Hatching some good ideas

By DON SHILLING
VINDICATOR BUSINESS EDITOR
YOUNGSTOWN -- Youngstown is developing one of the best places in the country to hatch a high-tech business, a Chicago consultant says.
The Youngstown Business Incubator has as many good business ideas percolating inside than all of the business incubators in Cleveland, said Patrick Gaughan, who specializes in advising new technology companies.
"It's a surprising success," he said.
The success stems from the Youngstown incubator's business-friendly attitude, which includes quick decision making, free rent, high-speed Internet access and discounted equipment.
Only a handful of nonprofit incubators in the country have the potential that the Youngstown incubator does, he said.
"Chicago should have done what Youngstown has done," Gaughan said.
Mission: The state, which funds the incubator, gave it a mission to focus on technology companies in 1998, and local entrepreneurs responded by moving in their fledgling companies. The incubator has seven technology companies and four other types of busineses that were there before the mission change. The companies employ 78.
Jim Cossler, incubator director, said the Mahoning Valley will benefit if the technology companies succeed because they intend to stay here.
"I really think at least three of these companies can become monsters," he said.
Gaughan said three companies already are profitable and their ideas are so good that they could have annual sales of $20 million or more within two years.
Problem: There is a catch, however.
"The challenge that the Youngstown incubator has is that it's in Youngstown," Gaughan said.
To really take off, these companies need money and strong management -- both of which are in short supply here, he said.
Gaughan, who is advising the incubator and its tenants, issued a report to the incubator's board of directors last month that proposed forming a fund that would invest in businesses.
Gaughan said the incubator could go from being a regional success to a model for the rest of the country if it can find a way to provide businesses with investment capital and management talent.
Some businesses at the incubator are at a stage where they need management help, but they can't afford a salary of $80,000 a year plus stock options, he said.
An investment fund, however, can specify that part of the investment money they give be used to bring in a senior manager, he said.
The local companies can't get that money now and their growth is being hampered, he said. Banks don't want to lend to them because their product is software, which would not have much value if the business fails, he said. Investment firms aren't interested in Youngstown companies because they want to keep a close eye on operations they fund, he said.
Gaughan said the incubator is signing tenants to agreements that they will keep operating in the area for five years after they leave the incubator.
Arranging financing: He said the incubator can succeed in developing an investment fund by building local support and relationships with the right sources in Cleveland.
Cossler said the incubator is working with Benesch, Friedlander, Coplan & amp; Aronoff, a Cleveland law firm that has 120 attorneys. It specializes in financing arrangements for companies developing intellectual property.
The firm will bring legal advice to the incubator and its companies and help them build relationships with institutional investors, Cossler said. The firm is providing some of its services for free to the incubator and has agreed to tailor its billings to meet the needs of incubator tenants, he said.
Gaughan said meeting these funding and management needs isthe second stage of growth for a successful incubator.
First stage: He said the Youngstown incubator has made it through the first stage, including these steps:
UTelecommunications infrastructure: The incubator has free rent, utilities and high-speed Internet access. It also has deals with IBM, Sun Microsystems and others that allow tenants to buy equipment at discounted rates.
UIdeas: Incubator businesses have a surprising number of marketable ideas.
UEntrepreneurs: These businesses are being built by people who are willing to take risks and make personal sacrifices.
USharing: Tenants have a cohesive community where they have regular information-sharing meetings as well as informal socializing.
UFast implementation: The incubator quickly responds to tenants' needs for equipment or other resources.