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Hatching Good Ideas? Characteristics o/ Minnesota's Business Incubators Incubator Organizational Structure and Affiliation Early incubators were often developed by local economic and community development organizations to redevelop vacant space. Over time, however, the organization of incubators has changed. According to an NBIA survey, 51% of all North American incubators were sponsored by government and non-profit organizations in 1998.' In the same year, 27% of all North American incubators were affiliated with universities and colleges, while 16% of all North American incubators were joint efforts among government, non-profit agencies and/or private developers. In 1998, only 8% of all North American incubators were run by investment groups or by real estate development partnerships as private, for-profit ventures. Finally, 5% of all North American incubators were sponsored by other sources, such as art organizations, Native American groups, church groups, chambers of commerce, port districts, etc. By early 2000, another NBIA survey estimated that 75% of incubators were non-profit (government or non-government) and 25% were for-profit." Overall, the key change between 1998 and 2000 was the increase of for-profit incubators as a share of the total. The increasing proportion offor-profit incubators is bringing about a structural shift in incubators. The rule of thumb is that non-profit incubators tend to work on a fee basis, with rent for space as the most common fee. In contrast, rather The increasing proportion of for-profit incubators and, by extension, incubators that assume equity positions in the companies incubated, does raise additional issues regarding government regulations. Under certain circumstances, incubators could potentially be required to register under the Investment Company Act of 1940, and register their mangers under the Investment Advisors Act of 1940.'° The registration process imposes additional costs on the incubators. Incubators, if required to be registered, would need SEC approval for certain transactions considered customary in the venture capital industry. These requirements could make business incubation less attractive for business developers who might fall under this regulation. At least one Minnesota company ended its incubation operations, at least in part, because of the prospect of government regulatory oversight." Organizational Structure of U.S. Incubators 1998 and 2000 / For-y y / ' Profi Private, 8% For-Profi 25% All Others ' Alf Others. 92% ' 75% / than charging astart-up company rent, for-profit incubators may take an equity source: position in the company. Giving up equity in the company can be helpful to the entrepreneur, particularly if cash is scarce. It can also ensure that the incubator has the same incentives to see the start-up succeed as the entrepreneur has. On the other hand, some entrepreneurs are hesitant to trade equity for incubator services for two reasons. First, the entrepreneur must share the rewards when success comes. Second, giving up equity may eventually lead to giving up partial or total control of the start-up company, with the extreme case involving other equity holders forcing the founders out of the company. 1998 2000 National Business Incubation Association. Accessed at www,nbia Drg/info/facts antl www.nbia.org/Info/faCt_Sheel on August 16. 2000. Minnesota Department of Trade and Economic Development