Boosting tech startups

Startups, those notoriously tricky ventures, have a 50-50 chance of folding within five years.

But the odds are a lot better for those nurtured in a business incubator.


Like their namesake, business incubators provide conditions to encourage fledglings' growth, typically by offering cheap office space, free or reduced-rate services and vital introductions to venture capitalists.

More than 85 percent of incubator graduates were still in business at last count, according to the 21-year-old National Business Incubation Association.


Without fanfare, Maryland is using this leg-up for bootstrap operations to supercharge its high-tech and life sciences industries.

Almost all of the 17 quasi-governmental incubators in the state specialize in one or both of those sectors; a little more than a third of the nation's 1,000 incubators do the same.

The Maryland incubators serve about 270 businesses, and their clients, as of last fall, employed 1,250 people.

About 80 percent of the 200 companies that have graduated are still operating independently or as divisions of other corporations, according to the Maryland Business Incubation Association. Most have stayed local.

State officials call such focus a smart way to build the "knowledge economy." And it appears to be attracting attention. Last week, the state announced a partnership with drug giant Johnson & Johnson, together creating a $500,000 fund for tech startups. Its high-tech incubators were among the reasons Johnson & Johnson chose Maryland, said company spokesman Marc Monseau.

"It's setting the tempo for the region. It's creating a philosophy and reputation that the region is tech-savvy," said Aris Melissaratos, state secretary of business and economic development.

The University of Maryland opened the state's first incubator in 1985, when the concept was just beginning to catch on nationwide. Most of the rest took root in the last decade, and more incubators - and post-incubators - are on the way.

The University of Maryland, Baltimore biotech park on the city's west side includes "accelerator" space for businesses that are further along in the early life cycle, and companies will be moving in this spring. The Montgomery County government, which runs two incubators, expects to open an additional one next month and four others within the next two years.


Martek Biosciences Corp., a Columbia maker of algae-based nutritional supplements, was one of the University of Maryland's first incubator companies. Now it trades on the Nasdaq stock exchange, employs 625 and racked up more than $200 million in revenue in its last fiscal year.

Guilford Pharmaceuticals Inc., a publicly traded Baltimore biotech bought by a Minneapolis drugmaker last fall for about $180 million, got an early boost from an incubator the Johns Hopkins institutions used to run. Its local office has about 250 employees.

In Vitro Technologies Inc., which provides products and services for studying drug-biological interactions in the test tube, was all of two people when it moved into the University of Maryland, Baltimore County's incubator in 1991. Now it has 75 employees, $11.5 million in revenue and a distribution center in Germany. It says it's been profitable since graduating in 1996.

"It basically helped us to hold on to our dollars at a time that we didn't have a lot of dollars to invest," said Paul Silber, president and chief executive of In Vitro.

Steve Dubin, Martek's president, said the services and scientific equipment on hand were helpful. But simply being permitted to join was critical, he said, because potential fund sources saw it as a stamp of approval.

"I don't think the company would have been funded if it wasn't for the incubator," said Dubin, then a venture capitalist deciding to invest in Martek.


It makes a difference, agreed Frank A. Adams, managing general partner of Grotech Capital Group, a Timonium venture capital firm. "The fact that they're in an incubator means at least one level of scrutiny has already occurred," he said.

It's also attractive to acquirers. North Carolina-based PharmaTech Solutions Inc. announced Friday that it will buy Realinterface Expert Systems Inc., a software applications company in the Chesapeake Innovation Center incubator in Annapolis.

Martek was an "affiliate" for its year as an incubator company because it needed more space than UM's Technology Advancement Program had at that time. It's not the only company to use incubator services without locating at the incubator . But the space is one of the attractions because it's flexible and affordable, often on the cheap side of market rate or even a lot less.

"It's rather like being in a larger company with all the facilities and meeting rooms and administrative support without having to spend an enormous amount," said Craig M. Liddell, chief executive of Amulet Pharmaceuticals Inc., a therapeutics business in the techcenter@UMBC incubator.

Tom Murdock, a Baltimore English teacher who helped start an online-learning services company last year, came upon Emerging Technology Centers by accident while looking for office space. He still seems astonished as he explains what he's received as a new tenant: assistance writing a business plan, finding capital, working through accounting requirements, understanding corporate law, even locating an experienced chief executive.

"It was remarkable," said Murdock, who moved Moodle Rooms Inc. into one of the Baltimore group's two incubators last month. "I just can't imagine building this company without their help."


Tim Weihs, co-founder of Reactive NanoTechnologies Inc., which moved to Hunt Valley last year from the same incubator, called it a "crash course in business" that - as a Johns Hopkins University professor - he needed.

Experts say incubators make good sense for communities, too.

"It's a concept of collaborative capitalism," said Thomas S. Lyons, director of the Center for Research on Entrepreneurship and Enterprise Development at the University of Louisville. "It's really about pooling resources."

Still lacking for incubator companies here is seed money. Few venture capital firms in the region are interested in the risk of early-stage businesses, though such funding can mean the difference between life and death for a high-tech company.

In 1998, the state formed Technology Development Corp. - TEDCO - to step into that void, but locals say much more is needed.

Grotech's Adams, who is also chairman of TEDCO, said the new $500,000 fund "is a drop in the bucket, but it's an important drop because it's the first" venture capitalism collaboration between the state and a corporation. He thinks other companies might follow.


"It would be nice to couple the incubators with some early-stage capital," added Dubin, of Martek. "The incubators are great, but you need to balance it out with more capital available."

The Chesapeake Innovation Center, the first homeland security incubator in the nation, provides that: It has big-name, big-money partners including the National Security Agency and defense contractor Northrop Grumman Corp.

"I think they see us as a tech scout," said Dana Liedholm, marketing director for the center, which considers itself more of an accelerator than an incubator.

Incubators typically get some local and state funding to open and operate, but much of their revenue comes from the companies they house. They charge money to lease office and lab space. Some take a small percentage of companies' equity.

Melissaratos figures the state government invests a few million dollars in incubators a year. Nationwide, many aren't self-sufficient because they're not passing their full costs to the businesses. But some are, including for-profit incubators with no government connection.

Chris Marschner, president of the Maryland Business Incubation Association and director of an incubator in Hagerstown, thinks incubators encourage entrepreneurial leaps.


"If you create a business environment where people believe they have a reasonable chance of success because others are there to help them, they will be more than likely to start a venture," he said. "We reduce the perception of absolute risk."

Incubated, graduated

A few notable companies that spent time in Maryland incubators:

Martek Biosciences Corp.

Headquarters: Columbia


Incubator: Technology Advancement Program at the University of Maryland

Entered: 1985

Graduated: 1986

Employees: 625

Revenue: $217.9 million in the 12 months that ended Oct. 31

Net income: $15.3 million


Misc: The algae-based nutritional supplement maker went public in 1993

Digene Corp.

Headquarters: Gaithersburg

Incubator: Technology Advancement Program

Entered: 1985

Graduated: 1988


Employees: 430

Revenue: $115.1 million in the 12 months ended June 30

Net loss: $8.2 million

Misc: The women's health diagnostics company went public in 1996

Guilford Pharmaceuticals Inc.

Headquarters: Baltimore


Incubator: Johns Hopkins' Alpha Center

Entered: 1995

Graduated: 1999

Employees: 250

Revenue: $47.9 million in 2004

Net loss: $87.9 million


Misc: The drugmaker was bought by Minneapolis-based MGI Pharma Inc. last fall for $179.6 million

In Vitro Technologies Inc.

Headquarters: Catonsville

Incubator: techcenter@UMBC

Entered: 1991

Graduated: 1996


Employees: 75

Revenue: $11.5 million in 2005

Net income: Undisclosed

Misc: The privately held company provides products and services for studying drug biological interactions in the test tube

Reactive NanoTechnologies Inc.

Headquarters: Hunt Valley


Incubator: Emerging Technology Centers in Baltimore

Entered: 2001

Graduated: 2005

Employees: 35

Revenue: $2 million in 2005

Net income: Undisclosed


Misc: The privately held company, formed by two Johns Hopkins professors, sells a "nanomaterial" that acts as a heat source