Corporate Incubators Provide Refuge for Fledgling Device Firms

Medical Device & Diagnostic Industry
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Originally published March 1996

Greg Freiherr

The process that transforms inventors into entrepreneurs is inextricably linked to the selection of the new company's first home. In order for an idea to take root as a new medical technology, to be tested and refined, and finally to emerge as a product requires an environment supportive of each phase. No step is more critical than the one from home office into the business mainstream. Before a company chooses its location, its directors must consider certain questions to calculate the company's future. "What cash do you have in the bank? What is your burn rate? What are your prospects to joint venture? What is your time line through FDA?" notes Lewis Kontnik, president of the Colorado Bio/Medical Venture Center (Lakewood, CO). "All of those issues affect your survivability."

The risks of miscalculation have made nurturing environments such as the one in Lakewood an appealing choice as a first business site. Such sites are aptly termed incubators because they shield newborn companies from the harsh realities of mainstream business districts as they grow. "We are a very good landlord," explains Kontnik, who presides over a sprawling, 22-acre site located in the Denver suburb.

Duane Schultz can attest to the benefits of this option. Schultz and Michael Jansen, cofounders of Advanced Coronary Intervention (ACI), spent nearly two years in the nurturing environment of the Lakewood incubator before moving to a mainstream site in late 1995. Offering low rent, the availability of an on-campus medical library, and access to local universities, the incubator enabled Schultz and Jansen to prove the va- lidity of a novel technology aimed at opening clogged coronary arteries using radio-frequency energy. "The incubator opened doors for us at Colorado State University for animal studies and at the University of Colorado Health Science Center for cadaver studies," says Schultz, chief operating officer of the cardiology company. "Working out of a basement, you couldn't do that."

Incubators are often, but not always, supported by local or state governments. And, the amenities are not always as attractive as the ones in Lakewood. A venture capital firm in Sunnyvale, CA, provided the space for start-up Ovamed Corp. to hang out its first shingle. But it was a no-frills offer. Ovamed's administration manager, Harriet Codeglia, recalls that the company president's desk was in a closet. She shared a desk with a secretary working for the venture capital firm. "Fortunately the secretary was part-time," Codeglia says.

NURTURING NEIGHBORHOODS

Incubators are not necessarily just a space set aside for entrepreneurial start-ups. Jeanne Strain, director of economic development for Cambridge, MA, describes the entire city as an incubator. "Cambridge is an incubator for the metro Boston region," she says. "Because we have MIT here, there is a lot of entrepreneurial activity."

Thomas H. Massie, founder of SensAble Devices (Cambridge), concurs. He says that new technology companies in Cambridge are almost forced to locate near the MIT campus--if they want to take the fullest advantage of the university's resources. "You move more than 10 blocks away, and it is no longer easy to get faculty to come over for lunch to help you out," Massie says. "Also we make use of part-time students who have maybe 10 free hours in a week, if they are lucky. They can't afford to be spending all their time in transit. They want somewhere they can drop in, get their work done, and get back out."

Although the varied definitions of an incubator are somewhat at odds with each other, they agree regarding the importance of a nurturing environment as a primary factor in the choice of a company's first location. Geri Cross, economic development manager for Sunnyvale, says, "We tell them we will work with them and let them know that we are really here to help them through the public part of the process."

Sunnyvale is home to a number of medical device companies drawn to this community from various parts of the country. The city also actively supports the development of home-grown entrepreneurs. Cross and her staff try to understand the goals and needs of each company, which is valuable when finding an appropriate site for the business, especially if renovations are needed.

Similarly, the city of Cambridge has a variety of support mechanisms designed to help entrepreneurs. City staff help develop business plans and line up potential sources of funding. When these two are in hand, and the company is ready to settle into its own workspace, the city's economic development staff works with real estate brokers to find new sites. Strain and her colleagues also work with a network of entrepreneurs. "We use them as mentors, matching them up with the would-be start-ups," she says.

MIT, because of its focus on engineering excellence, is a wellspring of new technologies and, as a result, new businesses. The founding technology of SensAble Devices grew from a senior thesis that Massie completed at the suggestion of his MIT advisor J. Kenneth Salisbury, a principal research scientist at MIT's artificial intelligence (AI) laboratory. "I invented this technology at MIT in the course of a few months and then spent one to two years trying to build the business side," Massie says.

At just 22 years old, Massie devised a way to combine robotics and the principles of force feedback to produce a simulator that mimics the sensations that surgeons feel when they cut and probe the human body. Those sensations may be as simple as a scalpel cutting through tissue or as complex as the varied resistance that accompanies the journey of a biopsy probe through the patient's skull, into the brain, to the periphery of a tumor.

FIRST STAGES

The idea caught the attention of publications including the Wall Street Journal, Business Week, and Discover magazine. When the national exposure brought increasing orders for early versions of the technology, Massie determined the time was appropriate to get the business into its own location. "The company started out as a moonlighting operation in the AI lab," he says. "It migrated to the married housing dormitory where my wife and I lived, so we wouldn't wear out our welcome in the lab where I was still a student. Then about a year ago, we moved into this place."

Massie found an office in a building where the real estate developer had set aside space for start-ups like his. Locating in a space shared by other young companies provided more dividends than low rent. One was the chance meeting he had with William Aulet, formerly a finance and marketing manager at IBM. At the time they met, Aulet was running a start-up company in an adjoining space. "It was a successful venture, but he saw this as potentially a larger opportunity and joined our company," Massie recounts.

Just as incubators serve a useful purpose in the earliest stages of a new business, however, their limitations tend to quickly catch up to companies on the road to success. Jansen and Schultz used their time in the Lakewood incubator to prove the validity of their technology. But, after two years under the wing of the city of Lakewood, Jansen and Schultz decided it was time to leave the nest. "The incubator is really critical for starting out, because it gets you involved with folks in the community, and you get known and get press and doors open--you are treated as a special person," Schultz says. "The problem is that it is only good for a short period of time. All of a sudden it is like being in kindergarten and you are wondering if you are ever going to graduate."

Schultz says after about two years, some of their potential investors were losing interest because the company was still in the incubator. "We figured if we stayed around here much longer it would start hurting us," Schultz says. "So we just went out and did it."

MOVING MAINSTREAM

Knowing when to jump to the next stage--to a site in the business mainstream--may also be dictated by the physical limitations of the first site chosen. As Ovamed grew, the company had no choice but to leave its incubator. Shortly after Codeglia was hired, two others were brought on board, she recalls, "and there was literally no place to sit." Codeglia's first assignment was to scope out a new location for the growing business, which endeavored to be a women's health company. "We wanted to answer what we considered unmet needs in a field where a whole lot of high tech had not yet been applied," she says. That area specifically was the treatment of infertility.

The first technology to be developed was a catheter, whose manufacture was farmed out to another firm. The requirements for business space, therefore, were relatively simple--space enough to house about four people "and running water to test the catheters to make sure they didn't leak," she recalls. The requirement for water "doesn't sound like any big deal," Codeglia notes, but finding it in small offices could be difficult.

To assist in the search, Codeglia enlisted a real estate agent she had used when looking for business sites for companies she had served in the past. In addition to the minimum space and running water, she laid down one other criterion. "I didn't want to have to do anything to it," she says. "The one we found we literally moved into 48 hours afterwards." The walls were painted and the rugs cleaned. Nothing else.

Often corporate expansion means a physical relocation from one building to another. Companies that plan ahead may have another option. The initial site chosen by SensAble Devices is on one floor of an office building run by a real estate company that nurtures small technology start-ups in the hope that when those fledgling companies grow, they will expand into permanent office space in the building. SensAble Devices is now at that point, having gobbled most of the available space in the incubator and still needing more. Massie and Aulet are currently weighing the option of moving into a larger space in the same building, but Massie appears to be leaning toward finding a new site some distance from the current location, yet still close to MIT. "We went from the lab to a dorm room to the incubator," Massie says. "Now we are moving out of the incubator to the office space of our dreams--once we find it."

Defining an ideal site is unique to the individual company. Although executives often have the ability to weigh all of the factors in choosing a site, and even put their emphasis on personal commute time from home to work, such options are not always the case. At a time when corporate consolidation appears to be increasing in the medical device industry, small companies with technologies complementary to those of larger ones are often acquired. Ovamed exemplifies this process.

About three years ago, Ovamed acquired a small Massachusetts firm, a manufacturer of miniature fiber-optic endoscopes, relocating it to Sunnyvale. The manufacturing operation required tiled floors and a place for shipping and receiving, neither of which were available in the small office set up initially for Ovamed. Codeglia, therefore, located a site that met the specific needs of the acquired company. When the lease expired at Ovamed's initial site, the parent company moved in with its newly transplanted operation. Now Ovamed is the subject of an acquisition, which may lead to yet another site selection. "The letter of intent has been signed and the acquisition should be complete in a few weeks," she says.

Greg Freiherr is a contributing editor for MD&DI.

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