BIC Makes it Happen
by Carl Hoffman
Viral Therapeutics, Inc., (VTI) doesn't look like a typical factory, and David Kientzler doesn't look much like your typical factory worker, either. He's got a Ph.D. in microbiology and molecular genetics, and the factory floor he's working on is a small, hushed laboratory filled with beakers and flasks and a dripping liquid. The products he makes are genetically engineered recombinant proteins, which leave the factory in tiny, cryogenically frozen tubes. Just a gram of these substances is worth tens of thousands of dollars.
It's companies like VTI that are the future of Tompkins County, New York. Today, VTI has seven employees. If things go according to plan, however, the three-year-old company will soon triple its employees and do several million dollars' worth of business a year. Its CEO and founder, Lee Henderson, is a brainy scientist. Its new chief financial officer is George T. Schneider. VTI pays the gray-haired 62-year-old financial wizard, a veteran corporate president and financial officer, absolutely nothing.
Excelsior Sentinel, Inc., another Tompkins County start-up, doesn't even have a factory yet. Since October 1998, when it began operating, it's done $10,000 worth of sales. But Excelsior executive vice president Dwight D. Bowman, a Ph.D. parasitologist in the department of microbiology and immunology at the Cornell University College of Veterinary Medicine, and his Excelsior partners hold a patent that may revolutionize the sewage industry.
If the Environmental Protection Agency approves a method like Excelsior's for monitoring the effects of disinfection treatments on sewage, "we'll have to build a plant in Tompkins County," Bowman says, "and we're talking big money." Unfortunately, Bowman's business experience is inversely proportionate to his understanding of "worms and crawly things," which is to say, virtually nil. Luckily, he's got a crack veteran financial guy as Excelsior Sentinel president to help the fledgling company: George Schneider. Schneider's salary? Yep, you guessed it, nothing.
Schneider's "real" job is president of the Business Innovation Center (BIC), a "virtual" business incubator created to help foster small businesses in this upstate New York county. With initial funding from Cornell University, Tompkins County, and the Appalachian Regional Commission (ARC), the BIC is hoping to "grow wealth and employment" in the county by giving entrepreneurs custom business planning advice and technical assistance. The ARC funding is part of the Commission's Entrepreneurship Initiative, a $15 million, three-year effort to stimulate local small business growth, and was recommended to the Commission by the Southern Tier East Regional Planning Development Board and the New York State Department of State. "Too often rural communities hitch their economic fortunes to cost-sensitive branch plants that have been recruited from outside with low wages, tax abatements, subsidies, or other incentives," says ARC Federal Co-Chairman Jesse L. White Jr., "and a day of reckoning usually comes when another community offers much lower cost structures and the plant closes and moves on. But," he says, "a homegrown business is more likely to stay put and reinvest in the community." The initiative has funded over 50 projects since 1997.
At first glance, Tompkins County may not seem like a typical Appalachian county. Home to Ithaca College and Cornell University, a hallowed member of the Ivy League, the county bubbles with the rich intellectual ferment of 27,000 students (out of a population of 98,000) and a pride of Ph.D.s, including the odd Nobel laureate and Pulitzer Prize winner. But seen in another light, Tompkins County is dominated by a single industry: Cornell is by far the largest employer. That fact, along with a declining manufacturing base (manufacturing employment dropped from 6,500 in 1980 to 3,900 in 1996), means Tompkins County is facing many of the same problems as Appalachian counties everywhere.
Economic growth, it was clear, had to come from new businesses. And Tompkins County was bursting with an untapped potential. Cornell is the ninth largest research institution (based on total research expenditures) in the United States. Every year its faculty and staff receive dozens of patents in such cutting-edge fields as biotechnology and agricultural and semiconductor technologies. And, indeed, its professors and even undergraduate students occasionally created successful companies. But compared with similar research institutions like MIT or Stanford, according to Schneider, Cornell's ratio of patents and new technologies to actual start-ups was low.
In the mid 1990s, 40 local private investors and institutions, most with some connection to Cornell, each ponied up $25,000 to create the Cayuga Venture Fund to invest in new, homegrown businesses to reinvigorate the county's economy. There was only one problem: "The business plans they kept getting were terrible," says Schneider. Cornell, meanwhile, had a new president, who was looking for new ways to strengthen the university's roots with the community, while Tompkins County had long been pondering the idea of some sort of business incubation program. Suddenly, the Cayuga Venture Fund's problems brought it all home, says Michael Stamm, president of Tompkins County Area Development (TCAD), which played the lead role in establishing the BIC.
"We decided that the real key to small business growth was intensive business management assistance that could be delivered anywhere," he says, rather than in one central building, the model for most business incubation programs. "We decided to follow the model of venture capital, but using intellectual capital rather than money, to look at all the opportunities and pick ones with the greatest community wealth and job prospects." With a board composed of five members from Cornell and five members of the community, the BIC was founded in 1997. Perhaps its most novel step was a decision to keep the BIC self-sustaining by taking equity positions in the companies it helps, rather than charging them up front for its services.
Today, the BIC has a staff of one, George Schneider, who was hired in 1997. The BIC's modest budget simply pays his salary, and Schneider serves as a roving consultant. He identifies promising business plans, helps would-be entrepreneurs write business plans and find start-up capital, helps established businesses become more profitable and competitive, and even joins the companies themselves, if necessary. "I provide them with my experience," says Schneider. "A lot of these Cornell guys know all this cutting-edge stuff, but they say, 'Why do I need a business plan?' There's a research culture here, a culture that says professors don't start businesses, and I'm an intermediary between the business world and all these successful scientists."
People like Dwight Bowman. Bowman may know more about parasites than just about anyone anywhere, but he knows nothing about business, even though his company has a technology that could change the face of the sewage industry. "If it wasn't for the BIC and George, I wouldn't have a company," says Bowman. "I like what I do at Cornell, and I'm not going to leave the university to start some risky business. I'm due to go up for full professorship next year, and it's the only thing I've ever wanted, and so I have to be very careful because a lot of people could use [my business activities] to question my commitment to the university."
Working after hours and on his lunch breaks, Bowman, along with his two partners, crafted a business plan with Schneider's help. They have made him president of the company to take care of all the financial details, including helping them get initial financing, in exchange for which the BIC receives an equity position in Excelsior Sentinel. "If we're successful, we're talking large sums of money in a short amount of time," says Bowman. And that, of course, will help Ithaca, Tompkins County, the BIC, and the other companies that the BIC may help later. "I don't mind giving up part of the company to the BIC, because if we're successful, I know where that money is going: to Tompkins County."
Looking to Grow
A few miles from campus, at the Cornell Business and Technology Park, Viral Therapeutics is busy making its recombinant proteins, products used in the diagnoses of and vaccine development for infectious diseases like herpes. Like Bowman, VTI CEO Lee Henderson is a scientist first and foremost, with a Ph.D. in biochemistry. Since Henderson created the company in 1995, VTI has perfected the technically difficult science of cloning and expressing some 20 different genes, which it both manufactures and licenses to other companies. "We've done it largely as a bootstrap operation," he says. Looking to grow, VTI sought investment from the Cayuga Venture Fund. The fund agreed, on the condition that Schneider come on board as chief financial officer. "They thought it would be useful and important to have some additional financial expertise in the company," says Henderson, "and we'd been using the BIC and George as a sounding board for our business and financial strategy anyway.""Cash flow is the name of the game," says Schneider, "and I put some discipline into VTI's cash flow." Again, in lieu of payment, the BIC traded its expertise for an equity position in the company. "I get to use the management experience of the BIC without a cash outlay," says Henderson, "and if I had had to pay someone, well, it would have been very expensive for us." Says Schneider: "The nurturing of businesses takes time, and if VTI is ultimately successful, then we'll be compensated."
Of course, the BIC is there for all businesses, not just start-ups. In 1995 Megan Shay took over her family's business, Evaporated Metal Films (EMF), in Ithaca, started by her great-uncle in 1936. Although Shay had worked at the business in her teens, she'd majored in fine arts in college and eventually become administrator of the Andy Warhol Museum in Pittsburgh, Pennsylvania. Suddenly one day she found herself in charge of a multi-million-dollar manufacturing business employing 60 people. And the business was in trouble, hemorrhaging money and technically behind its competitors. That's when Schneider and the BIC stepped in. "I had these grand visions of growing a $20 million company, and George said, '$20 million! You've got to survive until next month!' "
Schneider helped organize what he calls a 10-member SWAT team, which included area businesspeople and Cornell University professors who, Shay says, "left no stone unturned." For three months the team met with Shay about once a week, and "element by element picked through the business, from cash flow to personnel to solutions to our technical problems," she says. "They were the genesis of the plan that we put together to restructure the business." Although EMF trimmed its workforce, the restructuring saved the company and about 30 well-paying jobs. In the first nine months of 1998, EMF had significant losses; since October 1998 it has had four straight months of profit. "Asking for help is the hardest thing a company president can do," says Shay, "but the BIC was a fast track to a lot of resources for me, helping me realize that it's better to be a profitable $4 million company than a break-even $10 million one. And if we can survive, the contribution of EMF to Ithaca is high."
Thus far, the BIC is funded for only three years. That, too, is part of the plan, for ultimately the BIC will survive or fail only if the businesses it works with do. "We think the idea of taking an equity position in the companies we help is unique and important," says the TCAD's Michael Stamm. "By doing it that way, the companies have to see the value in the BIC, or else they won't want to give up pieces of their company. And it motivates the BIC since it knows that its future depends on the success of the companies it identifies and helps. Hopefully," says Stamm, "we'll get some real home runs in the not-too-distant future."
Carl Hoffman is a freelance writer based in Washington, D.C.