January 2006 00:00

Incubator failed to help entrepreneurs

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A small business incubator in Waynesville has failed in it mission to nurture entrepreneurs and start-up companies, and instead has devolved into little more than a building to house a handful of companies for the long haul, according to critics.

The same five businesses have been parked in the incubator for seven, eight, nine and 10 years, getting rent far below market rates. The cheap rent is supposed to help start-up companies in formative years. Most incubators move a company out within three years — five at the most — freeing up space for the next entrepreneur, and in turn creating jobs.

But the incubator in Waynesville has been an abysmal failure at creating self-sustaining businesses, according to Haywood County Commissioner Chairman Mark Swanger.

“I don’t think there is any question this incubator has been mismanaged,” Swanger said. “If you allow a business to stay indefinitely, you are eliminating space another start-up could use. The whole idea is to get businesses on their feet and graduate them out to create more jobs.”

Incubators were the newest rage in economic development in the mid-1980s. State and federal grants spurred their construction across the state, including more than $300,000 for the one in Waynesville. To get it off the ground, Haywood County chipped in another $100,000, plus donated the land.

A not-for-profit business called Smoky Mountain Development Corporation was set up to oversee the incubator and charged with promoting economic development in a 10-county region. Critics say the corporation had its chance to use the incubator to create jobs and failed.

Six out of six incubator directors across North Carolina seem to agree Waynesville’s incubator is not only a failure — it’s not an incubator at all.

“It doesn’t sound like you have an incubator,” said Paul Briggs, executive director of the Babcock Demon incubator in Wake Forest.

Floyd Shorter, director of a small-business incubator in Fayetteville, said if a business is so shaky it can’t afford real world rent, then it’s not going to create jobs anyway and is wasting space in the incubator.

“We are not just a lease unit or property managers,” Shorter said. “We are here to start up new businesses. There needs to be space for others who want to do the same thing.”

Keep the eye on the goal, which is creating jobs, said Jeff DeBellis, a market research analyst with the state Small Business Technology and Development Center.

“Anyone can collect rent,” DeBellis said.

Most on the board of directors for Smoky Mountain Development Corporation agree.

“I don’t see there has been any progress as far as incubating new businesses,” said Bill Forsyth, a board member and economic development director for Cherokee County.

 

Track record

In the great majority of cases, even the businesses that have left the incubator over the years have failed to create many jobs.

Two-thirds of the 25 companies launched through the Haywood County incubator since its inception in 1987 have gone under. Those that stayed in business largely failed to create jobs, and today employ only the owner or the owner and one other person. In 20 years, only two businesses that got their start in the incubator succeeded and created jobs after leaving: Altec with 29 employees and Norris Embroidery with 11.

One reason for the dismal track record among graduating businesses could be the lack of support services. Nearly all incubators offer business advice and consulting, whether it’s developing a marketing strategy or learning to manage employees.

“One of the definitions of an incubator clearly states you have to have an on-site director who works with companies and has a program,” Paul Briggs, executive director of the Babcock Demon Incubator in Wake Forest.

But that wasn’t offered.

For businesses to succeed, those services are important both during their stay in the incubator and after they leave, Haywood County Economic Development Director Mark Clasby said.

“Part of the program of an incubator is you don’t bring someone in and leave them. You mentor them and counsel them,” Clasby said. “And when they graduate, you don’t just drop somebody. You continue to work with them so they won’t become a statistic.”

 

Whose job?

Since its inception, Tommy Fouts served as the director of the incubator and Smoky Mountain Development Corporation until this September when he resigned amid growing turmoil over the corporation’s purpose.

Fouts agreed with critics who said he did not spend much time or energy running the incubator in recent years. He contends, however, that running the incubator was not his primary job. Instead, Fouts spent most of his time while working for the Smoky Mountain Development Corporation serving as a liaison for business owners seeking loans from the Small Business Administration.

Smoky Mountain Development Corporation has processed more than 40 SBA loans in the 10-county area since the early 1990s. SBA loans augment traditional bank loans and help small businesses obtain much-needed financing. According to documentation provided by Fouts, those loans helped a wide variety of businesses from hotels to restaurants and made possible more than $70 million in projects and created around 600 jobs.

Fouts said the loans were his main priority and that running the incubator was largely a volunteer component of his job.

“You need someone to focus full time on the incubator, and we didn’t have that,” Fouts said. “There is no way to make it profitable anyway, so we said just let the incubator run break even.”

That meant the incubator was largely on auto pilot in recent years and the business tenants were on their own.

Since Fouts’ departure in September, an office assistant with the Haywood County economic development commission has found managing the incubator relatively simple. It involves collecting rent checks once a month, divvying up the power bill, calling a repairman if something breaks, and paying the janitor and landscaper.

Peggy Melville, a board member on Smoky Mountain Development Corporation, said managing the incubator should have been as equally important to Fouts as the SBA loans.

“The incubator needed to function as an incubator and needed to be managed as an incubator,” Melville said. Melville said most people have multiple priorities in their job that can’t be ranked as most important and less important, including her own job description with Home Trust Bank.

“They say here’s all the things you are supposed to get done and you figure out how you are going to do it,’” Melville said.

Operation of the incubator was initially the whole point of the corporation and is the primary reason it has a tax-exempt status. On federal tax forms, running an “incubator facility for new businesses” is the main reason Fouts gives each year for maintaining Smoky Mountain Development Corporation’s tax-exempt status.

Other board members have defended Fouts’ performance with the incubator.

“It’s not Tommy’s fault,” said Gaylerd Davis, a board member and retired president of Apple Growers Cooperative in Hendersonville. “The board didn’t pay enough attention to what was going on.”

Davis is among those who think Smoky Mountain Development Corporation should get another chance.

“We need to sit down and find out what went wrong with our incubator and why it didn’t succeed,” Davis said. “In my opinion, Smoky Mountain Development Corporation is the daddy of the incubator business in WNC. We have been here 20 years trying to make this thing go.”

While Fouts said the incubator was not a top priority, he does not consider it a failure.

“I was the leader in the state as far as incubation was concerned,” Fouts said.

Once in vogue, many incubators have fallen by the way side, according Bill Forsyth, economic development director in Cherokee County and a board member on Smoky Mountain Development Corporation.

“It’s hard to make an incubator that worked. The concept sounds good, but I don’t think Haywood County is a big enough place to do it,” Forsyth said. “I don’t see there has been any progress as far as incubating new businesses.”

 

Any takers?

Fouts said he let the same businesses sit in the incubator year after year because there wasn’t anyone else looking for space.

“I haven’t really had interest for anybody going into the incubator in the past five years,” Fouts said. “Maybe we need to look at the economy.”

Fouts said he had a standing agreement with business owners that they could be kicked out to make room for a promising new start-up if one came along.

“Anytime I needed space, I could get it within 30 days. Give me 30 days and I would get them space,” Fouts said.

Swanger questioned Fouts’ claim.

“I think that is revisionist history,” Swanger said.

Swanger said he has personally referred entrepreneurs to the incubator, and later heard they were told it was full.

Fouts said he didn’t want to kick out a paying tenant until there was another one waiting in the wings. He said he needed the money to cover overhead and upkeep of the building.

The tendency to hang on to stable tenants is not uncommon, especially among rural incubators, according to DeBellis, a market research analyst with the state Small Business Technology and Development Center.

“The challenge for incubators in rural communities becomes to be self-sufficient and graduate folks,” DeBellis said. If there’s no demand for the space, kicking a tenant out simply because their time expired leaves the incubator without income.

“If there’s a valuable tenant taking up a lot of space and paying rent and helping that non-profit stay afloat, then they might allow them to stay a little longer until they can find another tenant to take their place,” DeBellis said.

Smoky Mountain Development Corporation did not need help staying afloat, however. The rent coming in was more than enough to cover upkeep. After insurance, landscaping, cleaning, and repairs, there was roughly $5,000 to $9,000 left over.

Meanwhile, Western Carolina University bankrolled Fouts’ salary and the 3 percent commissions made on SBA loans piled up in the bank. In recent years, there was around $300,000 in reserve to cover gaps in rent.

Critics say Fouts didn’t move out old tenants and recruit new ones simply because the status quo was easier.

 

Stepping up

Fouts said instead of criticizing the way he ran the incubator, Haywood County Economic Development Director Clasby could have pitched in and helped.

“If he recruited somebody, then we could kick somebody out,” Fouts said. Fouts said the same goes for Swanger.

“They have never made any kind of proposal or suggestion over the past year,” Fouts said. “Why did they never come and sit down with me and talk about it?”

Swanger said they did try to work with Fouts.

“Previous efforts to even have a cordial conversation with the executive director had never been successful,” Swanger said of Fouts.

Fouts also said if Clasby didn’t like businesses sitting in the incubator, he should have helped them find space elsewhere. Clasby said he did find space for two of the tenants in the incubator, but the rent was twice as high as the rock-bottom prices Fouts offered, so they chose to stay put.

“There is not an incentive for them to move out,” Clasby said. It would be difficult for the county to move existing tenants along and recruit new ones when it wasn’t their building.

Fouts has accused Haywood County of wanting the building for county office space, not for an incubator.

“The county has been after this building for 20 years and I have been the one standing here keeping them from taking it,” Fouts said.

Swanger and Clasby balked at the idea. Clasby has already researched incubators in anticipation of setting up a program for the building. He solicited Haywood Community College Small Business experts Sharron Donahoe and Greg Rutherford to help draft the plan. The three toured a pair of incubators in Oak Ridge, Tenn., considered among the most successful in the country. The HCC Small Business Center is located next door to the incubator, allowing Donahoe and Rutherford to provide support, advice and counseling, Clasby said.

“They have classes and training on how to start a small business and how to write a business plan,” Clasby said. “It’s what I call a joint effort between us and the college. It is pooling our resources to help people become successful in business.”

Clasby wants to implement a graduated rent structure used by most incubators. Keeping rent rock bottom year after year does the business owner a disservice. It doesn’t prepare them for the real world, Clasby said. Moving them closer to market rates each year gets them ready to go on their own.

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