Out of Biz: What felled NewBiz Virginia?

Story by Chris Graham

(Clarification | Factory Antique Mall alive and well)

It was the 1990s. The dotcom boom had everybody convinced that this new thing they were calling the New Economy was going to make everybody on the right side of the curve filthy rich.
The trick was figuring out how one could participate in the New Economy. Not even people who were profiting from it knew exactly what the New Economy was, other than it had something to do with technology.

One idea that was all abuzz on this related new thing they called the Internet was something called a business incubator. The idea was simple – just like incubators that were used to hatch bird eggs and incubators that were used to help premature babies get a foothold on life, a business incubator would give startup businesses the tools they needed to survive the rough going in their early years and eventually thrive.

And so it was that business incubators were popping up all across the United States when a group of government and business leaders from Augusta County, Staunton and Waynesboro got together in 1998 to form the Shenandoah Valley Business Incubator and Technology Center, later to be known as NewBiz Virginia.

It wasn’t your ideal business incubator, to say the least – the location that was settled upon was in Verona on the back side of the Factory Antique Mall at a rent that passed the $4,000-a-month mark before too long, and the funding from the three local governments that had agreed to back its formation was just a little more than that monthly rent, which didn’t leave much for the mentorship program that was key to the incubator’s long-term efforts and to the recruitment and development of small business that was to have been the incubator’s lifeline.

Throw in a poor choice in the hiring of the person who would become its long-time executive director, and it’s not a mystery as to how NewBiz Virginia blew through just short of a million dollars, the bulk of that local taxpayer money, in its eight years of operation, with only a bagelmaker still struggling to make ends meet and a financial-services company that for its part does seem to be doing well for itself, and that’s it, to show for the effort and expense.

  

What went wrong?

A Virginia Tech study commissioned by NewBiz early in its run projected that 400 direct jobs and 500 ancillary jobs would be created through the incubator project in its first 10 years.

“Which of course sounded great,” said George Drummond, a former president of the NewBiz Virginia board of directors.

But there had been other indications that weren’t as rosy as the Virginia Tech study and the general feelings from board members that the effort was destined for automatic success. Drummond cited to me an e-mail circulated to board members in 2000 that gave details of a report on business incubators that predicted that most of the incubators then in the startup phase would fail.

“But there was this sense of, That’s not going to happen to us, because we have a good product. This is going to work,” Drummond said.

Talking with Staunton economic-development director Bill Hamilton about what went wrong, I got the sense that he, too, thinks now that the project was doomed from its early days. “I think in hindsight the concept is pretty challenging to carry through to success,” said Hamilton, citing as the biggest hurdle that needed to be overcome “the fact that you need a very low cost to operate,” suggesting that the mode of operation that would most likely lead to long-term success would involve either the donation of space for the incubator or the ability to pull down substantial public grant monies to help keep the bottom line in line.

“If you don’t have those circumstances, it really makes it more difficult to be successful,” Hamilton said.

It would have taken two to three years at the outset, Hamilton said, for the local incubator to secure enough federal and state grant money to get off to the kind of start it would need to be able to make it in the long run. “But our group decided to move forward, thinking that if we waited two or three years we might lose the work that we had put into it and lose the support to continue on,” Hamilton said.

“So we tried it without having that upfront money available, and I think in hindsight it made it very difficult to succeed,” Hamilton said.

The first independent financial audit, for calendar year 2002, was promising, having the incubator operating at a net loss of $1,042 on operating revenues of $137,502. But that would prove to be the high-water mark for NewBiz Virginia. By calendar year 2005, the incubator was operating at a $45,444 loss on operating income that had declined to $98,515.

By the middle of 2005, facing the beginning of negotiations on the renewal of the lease on the space at the Factory Antique Mall, “We were at the place where we either had to renew the lease or do something different,” said Brent Frank, the former economic-development director in Waynesboro and another former NewBiz board president.

The board was “happy with what we’d accomplished, but from a financial standpoint it was pretty obvious that it wasn’t going to be sustainable with the number of tenants that we had in the building,” Frank said.

Agnes’ Very Very, the bagelmaker, had set up operations at the incubator in 2003 and was still on site at NewBiz. Conservation Services Inc. was also on site, though Joe McCue at CSI stressed to me that the company was strictly there as a tenant and had no other connection to NewBiz. “We were already an established business, and the incubator had space in their building. All we did was rent space in their incubator. We never used any of their services. In fact, I really don’t know that much about their incubator. We were just a business using space that wasn’t being used by the incubator’s startups,” McCue said in a voicemail message.

Documents obtained by The New Dominion whose authenticity was confirmed in a review of records on the history of NewBiz on file at the Augusta County Government Center in Verona indicate a good bit of soul-searching among members of the board and then-executive director Steve Landes, a member of the Virginia House of Delegates who headed up the day-to-day operations of NewBiz from 2000 to 2006, on the issue of what could be done to get things moving in the right direction. Landes’ July 2005 personnel review and a subsequent exchange of e-mails between Landes and an executive-board member in July and August 2005 were focused to a great extent on the role that the board felt Landes was supposed to play in recruiting new tenants to NewBiz and leading the organization’s fundraising efforts and the expression of frustration from Landes regarding his job description, which he apparently felt was to fall almost entirely in the facility-manager role.

Landes declined an interview request from The New Dominion to talk for this story. “Since I am no longer associated with NewBiz Virginia, and have not been for over three years, I see no need for an interview,” Landes wrote in an e-mail.

  

Postmortem

“It was simply an idea before its time. It was a good idea. We tried it. It just didn’t work out,” another former NewBiz board member told me privately. “You don’t see too many entities like this get together and say that what they’re doing isn’t working. But we recognized that what we were doing, as well-intentioned as it was, just wasn’t working. So we did the responsible thing, what we thought was the responsible thing, and put together an exit strategy.”

The part about NewBiz not working is spot on, as is the part about the effort being well-intentioned. The “good idea” part was questioned at the outset by Drummond and later on by Hamilton, who stressed to me that his involvement with NewBiz lessened over the incubator’s life span.

A read of the documents made available to The New Dominion about the internal discussions of ’05 makes it clear that Hamilton wasn’t the only person involved with NewBiz Virginia to check out early. Responding to an e-mail criticism from Landes that members of the board were only showing up for board meetings, an executive-board member shot back, “One of the reasons there appears to be little involvement on the part of the Board is an overall lack of organization focus/direction. We seem to have been in survival mode for much of the past several years.”

Which brings us back to the idea that NewBiz Virginia was doomed from the start. I ran that hypothesis by Jim Flowers, the director of a business incubator in Blacksburg and the president of the Virginia Business Incubation Association. What I gleaned from talking with Flowers is that perhaps the folks behind NewBiz didn’t give their project enough time to succeed.

“This is not an overnight thing. This isn’t bringing in the Volvo plant or the Rolls-Royce plant. This is a systemic change in the nature of your community,” Flowers said.

An incubator, Flowers said, is like any other business. “It has all the same challenges as a business that starts up to make bagels or whatever,” Flowers said. “It has its own issues of, Are we in the right place at the right time, Do we have something magical to offer, Have we got a strong management team, Are we going to be able to deliver what we promise to our clients?”

There’s probably a little of everything in the end that we can say led to the demise of NewBiz Virginia. It was undercapitalized and underfunded from the very start. The decision to move forward without adequate startup capital and a steady funding stream turned out to be less than wise. It was poorly managed, from the perspective of a board of directors that didn’t commit the time and energy necessary to provide a sense of direction and from the perspective of hiring an executive director who didn’t have solid business startup credentials or experience and was at the least distracted by his commitments to the Virginia General Assembly and at most was in over his head trying to juggle the competing responsibilities.

And then the plug was pulled too soon.

But I think we’ve learned some valuable lessons from the experience. The Staunton Creative Community Fund is a prime example. Hamilton told me that the Fund, which focuses on mentoring and in the place of providing low-rent space offers microloans to qualified startups, was “educated somewhat by the lessons we learned from NewBiz.”

“We still believe that support to local entrepreneurs and support to local small business is very important and is growing more important by the year as the global economy changes things so that rural areas like ours seem to have less and less control over things outside of our own geographic area,” Hamilton said.

“I believe that Staunton Creative Community Fund is the right approach for this time. It’s always possible somewhere down the road through SCCF or another venture – there may be another time when a physical building seems appropriate. But we’re not trying to get there with SCCF. We think we’ve got a very important way to help local business, and we want to go down this road,” Hamilton said.

The commitment is the key. Because if you can boil down what went wrong with NewBiz Virginia, it was the commitment issue that was at the center of everything.


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