Kris Nelson Community-Based Research Program . . .a program of the Center for Urban and Regional Affairs (CURA)

West Broadway Business Incubator

&

Co-working Space Project

Prepared in partnership with

NEON Prepared by

Lawrence Karongo Research Assistant

University of Minnesota

2015

KNCBR Report # 1396

This report is available on the CURA website: http://www.cura.umn.edu/publications/search

The Kris Nelson Community-Based Research Program is coordinated by the Center for Urban and Regional Affairs (CURA) at the University of Minnesota, and is supported by funding from the McKnight Foundation. This is a publication of the Center for Urban and Regional Affairs (CURA), which connects the resources of the University of Minnesota with the interests and needs of urban communities and the region for the benefit of all. CURA pursues its urban and regional mission by facilitating and supporting connections between state and local governments, neighborhoods, and nonprofit organizations, and relevant resources at the University, including faculty and students from appropriate campuses, colleges, centers or departments. The content of this report is the responsibility of the author and is not necessarily endorsed by the Kris Nelson Community-Based Research Program, CURA or the University of Minnesota © 2015 by The Regents of the University of Minnesota.

This work is licensed under the Creative Commons Attribution---NonCommercial-ShareAlike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/

or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA. Any reproduction, distribution, or derivative use of this work under this license must be accompanied by the following attribution: “© The Regents of the University of Minnesota. Reproduced with permission of the University of Minnesota’s Center for Urban and Regional Affairs (CURA).” Any derivative use must also be licensed under the same terms. For permissions beyond the scope of this license, contact the CURA editor. This publication may be available in alternate formats upon request.

Center for Urban and Regional Affairs (CURA) University of Minnesota 330 HHH Center

301—19th Avenue South Minneapolis, Minnesota 55455

Phone: (612) 625-1551 E-mail: cura@umn.edu

Web site: http://www.cura.umn.edu

The University of Minnesota is committed to the policy that all persons shall have equal access to its programs, facilities, and employment without regard to race, color, creed, religion, national origin, sex, age, marital status,

disability, public assistance status, veteran status, or sexual orientation.

Kris Nelson Community-Based Research Program (un-official cover) A program of the center for Urban and Regional Affairs (CURA)

West Broadway Business Incubator

&

Co-working Space Project

Prepared in Partnership with

Northside Economic Opportunity Network

Prepared by

Lawrence Karongo

University of Minnesota

Research Assistant

2015

CURA Copyright Page

Table of Contents

Executive Summary & Introduction 4

Mapping of Neighborhood 7

Demographics 7

Economic Leakage 10

Consumer Opportunity 11

Level of Business Activity 12

Incubators and Co-Working 15

Economic Development 15

Incubating Process 17

Case Studies: Incubator 21

Case Studies: Co-Working Spaces 24

Interviews and Focus Group 27

Summary and Recommendations 32

Key Points 34

Appendices 37-44

Endnotes 45

Executive Summary

The foundation of economic growth in the United States is rooted in small businesses. A thriving

community environment is an outcome of a healthy business district. However, the success rates of new

venture small businesses are low, with failure rates as high as 80% within or by the first year1. Looking at

urban settings such as North Minneapolis, specifically at the Near-North neighborhood (Appendix I), the

unemployment rate is as high as 21.9% for persons 25 years or older. The poverty rate is 39.4 %2, and is

coupled with a lack of substantial economic diversification in the area, and lack of community

representation in business enterprises. This indicates a need to produce and maintain more successful

community-based small businesses. A business incubator combined with a co-working space in the heart

of West Broadway Avenue is essential in the process of building an economic force particularly with a

focus on small businesses. The opportunities that this space poses range from community employment

opportunities, product creation and diversification, and positive community engagement along with an

opportunity of added vibrancy in the area.

This research was conducted on the basis that it would provide the necessary information for the North

Side Economic Opportunity Network (NEON) to understand the method and processes necessary to start

on the endeavor of forming an incubator and co-working space. This report hopes to provide that

information and more upon its conclusion. Through 3 months of dedicated research by means of

literature reviews, in person interviews and survey distribution a lot of information has been garnered.

This information varies from community breakdown, business analysis, to case studies of incubators and

co-working spaces. The four main takeaways for an organization looking to construct such as a space in

an urban setting like North Minneapolis are as follows:

1) Tracking data on incubated business as well as co-working spaces annually.

2) Reducing the rent price for incubated business to 10% below market rate.

3) Having a quick turnover rate for incubated businesses, research suggests two and half years.

4) Designing a vibrant work environment specifically aimed at your co-working clients.

Introduction

To understand how a business incubator and co-working space have the potential to make a positive

impact on the community, we first must define what they are. According to the U.S. National Business

Incubation Association (NBIA) a business incubator can be defined as a, “Support process that

accelerates the successful development of start-up and fledging companies by providing entrepreneurs

with an array of targeted resources and services.”3 Business incubators have three main purposes:

reducing the failure rate of small businesses, creating jobs for the local community, and improving the

economic diversification of the business district. Small businesses fail predominantly due to difficulties

with managing costs, failure in marketing and personnel operations, and having overall ineffective

management. Research produced and published such as, Incubation Push or Business Pull? Investigating

the Geography of US Business Incubators argue that within a well-run business-incubating system, many

of the tenants who are in business experience a more positive business outlook with a potential success

rate of five years as compared to non-incubated businesses that have a projected success rate of four

years3. The University of Michigan in a 1997 report pushed this finding, citing that 87% of tenants in

well-operated incubators do in fact see five years of sustainment as compared to the typical four years

of 50% of U.S. businesses3.

The other component of this thriving business space on West Broadway is the co-working space. To

understand the necessity of a co-working space coupled with an incubating system we need to

understand the importance of networking. Networking is a big part in how business owners operate in a

co-working area18. For-profit and nonprofit organizations around the country have taken advantage of

this system and have started businesses that house entrepreneurs selling the idea of co-working18. Here

in Minneapolis, there are several co-working organizations that can be observed. One such model is

Coco in Downtown Minneapolis. Coco has set itself apart as one of the more successful co-working

organizations in the country specifically with many of the involved technology start ups it houses. The

tech industry is known as one of the fastest growing sectors in business, and it’s clear that co-working

habitats are advantageous to the industry’s success. Thus, it is easy to see how this idea can be applied

to other varying industries with the same hope of achievement. Furthermore, with the advancement in

technology and broad capabilities in communication, many successful entrepreneurs have become

mobile. It is not uncharacteristic for a coffee shop to have one or two business owners working within in

them simultaneously throughout the week. A co-working space brings these entrepreneurs into a shared

work-friendly space where they may have their own desk, office space, or floating chair. Other amenities

include a conference room regulated by hours, printing services, and Internet access, as well as the

availability of a receptionist. Through all this, the key selling point of a co-working space is the

opportunity to network at various capacities with other business owners in similar or different fields.

One aspect that is most evident, especially in technology focused co-working systems, is the level of

innovation and product and service diversification that is present due to the networking pieces many

entrepreneurs have with each other. Combining these aspects of networking with an incubated system

greatly increases opportunities of growth and sustainability for businesses.

The Northside Economic Opportunity Network (NEON) hopes to bring these two pieces to the business

hub of North Minneapolis. NEON is located at 1101 West Broadway Avenue, a central location for the

business hub of Broadway. As a nonprofit organization, the mission of NEON is to expand the economic

development and wealth opportunities for low to moderate-income entrepreneurs in North

Minneapolis as well as play a role in the overall improvement of the community. A business incubator to

support emerging and already established entrepreneurs will be integral in not only providing a growing

atmosphere for the business enterprise of West Broadway but also will be essential in community

engagement and development. With an addition of a co-working space, a culture of networking and

business relationships will not only be fostered but also maintained. Currently the offices of NEON are

located in the space that was once utilized by Dr. John Williams for his dentistry practice. In the fall of

2015 NEON will relocate its offices across the hall to a larger space that was once utilized by Hennepin

County. Dr. Williams wished to one day open a business center in the space NEON anticipates moving

into. Therefore, in the process of continuing to grow and accomplish its goals as a nonprofit

organization, NEON hopes to see through on the late Dr. Williams’ goal.

Mapping Out the Neighborhood

Demographics

To understand how a business incubator and co-working space on West Broadway is going to affect the

community and impact development, we first must look at the neighborhood. North Minneapolis can be

divided between two neighborhoods: Near North and Camden. According to the 2010 census data there

is a total population of 79,436 residents. Demographically, North Minneapolis as a whole is comprised of

43 % Whites, 36 % African Americans, 10 % Asians/Pacific Islanders, 8 % Latinos/Hispanics, 5 % Mixed

Race people, 2 % American Indians, and 4 % people of other races4. With Lowry Avenue and Broadway

Avenue being the stable for small business operations in North Minneapolis, the following research

analysis focuses on businesses and entrepreneurs who reside or work specifically within the 55411 zip

code (See Appendix 2).

The demographic composition of Near North is very different compared to the overall demographic

composition of North Minneapolis. Based on the 2010 census, the population in the 55411 zip code is

27,428 residents with 56 % African Americans, 19 % Whites, 15 % Asian or Pacific Islanders, 2 %

American Indian, 6 % people of mixed races, and 3 % people of other races5.

Looking at the business environment in this area, only 1.5 % of business owners are African American.

From a 2011 Public Policy professional paper, “Self-Employment and Small Business Ownership Minority

Businesses in North Minneapolis”, the research showed that there were a total of 815 businesses in the

neighborhood. Of these 815 businesses, 770 were non-minority owned while 45 were minority owned.

Breaking it down further by demographics, 12 were owned by African Americans, 6 by Asians, and 1 by

Hispanics, which results in the 1.5 percentages of black business owners6. With a high population of

African American residents in the area and a very low percentage of African American business owners,

the impact of these businesses on the community is little to none. This is a problem when we view

things from an economic development standpoint. Small businesses grow an economy, but to effectively

accomplish this they must reflect the diversity of the community they are in. This is also important in

order to facilitate the necessary growth through aspects of employment and community participation

and engagement6. Urban communities across the country have take up this idea of an incubator to help

develop and grow their communities. Cities such as Philadelphia, Chicago, Harlem, and Oakland have all

supported incubating organizations. In spring of 2006, Neighborhood Development Center along with

the city of Minneapolis opened Midtown Global Market. The Global Market opened in an area that was

very much similar to Near North neighborhood as far as socio economic status. Global Market has

operated as incubator for many community businesses that have taken up space in the market, and with

the success of these businesses as well as the success that Global Market has had, a visible positive

economic effect on the community has occurred.

On average, local minority businesses have between 1 and 20 employees, which is typical for small

businesses. Looking at the predominant barriers spoken of specifically by African American business

owners, financing, lack of initial capital, and the perception of crime are at the forefront. According to a

2011 study by a University of Minnesota Master’s of Public Policy professional paper, in 2010 crime in

the Near North neighborhood was ranked 11 highest with total occurrences of 436. Compare this to the

Marcy Holmes neighborhood by the University of Minnesota campus, which had a total of 655 crime

occurrences and to Downtown West with a total of 2,146. In the year of 2010, Near North made up 2.6

% of all the crime in Minneapolis while Downtown West comprised of 12.9 % of all the crime in

Minneapolis. From the year 2011 up until May 2015, crime in Near North has maintained a rate of 3 % of

all Minneapolis crime, while Downtown West has remained at 11 %. With the perception of crime, as

well as a lack of resources, the question then becomes why establish a business here in North

Minneapolis? Many of the surveyed minority business owners, from the University of Minnesota paper,

expressed that the need to locate in North Minneapolis comes from personal history, such as being born

and raised in the neighborhood, to expressing the desire to see the community thrive in all possible

aspects. Residents and current business owners surveyed have expressed, that perception of crime is

much more of a problem than actual crime7. According to a Minneapolis Economic Development report,

surveyors agree that violent crime is not the issue but rather loitering, soliciting, and petty aggravators is

the problem. It is important to look at the crime aspect due to the low level of consumer attraction and

commercial business attraction. Crime is seen as a great issue in North Minneapolis as compared to

other areas around the Metro. These numbers assert that crime is not as rampant as assumed as

compared to elsewhere and thus should not be a reason for failure in business activity in the

community.

Economic Leakage

With the lack of diversification in the economy currently along West Broadway and Lowry, the amount

of economical leakage occurring is enormous. To first define, an economic leakage is when residents of a

community travel well over a mile beyond their neighborhood to purchase their general goods taking

the flow of money out of their residential area. A report was conducted in 2010 on the Diamond

community of San Diego. Economically and demographically the Diamond neighborhood resembles the

Near North area. In the report, James Bush finds that 60 million dollars in retail leakage occurred by

2010 within a mile radius of Diamond8. The direct link in the report to the outflow of retail sales is long-

term disinvestment, crime, and more poignantly the lower household income in the community14. Due

to this low household income, commercial national chains fear the community lacks the financial ability

to support their businesses. Many problems befall Near North as those that have affected the Diamond

community. The retail outflow in North Minneapolis, specifically in the Near North neighborhood, is

similarly very large. Currently, the business district of West Broadway is made up of largely convenience

good stores and service businesses. Any available retail can be characterized as encompassing solely

small “mom and pop” shops, which have proven not enough by quantity and size to compete with

commercial retail businesses. According to the City of Minneapolis’ Economic and Business

Development report, the contributing factor to the leakage is years of issues along West Broadway

pertaining to “public safety, [the] decline in incomes and disinvestment in local property.” In addition

the lack of proper well-represented and managed businesses7 has also been a factor.

Consumer Opportunity

There is an opportunity for West Broadway to maintain and increase much of its business revenues. The

neighborhood sees more than 20,000 cars per day and roughly 1,000 bus riders7. With I-94 right along

the border of Near North, the possibility of attracting more customers is evident with 125,000 vehicles

traveling each day along the freeway7. The average age of the population of residents along West

Broadway and along Lowry is 25. This is younger than the overall Minneapolis average age of 367. This

provides a perspective when businesses are emerging in the area. The target market is relatively young

and with such a young population, retail and commercial consumption is in high demand making similar

competing producers even more necessary in the area.

To provide a description of the shopping patterns and habits of residents in the Near North area, the

Minneapolis Economic and Business Development Report constructed a survey. The findings in the

survey were that Cub Foods, Walgreens, and CVS were considered highly valuable to residents and often

were relied upon as major retailers. The majority of respondents cited Cub Foods on West Broadway as

the primary supplier for food at home. Wal-Mart was the next most utilized food supplier with the

closest store situated in Brookdale Center. When considering non-grocery items, respondents cited Mall

of America as well as Rosedale as their primary retail of choice; the distance totaling 14 miles and 7

miles respectively. When it comes to sit-down restaurants the survey points to downtown, Global

Market, and uptown as the places of choice for residents in the neighborhood. The fast food restaurants

are the only commercial businesses that respondents say are easily accessible and popular among

residents. The overall finding in the survey is that there is subsequently a lack of varying businesses in

the Near North area resulting in a lack of economic diversity and leading into the continued outflow of

revenue7.

Level of Business Activity

To get a general glimpse of the business environment or how many businesses comprise the Near North

area, the Duns and Bradstreet (D&B) data tool was utilized. Duns and Bradstreet is an organization that

holds data on millions of national and international businesses. With this data, the organization keeps

track of the business location and their face value based on operations. By assessing this data varying up

to date information on businesses in the 55411 zip code was pulled. From this current data, the total

number of businesses are 993, with 944 non-minority owned and 50 minority owned. Only 5% of all the

businesses owned in the Near North area are minority owned while 95% are non-minority owned.

Looking at the growth rate in both categories, within the 5-year period since the University of Minnesota

compiled the last data, minority-owned businesses have had a growth of 3% compared to non-minority

with a growth of 6%. Using the previous research to look at the level of African American owned

businesses within the minority category, we can infer that there is no substantial growth in the number.

This is even more evident as there has only been an increase of 5 minority businesses, jumping from 45

businesses to 50 according to D&B. Therefore, we can assume the percentage of African American

owned businesses have remained at a percentage closer to 1.5%.

Underground Economies

It is important to note that the data pulled from Dun & Bradstreet comes from formally registered

businesses that have created an account with the company thus receiving a Duns number. A Duns

number is a nine-digit identification number for the physical location of a business. Therefore not all

registered businesses have one and not all businesses that are in operation in Near North are registered.

The Duns and Bradstreet database was used as a tool to provide a general glimpse of the business

activity in Near North. Understanding these unregistered businesses and the estimation of how many

there are is important in the endeavor of establishing a successful business environment in a

community. Businesses that are unregistered and yet still operate can be categorized as operating in the

informal economy. This is an economy that has no government regulations and lacks any form of checks

and balances9. Looking at North Minneapolis and other similar communities across the country that

have populations within the informal economy there are certain factors to consider. The first is

government procedures. The regulatory systems put in place by the government can be a hindrance for

many entrepreneurs due to said lack of knowledge of the processes of the legality and the fees

associated with business establishment10. Within the larger U.S. economy, quantitative data on

unregulated business or informal economies is practically nonexistent. Therefore, to get a grasp of the

potential level of informal businesses activity in the Near North area, we must take research obtained

from survey studies, found in areas un-identical to North Minneapolis, but still useful.

The “Informal Work in Nonmetropolitan Pennsylvania”, is a study produced in the Rural Sociology

journal. This article looks at a low-income rural community and produces some substantive information

regarding the informal sector in the U.S. The study was conducted in survey form and administered to

505 families. The results from the survey suggested that there is a wavering linear correlation between

income and the likelihood a household participates in the informal economy. Due to this correlation, the

assumption in the paper, is that the lack of access to capital or maintained affordable micro-financing is

the greater barrier. This is coupled with the perception of a lack of opportunity as well as procedural

barriers. The Nonmetropolitan Pennsylvania further details its findings, in that more than half of the

households interviewed said they knew of someone working in the informal economy10. The researchers

found that the households in the rural Pennsylvania community with incomes between $20,000 and

$40,000 have a probability of 54.1% of being involved in the underground economy. Households with

incomes between $15,000 and $40,000 have a 59.4% probability of having members holding a business

in an underground economy10. A substantial amount of the businesses are regarded as service

orientated such as baby-sitting, cleaning, hairdressing and so forth. As previously indicated the level of

business activity in the Near North area is high especially when taking into account the businesses

operating in the informal economy. What this study connects between this rural community and an

inner city such as North Minneapolis is the income level and the resulting probability of informal

economic activity. According to City-Data.com, the adjusted income in the 55411 zip code in 2012 was

roughly $27,956, which is less than half of the state average. With Near North defined as a low-income

community infringing the findings from Pennsylvania State University on the area is justifiable. We can

conclude that roughly half of the households in Near North operate a business in the informal economy.

To even further show the connection between economic activity in urban and rural communities,

consider the following study. In the summer of 2011, the University of Minnesota conducted a study

comparing the economic differences and similarities or urban and rural communities. The paper

produced, “Urban vs. Rural? More like urban and rural together, study says” asserts that “urban and

rural Minnesota are interdependent.”11 The economic activity occurring in the two distinct

environments are dependent of one another. Two points made that are critical to the prior assertion of

informal economies in Minneapolis is that first, rural communities are a hot bed of many industrial

opportunities so jobs are often provided and sought after in specific rural areas. For example, “Forty-

seven percent of Minnesota’s manufacturing cluster output originates in rural Minnesota.”10 The second

point to understand is that urban communities in Minnesota greatly benefit from “improved prosperity

among its rural neighbors.”11 If rural Minnesota’s industrial sector picks up 6 percent growth then urban

communities experience a 16 percent increase in jobs and 38 percent increase in output. However, the

same is true if there is a decrease in the growth11. The general message from this paper is that

improvements as well as declines in the rural sectors and in households send ripple economic effects

into the urban settings, specifically in the inner cities. Hence, allowing us to compare the informal

economies in rural and urban settings and set them as similar.

Incubators and Co-Working

Economic Development

According to a 1985 report Guidelines for Determining the Feasibility of a Small Business Incubator,

produced by the Illinois Department of Commerce and Community Affairs, there are three main general

difficulties faced by small businesses. These difficulties are, location expense, marketing, personnel

operations and management inability. These factors spell disaster for beginning small businesses as 8

out of 10 businesses fail specifically because of these factors12. The purpose of a business-incubating

system again is to create a system and environment that assists in reducing this high failure probability.

According to David Allen and Mark Weinberg in “State Investment in Business Incubators,” there are

three main goals for incubators. One, incubators must reduce the failure rate of their incubated

businesses. Two, the increase in incubated business must also result in increased jobs in the community.

Three is economic diversification. With the increase in small business creation and the evermore

graduating tenants, diversification must be an underlying goal.

The process of managing an incubator distinctly pertains to the organization. NBIA, incubators are run

either by non-profit organizations, for-profit organizations or academically run by universities. The year

1980 was the time an incubated system for businesses first really took form in the United States. In 1980

there were only 12 verified business incubators and by 2006 the number had grown to 1,100. Currently

the NBIA estimates that there are 1,400 incubators across the country, 32% of these incubators are

academically run, 7% run by for-profits, and an over 60% are run by non-profit organizations13. These

non-profit organizations operate commonly as community and economic development agencies. Being

that the focus of most of them is to create jobs, the numbers show that there is a positive correlation

between established well-run incubators and job creation. In 2005 the incubators in North America

assisted roughly 27,000 startup businesses, which resulted in the creation of 100,000 jobs in the

continent and a revenue stream of $17 billion3. However it is important to keep in mind that the

economic impacts that occur because of a business incubating system are to be expected only in the

long run.

In 2008 the U.S. Department of Commerce, Economic Development Administration released the

Construction Grants Program Impact Assessment Report. Grant Thornton, an independent audit, tax and

advisory firm, along with ASR Analytics was asked to construct the report. They looked specifically at the

economic effects and federal cost of the construction investments program by the government. The

report is over 400 pages long but roughly 20 of those pages speak specifically to the importance and

impact of incubators as compared to other aspects of infrastructure development. The overall finding is

that when it comes to jobs, incubators provide 20 times more jobs than any other community-based

infrastructure jobs or projects the government could fund. It costs the Economic Development

Administration (EDA) between $2,001 and $4,611 to create one job from infrastructure, construction,

and commercial projects14. When it comes to incubators it costs the EDA around $144 to $216 to create

one job14 (See Appendix IV). Investment and funds correlated with business incubators have the most

effect on community-based jobs as well as “appear to have the largest correlation with future economic

growth.”14 The goal of the EDA is to promote innovation and entrepreneurship. This report found that

even though more infrastructure, construction, and commercial projects are undertaken, the steady

increase in incubating projects are astoundingly creating more jobs on the margin than the previous

investments. Consequently for the EDA, increasing the investment in business incubators seems to be

much more of an appealing option over time.

Incubating Process

Highly prevalent factors in a community that influence the establishment of an incubator:

● Agglomeration o Populations density o Mobility o Urbanization

● Welfare

o Security o Poverty levels o Social diversity

● Business/entrepreneurship levels o Establishments o Opportunities/locations o Commercial

When a business owner decides to move their business into an incubator their main reason for doing so

is to minimize their operation costs. Next are the support, mentoring, and financing opportunities that

are provided. In addition, the added necessary office amenities are also a component. When looking at

what an entrepreneur has to lose, there is not much that is very clear. It would seem that an incubator is

the optimal choice for any start-up small business owner. However, business owners need to

understand that there are some aspects they would have to compromise such as allowing access to the

operations and documentation of the business to managerial staff. In essence what a business owner

has to give up is that privacy that they have, if in fact they wish to have their business incubated. In all

other aspects there is not much that a business loses especially when it comes to necessary office

amenities. According to the “The Small Business Incubator Industry: Micro-Level Economic

Development” report produced by Candace Campbell and David Allen, these are the factors that had the

highest frequency of use: copier, shipping/receiving, mail, conference rooms, business planning, clerical

support, and receptionist15. The following supplies and services were noted as being the most important

offered to incubated businesses: risk management/insurance opportunities, building security, mail,

government grants, loans, receptionist, inventory space, copier, advertising and marketing

opportunities, possible health and benefit packages, telephone and internet15.

David Allen, a former professor of Public Administration at Pennsylvania State University describes

incubated businesses as small organizations hiring an average of two to six employees. All incubated

businesses are not going to have an excess of employees of ten or more but rather a small number

closer to two or three. The idea behind the increase in job growth is for an incubating organization (such

as NEON) to have between five and ten businesses incubated within a period of time, with each business

hiring one or two employees at the start and eventually continuing to increase. On average the largest

growth of an incubated business is after they have graduated (exited) the incubation system. The

average time period for a business to stay incubated is 29 months according to David Allen and Mark

Weinberg16. This is a period of two years and five months. Not all businesses need this much time to

reach a position to graduate and move on, however it is the time that an incubated business can sustain

itself while incubating several businesses. For non-profit organizations the goal is to make sure that they

establish the businesses and help them sustain specifically by minimizing costs. One way they minimize

cost is the rate charged to be a tenant at the incubating location. On average the business tenants pay

the incubators at a rental price below the market rate16. In Minnesota the average rental price per

square foot is roughly $1.30. Non-profit incubating businesses on average ask for a rental price per

square foot that’s 10% below the market rate16. As the incubated business extends its stay then the

more likely it is that the incubating organization will increase the rental price bringing it closer to the

market rate.

In general a majority of the firms incubated are very young. In a survey of Pennsylvania business

incubators, 54.9% of tenants in incubators were less than 3 years old overall16. An organization such as

NEON must consider not only having newly started businesses but likewise older service demanding

business. This allows for diversity in revenue streams as well as an aspect of mentorship beyond the

incubating organization. In the survey constructed by Pennsylvania University looking at incubated

business, one aspect that was very consistent and promising was the connection between the tenants

and the local community. Many of the entrepreneurs described being a part of the community for a long

time. Fifty percent of those surveyed expressed living in the area for 12 plus years15. This is promising for

when the businesses eventually graduate from the incubated system. The hopes should be that

businesses that graduate move into a location within the community and continue to hire residents of

the community. The book The New Business Incubator: Linking Talent, Technology, Capital and Know-

How, found through surveying that from 30 graduating incubated firms, 80% of them planned on

relocating in the same city as the incubator15. This is an integral aspect to the long-run development

piece.

In order to measure the success of an incubator as well as the effect that it is having on the economic

development of the community, incubating organizations must keep track of success to failure rates.

Success is defined as a firm that has steadily increased its revenue stream and within or at the 29

months has graduated from the incubator. Failure is defined as a firm that has completely shut down its

business operations. The national study of business incubators conducted by Pennsylvania State

University looked at 45 incubators finding that on average the success ratio of public organizations was

2.3: 1, roughly two successes for every one failure. This is a greater ratio than any for profit and most

university incubators.

The exit and entry criteria for incubators must very clear and concise. Graduating and exiting are not

necessarily the same idea. A firm can exit the incubator due to business failure if absolutely necessary.

They can also exit based on management decisions derived from rental agreements or requirements. A

turnover is specific in that a firm has been incubated for a length of time set by the incubator and that

firm has seen considerable growth since it began its incubating process. When it comes to entry

requirements, the incubating organization must consider each applicant very carefully on current

standing of business, potential, and management experience and ability. On average, organizations have

committees that review and interview each applicant. The committees are made up of business

professionals with expertise in accounting, management, finance and general business operations.

These are also the qualifications essential to make up the management and staff of the incubator.

Case Studies: Incubators

To provide a perspective of how big an incubator can get as well as a small reasonable successful

incubator lets consider the following case studies. These numbers also provide an idea of how successful

one should expect their incubating business to be over a span of 8 years or so. The two following case

studies are of incubators that are no longer active. Yet because they are inactive, they can provide us

with concrete numbers that show their level of success.

Decatur Industry and Technology Center17, which was located in Decatur, Illinois between the years

1986 and 1993. With a recent closing of a local plant, the U.S. Economic Development Administration

received a grant to renovate and establish an incubator. The goal of this facility was to create economic

diversity within the community increase level of entrepreneurship and earn enough to sustain the

incubator over time. The facility was originally owned by the city but run by a community development

agency. Here are some of the takeaways from the Decatur Industry and Technology Center:

● 153,000 square feet.

o Heavy Manufacture focus

● Average of 11 employees per firm

● Between 1986 and 1993

o 61% increase in employment

o 77% increase in salary and wages

o 104% in sales

● By 1993

o Had employed 319 persons

o Accumulated $22 million in salary and wages

o $127 million in sales

o Generated and estimated $2.5 million in additional tax revenue

Quest Center for Entrepreneurs17was a smaller scaled incubator compared to the Decatur incubator. It

was located in Hutchinson, Kansas and was active between 1987 and 1993. Quest was started by a non-

profit organization with the goals to create jobs, diversify the economy, facilitate startups businesses,

and sustain growth. Unlike Decatur, Quest didn’t focus on manufacturing rather firms varied on

specification. Here are the takeaways from Quest:

● 21,000 square feet

● Half of operation income was from rent and service fees, other half from city and county

governments

● Average of 2 employees per firm

● Between 1987 an 1993

o 7% increase in employment

o 61% increase in salary and wages

o 89% increase in sales

● By 1993

o Total of 50 people had been employed

o $3 million in salary and wages paid

o Over $14 million in sales

o Generated an estimated $337,000 in additional tax revenue

The following models are of active incubators. The only way to obtain this information was by contacting

each business and inquiring over the phone specifics on their incubating system. These numbers provide

an idea of what is offered already.

Case Studies: Co-working Spaces

The following models are of co-working or collaborative spaces and a majority, are located here in

Minneapolis. Minneapolis is one of the cities across the nation that has really embraced this idea of co-

working as many businesses are jumping into this industry. As mentioned previously in this paper,

Minneapolis is home to Coco, a very successful co-working and collaborative space with four locations in

Minneapolis and St. Paul currently. Talking with Kyle Coolbroth, the CEO and co-founder, the sense is

that Coco is one of the premier and successful co-working spaces in the country. With partnerships with

large companies such as Google, it is clear that they stand as one of the premier companies in the

industry. A majority of co-working spaces are for-profit and their main concerns are not necessary the

success of the firms that they house but rather if they are facilitating a space that is adequate for

community, inspires innovation and simplifies the work experience. Therefore there are no subsidies of

any form when working in a collaborative space, and in any case the majority of entrepreneurs utilizing

the space are not there to get any form of advising. Rather the space acts as an satisfactory environment

to work and build a business with out the necessary need to rent or buy a facility, or stumble across

from to location to location. It also indirectly incorporates an atmosphere of networking due to the

other entrepreneurs around in similar fields as well as different18. Many of the amenities offered are

essentially what would be necessary in an office or even an incubated space. These amenities include,

offices, desks, floating chairs, conference rooms, copy machines, fax, printers, coffee, kitchen space,

outgoing and incoming mail, as well as Internet and telephone access. What makes a co-working space

also very convenient is that it is up to the user to determine their level of utilization of the space. Hence

there are different memberships that can be offered. For example if an individual wants to use the space

for the day, then they may be able to purchase a day pass and utilize the amenities available. That may

move along further with weekly memberships to monthly and long-term memberships. Here are some

models of collaborative spaces.

Interviews and Focus Group

Beyond the literature review, the other component of the research was to conduct in person interviews

as well as hold a focus group. The interview process began in the month of July, with the first couple of

weeks devoted to pooling possible interviewees. The Dun and Bradstreet data was very helpful in the

beginning process of getting some contacts and addresses. NEON’s own database on small businesses

clients also proved useful. The other method used was surveying the nearby cafes, specifically the

Avenue Eatery and Breaking Bread right on West Broadway. These two locations are popular

destinations for mobile business owners in North Minneapolis, so they served as ideal locations for

finding interviewees and observing the flow of business activity. In order to effectively conduct the

interviews and run the focus group an interview guide was constructed and a most likely and least likely

survey. The interview guide has 25 specific questions that are business related looking at needs and

challenges. The survey has two sections. The first section scales the most important factors when it

comes to business decisions. The second section details the confidence level of the owner in their

business and having it in the community. The decision-making factors are important because they

illustrate what the business owners require when looking for facilities. The confidence scale is vital in

order to understand what affect the community has on the business.

In the second week of July the interviews began and lasted until the 31st of July. The interviews coupled

with the focus group made up a sample pool of 30 business owners and pre-venture entrepreneurs. Out

of the 30 only 15 of these interviews garnered substantial results, substantial meaning they answered

90% of the questions completely. The following findings are derived from these 15 interviews. On

average, the majority of respondents had been in business for four years or less with a few having been

in business over four years. Over 70% of the interviewees identified as North Minneapolis residents and

stated that if they were to relocate they would remain in the same city. When it comes to the goals of

business owners, the idea is always growth. However that can be very subjective. Some key aspects of

business that would be essential in improving upon to gain this growth according to the respondents are

marketing, managerial operations, policies and capital. Marketing because of the lack of a strong

customer base. Managerial operations due to a need to better direct employees if any, and increase the

attentiveness of administrative tasks such book keeping, paper work, and website upkeep. The policies

align with the systems set in place that are necessary to effectively start and run a business, so such

aspects as fees, contracts and legality can be stumbling blocks. Capital was a consensus among

respondents as the number one inhibitor of expanding their business. When asked why, the

overwhelming majority stated that financial institutions such as banks often act as hurdles when

applying for loans and grants, specifically for African American business owners. When it comes to the

strengths of the businesses, 90% of those interviewed spoke of hard work, goal setting, and

understanding the overall direction of the company. These strengths are what lead to the successful

completion of work for many of the business owners.

Being a business owner specifically in the Near North can present its own challenges. Earlier, this paper

detailed statistics on crime in the locality, and how it relates to all of Minneapolis. Even though the

percentage of crime occurring in the area is low compared to some other parts, crime is still no doubt an

issue and a concern. Surprisingly however, it is not a great concern for over half the business owners

interviewed. There is a sense of understanding already that the crime that does occur does not

negatively affect their business in any way directly. Sure there are security issues, with the reality of

casual solicitors and loiterers but that is not a majority concern in running the businesses. The concern is

the perception of crime that is held across the metro area. Ninety percent of North Minneapolis

business owners interviewed said that the perception of crime is a hindrance for their business. The

ability to attract regional or even outside region customers is a problem, when the location of the

business is identified as being in North Minneapolis. A word that kept coming up was stigma, there’s a

stigma associated with being in the Near North area specifically. This is a larger piece in what hinders

North Minneapolis business owners from maintaining a solid reliable customer base from their

perspective. Additionally when asked where a majority of their customers come from, over 50% of

business owners point to the local community. With the high traffic that is close to West Broadway and

Lowry Avenue, specifically because of I-94, the potential to pull in regional and outside region customers

is there. Nevertheless the stigma associated with crime and the community is a deterrent. Pushing the

envelope even further, for African American business owners, being taken as credible and having their

product or services regarded as good quality is a hindering component in customer attainment. A

majority of the interviewees when asked, what challenges do they face as African Americans, responded

by saying that they need to proof their worth as a business. Not only from customers outside the area

but from within the community as well.

The needs of business owners concerning office and workspace vary across the board. In general all the

aspects of what is available in incubators and co-working spaces suffice for much of what the

respondents were saying. One piece that is not overly obvious but was mentioned by a few respondents

is storage space. There is a need for storage space that is easily accessible in the community. Currently

some companies such as Tri-Construction and Tires R’ Us operate in North Minneapolis but they have to

store supplies and added inventory at an off site location. On average telecommunications and

broadband reliability as well as cost and speed are very important to everyone that was questioned.

Energy reliability and cost was also just as high on the scale of decision-making factors for businesses.

This is compared to costs and credit, which entails cost of building, availability of loans and cost of loans.

The second most important factor was the local business support. This is considered as the community

attitude towards the business, the community promotion of itself and businesses, economic

development authority and the incentives for businesses in the community. When speaking with many

of the business owners, an average working space would entail amenities such as:

● Affordable or free printing ● Coping services ● Phone and fax communication ● High speed internet ● Vibrancy/daylight ● Conference/presentation rooms ● Free coffee ● Small Kitchen access ● Parking availability ● Security/safety ● 24 hour access

● Possible receptionist The focus group mirrored much of the information gathered from the interviews. To facilitate the focus

group, questions were asked to drive the conversations in specific directions but allowed for dialogue.

The dialogue provided deeper perspectives than originally thought of. Here are the questions used to

facilitate:

1. What challenges do you confront, trying to start a business or run a business? a. What about as a North Minneapolis business owner? b. What about as an African American and or minority business owner?

2. Are there any community/neighborhood concerns that you have? a. Crime? b. Transit?

3. If starting a business or you already have one, why North Minneapolis? For questions two and three, the answers are consistent with much of the findings stated earlier. The

perception of crime is the actual hindrance rather than crime itself, and transit has more or less

improved over time especially with the addition of bus 30 in 2014. Ninety percent of the attendees of

the focus group explained that Near North is where they call home and want to see it succeed. Thus why

they open their businesses in the community and keep them in the community. The only aspect that

was pushed very forcefully more so than with any other interview or conversation had was the support

from the community for black businesses. Terminology that was used quite often was “supporting our

own”, to describe the lack thereof of black business support. It is important to note that the

overwhelming majority of business owners interviewed and participants in the focus groups were

African American. The only non-African American respondents were two female White business owners.

Non-minority business owners obtained through the Dun and Bradstreet database were not as

responsive to interviews or the survey. Some other points of frustration noted from the focus group

include:

● Establishing partnerships/Networking opportunities ● Management of time during business ● Building trust in networks ● Certification barriers/government barriers/lack of understanding ● Lack of proper customer service ● More self-management skills ● Lack of sufficient simple business plans ● Lack of commercial attractors ● Lack of vibrancy in businesses on Broadway

A learning point from the focus group as well as the interviews was that, these issues are not easy or

fast fixes. However, organizations such as NEON, West Broadway Business Area Coalition, and Lowry

Business Association must survey on a regular basis the needs and challenges of those they wish to help.

Not only will that give the organizations further perspectives but will also attract small business owners

to continue investing in community business building programs as well as inspire more business

ventures.

Summary and Recommendations

To summarize, this report has detailed the necessary information about incubators and co-working

spaces. This is information critical to NEON attaining their goal of establishing such a space. The first part

of the paper defines incubators and co-working spaces and their uniqueness. It is important to

understand, especially as a management team the differences and how to facilitate services to both

groups of tenants. Their purposes are the same, but the method in which NEON serves them is different.

The next part of this report has detailed aspects of the community that are important to take note of as

considerations for a business space such as this are being made. The level of business activity in North

Minneapolis, specifically in the Near North area is quite high especially looking at the potential level of

underground economic activity. The potential for growth is there, and it’s convincing seeing so many

enthusiastic business owners through the interviews and focus group. Moreover more needs to be said

about the reality of crime versus the perception, and the effect that is being produced due to that

perception. It is also important to pay attention to the level of traffic happening currently down West

Broadway and Lowry, and the potential level of traffic available with the application of I-94. In a

previous report done by the University of Minnesota from 2010, the findings show that ownership by

minorities was very minimal compared to non-minority business owners. Further more business

ownership by African Americans was even lower. Similar research is conducted within this report

verifying those 2010 findings. The findings showed only a 3% growth in minority businesses since,

concluding that there wasn’t a substantial growth in the level of registered African American businesses.

In order to help contribute to the growth of the community economically, business operations will need

to grow to where the firms are really engaged in the community. This can help close the gap overtime of

the leakage that occurs currently. With the establishment of an incubating space, the potential for

growing firms that are committed to the community is there. On average, incubators develop firms that

after graduating move on and establish themselves in the community15. The investment in incubators

has also been shown to be, overtime, less expensive than other development measures14. Incubator are

not only less expensive but also more successful in community development. The co-working space, as

an addition, acts as a catalyst to the business activity and networking possibilities that can occur in the

area18. Through the interviews and the focus group, it is clear that small business owners around the

community are excited about a space such as this along West Broadway. Not only are they excited, they

wish to be a part of the process and contribute where they can. Through conversations with other

business incubators and co-working space organizations across the country, there is an eagerness to

know the outcome of the NEON project and see the affect the project can potentially have on the

community.

Key Recommendations

1. Tracking data on incubated business as well as co-working spaces annually.

2. Reducing the rent price for incubated business 10% below market rate.

3. Have a quick turnover rate for incubated businesses, research suggest two and half years.

4. Design a vibrant work environment specifically aimed at your co-working clients.

In order to incentivize more government agencies to continue to support the NEON project, specific

reports tracking information must be considered. According to the Illinois Department of Commerce and

Community Affairs, the incentives for government support are: economic diversification, job growth,

new enterprise development, inspiration for business entrepreneurship, and community support12. It is

important for NEON to begin looking at how over the next five years this data will be produced. NEON

currently is very accessible to the community and engages in community events. Presenting the project

to community at events, on radio stations and speaking on it can further expose the neighborhood to

the project. This inevitably will pool support that will be critical. Not only will it pool support, it will

inspire further endeavors from community members in the area of entrepreneurship. Surveys are a

good tool to measure and provide data on such community engagement and increasing level of

entrepreneurship. As previously mentioned, the success and failure rate of businesses with an incubated

system are imperative to keep track. The ratio to keep track of is, success of businesses that have moved

out of the incubator over the number of firms that have failed in the incubator16. This is arguably the

best measure of economic effectiveness due to the fact that businesses higher more employees when

they have graduated and operate outside of the incubator18. Along with keeping track of this ratio,

NEON should keep track of the number of employees each business has while incubated.

When considering firms to place in the incubator, a selection committee should be put together

comprising of business operations experts. Each application must be reviewed specifically on the

potential of business success and the effort already put in. In general the community organization

stakeholders should review each application as well15. The incubator and collaborative space

management team should also be well knowledgeable of business operations. When it comes to the

incubating system, on average businesses should be tenants for two years. Lease agreements should be

made, and be very explicit about the agreed upon end or turnover19. If a firm wishes to not move out of

the incubator by those two years, NEON should consider raising the current rent by 10% per every year

beyond the second year. The services provided for the incubated tenants should be very simple and

basic in order to reduce expenses. The services that are provided by NEON to incubated businesses

should reduce the overhead cost of firms. These services can include but are not limited to receptionist

availability, copying, printing, data processing, bookkeeping, and legal and contractual services19. These

services coupled with entrepreneurial classes, office equipment, conference rooms, offices, desks,

cubicles, coffee, and a kitchen will suffice in helping incubated business reduce costs. There are many

different perspectives that management teams have on how to effectively help incubated business.

There isn’t a singular correct method or the best method, but continued research and growth in learning

is necessary to help manage an incubator. See page 36 of this report for contact information on

different incubators across the country.

Taking a quick tour of Coco in Minneapolis, and visiting different websites of co-working spaces, one

thing is clear. The atmosphere created by the design of the space is very important to the work

environment. The vibrancy of the space will not only facilitate a friendly workspace but also attract

possible future clients. Things to consider during the renovation are:

● Bright colors (walls and or furniture),

● Art (murals, paintings), ● Cubicles vs. desks ● Outside space

Many of the collaborative spaces available to look at as examples, really push the idea of innovation.

The question is, how is it that the space will help inspire originality? Bright color furniture and or walls

are consistent in all the models looked at. With different artist across North Minneapolis, opportunities

to showcase their artwork as well as use them to add to the space are there and should be taken. For

long-term co-working clients and even incubated firms, desks and or cubicles are good options. A

combination of the two is what seems consistent in many models. The possibility of an outside space,

one that can be utilized in the warmer months can be an addition to the project and community. A patio

space with tables and chairs either in the back of the building and even possibly the front could really

add to the attraction of the site.

To help come up with possible prices for co-working clients, below are pulled prices from Coco.

*All group rates are six-month leases with 24/7 access.

Through the 8 to 1615 month period of planning for the incubating and collaborative space, some

feasibility assessments should be conducted. The first is tenant composition. NEON should have a clear

idea of the target market for both spaces. Ideally, based on several studies, the site should be composed

of a good mix of tenants19. These can be experienced business as well as new venture businesses.

Another aspect is having an attractor firm within the space, which would help with increasing the flow of

people and potential clients. The next assessment is the financial plan. Based on the expenses of

renovating, expected utilities, and rent, a monthly and yearly cash flow should be produced. It should

include the aforementioned expenses as well as the vacancy rate and assumptions on pricing for

tenants12. This will help with getting clearer on how to effectively incubate firms as well as provide

suitable memberships for co-working clients. Continued analysis of market potential should be done to

understand the product and services needed, as well as the operation of the local economy12.

Limitations

There are only a few limitations to go over. First, the Duns and Bradstreet data used in the research only

provides information from their clients. The data also does not have information on the length of time

businesses have been operating. So some of the businesses may no longer be operating or in the area.

Another limitation is time. Research never completely ends; it only stops to meet a deadline. Thus even

more time would be necessary to get even more small business owners interviewed and surveyed to

greater understand their needs as well as the business activity in the community.

Contacts

Nonprofit

Local Development Corp. Of East New York, 80 Jamaica Avenue, 3rd Floor. Brooklyn, NY 11207

Tel. 718.385.6700

www.idceny.org

Fulton-Carroll Center For Industry, 320 North Damen Avenue Suite 100, Chicago IL 60612

Tel. 312.421.3941

www.illinoisinnovation.com/fulton-carroll-center-incubator

Bennington County Industrial Corp. 215 South Street 2nd Floor Bennington, VT 05201

Tel. 802.442.8975

www.bcici.org/contact/

Appendix I. Minneapolis Neighborhoods

Appendix II. Minneapolis Neighborhoods by Zip Code

Appendix III. Crime in 2011

Appendix IV. Total Crime 2011-May 2015

Appendix V. Incubator Concept Models

Incubator-Incubation concept Map: Hacke

Appendix IV. Local Jobs Generated Per $10,000 and Cost Per Job

Grant Thornton LLP and ASR Analytics14

1 Illinois Department of Commerce and Community Affairs. Starting A Small Business Incubator A Handbook for Sponsors and Developers. (1985). 2 Movoto Real Estate. “Minneapolis, Mn, 55411.” http://www.movoto.com/minneapolis-mn/55411/demographics/. (Accessed June 22). 3 Haynes E. Kingsley, Qian Haifeng. Incubation Push or Business Pull? Investigating the Geography of US Business Incubators.(2009). 4 Northside Economic Opportunity Network 2013-2016 Strategic Plan.(2013). 5 City-Data.com, “55411 Zip Code Detailed Profile,” http://www.city-data.com/zips/55411.html (accessed July 1st, 2015). 6 Cakici Hanife, Nguy Linda, Peer Audrey. “Self-Employment and Small Business Ownership Minority Businesses in North Minneapolis.”MPP Professional Paper. (2011). 7 Economic and Business Development. “West Broadway, Minneapolis.”nd. 8 Bush M. James. Community Driven Economic Development Strategies for Rainier Beach. (2010). 9 Alderslade Jamie, Freeman Yusef, Talmage John. “Measuring the Informal Economy- One Neighborhood at a Time.” The Brookings Institution Metropolitan Policy Program. (2006). 10 Cornwell T. Gretchen, Findeis L. Jill, Jensen Leif. “Infromal Work in Nonmetropolitan Pennsylvania.” Rural Sociology.60 (1). Pp.99-107. (1995). 11 Vitcenda Mary. “Urban vs. Rural? More like urban and rural together, study says.” University of Minnesota. www.extension.umn.edu/community/news/urban-rural.html. (Accessed on June 19 2015). 12 Illinois Department of Commerce and Community Affairs. Guidelines for Determining the Feasibility of a Small Business Incubator.(1985). 13 The National Business Incubation Association, “Business Incubation FAQs.” www.nbia.org/resources/business-incubation-faq. (Accessed June 2nd 2015). 14 Arena Peter, Adams A. John, Noyes Kristin, Rhody Stephen, Noona Meghan. U.S. Department of Commerce, Economic Development Adminsitration. “Construction Grants Program Impact Assessment Report.” Report on Investigation and Results. (I). (2008). 15 Allen N. David, Campbell Candace. “The Small Business Incubator Industry: Micro-Level Economic Development.” Economic Development Quarterly. 1 (2). (1987). 16 Allen N. David, Weinberg L. Mark. “State Investment in Business Incubators.” Public Administration Quarterly. 12 (2). (1988). 17 Markley M. Deborah, McNamar T. Kevin. “Local Economic and State Fiscal Impacts of Business Incubators.” State & Local Government Review. 28 (1). (1996). 18 “Going it alone-together; Co-working spaces multiply locally, giving independent workers more options.” The Indianapolis Business Journal, July 2, 2012, final edition. 19 Campbell Candace. “Hatching Small Businesses.” Planning Practice. (1984).