Editor's Eye on Baltimore: From Co-working to Acceleration - A Primer on the New Approaches to Innovation Space

Posted August 25, 2011

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Michael Teitelbaum

Recent columns present a number of differing concepts regarding space used for start-ups. What space does Baltimore need to compete? What can we learn from regions that are ahead in rethinking space? What are we trying to achieve? So that we can discuss these issues, here is a primer on evolving concepts of space.

A Roadmap. This week's column isn't intended to be exhaustive, complete or bereft of bias. There are three types of space being used by innovation communities: co-working facilities, incubators, and accelerators.

First: Co-working Facilities. Co-working evolved when coffee shops no longer cut it. Co-working is more a philosophy on how to work rather than a physical space. It tends to attract professionals of various stripes (not just software coders) that find it rewarding to work near others and not in isolation. The work everyone does in such a facility is generally independent of each other, but all appreciate the socializing aspect of not being stuck at home or in a coffee shop. Co-workers are usually (though not always) freelancers or contractors who are not part of a larger company.

The space used is generally open (not cubicles or offices), although there are often meeting rooms and areas that are more collaborative and some more quiet in nature. There are few shared amenities, usually wifi but rarely a phone system (who needs one) or copier/printer (kinkos abound).

The subtlety that's often lost is that co-working really isn't about the space, no matter how cool, but about the social experience of collectively working on different projects. Healthy co-working facilities nurture a community esprit; ones that struggle feel like a budget variation of an executive office suite. The vibrant co-working facilities take on a life beyond their Ikea desks - such as hosting networking events, business plan presentations and happy hours.

The revenue model is akin to that of a health club. There are different membership levels based on usage. Some facilities are member managed; others have a paid manager. Many early co-working facilities are non-profit or break-even in nature, although there are an increasing number of for-profit facilities. In Baltimore, we have at least two co-working facilities, Beehive Baltimore (in full disclosure, in which I am a partner) and Capital Studios.

Some Questions Raised. With the increasing number of co-working facilities, how big is the market? Does the revenue pressure of for-profit models impact the "community" feel of a facility? Is co-working a fad or trend? Is it a new way to work that will attain broad acceptance or be isolated to a subset of freelancers? Will co-working evolve to become an oasis for office workers to escape a cubicle? Can co-working become a destination for creativity and problem solving across talents and experiences? Do you start such a facility with an engaged community in tow, or do you start with the space and hope they'll come? Who best governs the facility - the members or a manager?

Second: Incubators. Unlike the collaborative work space of a co-working facility, incubators are designed to foster the growth of an early stage business through offering services, such as office support, shared facilities, mentoring and networking. Most incubators measure success in terms of revenue growth and job creation of the companies they graduate.

The real estate paradigm of an incubator is much different than a co-working facility. Companies (not individuals) lease dedicated space (think office suite) and pay above market rent to cover the costs of the additional services offered. While some companies join an incubator to be near other start-ups, most enroll to position their organization for success. A company can be in an incubation program for as short as a year or interminably. Most companies graduate from incubators when they have proven their business model, either through revenues or a successful round of institutional funding. Some "graduate" when the incubator wants the space freed up for a more promising applicant. A few never graduate at all.

The challenge for all incubators is they have fixed (capital) and operating (ongoing) real estate overhead which drives much of their behavior. In the end, the operator has to ensure that the real estate debt service costs and operating overhead are paid. This places the incubator under the challenge of ensuring that it maintains a high occupancy rate and while the desire is to lease to the most promising companies, it can't leave space unfilled for long.

While there have been for-profit incubators (with mixed results), most incubators are either run as non-profits, as part of local government's economic development efforts, or in conjunction with an academic institution. Examples in the Baltimore area are the Baltimore Development Corporation's Emerging Technology Center and UMBC's incubator. Academic incubators have the added mission of facilitating technology transfer from their laboratories and research efforts.

Some Questions Raised. Do start-ups care about real estate or services? How can an incubator get out of renting space and use resources for more relevant support? How can incubators deliver more impactful services? How can proven entrepreneurs be more engaged? What role should an incubator serve in addressing early stage capital needs? How can incubators be more agile in adapting to changing models and needs? What does the incubator of the future look like? How can incubators return to attracting the most promising companies?

Third: Accelerators. While it's not quite the right paradigm, think of an accelerator as incubation on steroids. These programs are neither co-working nor incubation in the classic sense. An accelerator offers a group of previously unconnected entrepreneurs the opportunity to spend a few very intense months together as a "class", laser focused on each of their business ideas. Each accelerator class goes through an intensive process of developing their business plans, building prototypes, accomplished through a combination of classes, mentoring and peer support. Most of these programs offer some funding in exchange for a small stake in each company, and almost all of them graduate their companies through what is called "demo day", where their concepts are presented to area VCs and angels, and they vie for additional funding awards.

Real estate plays a supporting role in accelerators; the key seems to be the organization's ability to engage area entrepreneurs to share their experience and insight with class members. The concept of accelerators has hit everyone's radar in the start-up community - with incubators, tech transfer offices, co-working facility owners and others sorting out how to bolt an acceleration program onto their existing model. But the challenge is that accelerators are not a hybrid of other models. They are a unique mix of boot camp, incubation, co-working (or at least collaboration), funding, mentoring - all with a hyper defined goal of winning "demo day" and attracting funding interest.

These accelerator models are in their infancy. It is clear that such a rapid prototyping process doesn't fit all business models (or entrepreneur types, for that matter). Much of their popularity seems to derive from the speed, clarity of purpose, and orientation toward attracting funding. But if the track record (and sustainability) of the über accelerator, called Y Combinator is any guide, they will remain an interesting and potentially valuable part of the start-up landscape.

I know of no Baltimore accelerator, although there are rumors of area incubators working on adding them to their facilities and of at least one entrepreneur toying with setting one up. As mentioned in last week's column, the issues facing one attempt in Baltimore, Startup City, suffered from the absence of an experienced, engaged base of entrepreneurs who were ready to not only invest some money but equally importantly, their time. As Adam Zilberbaum explained regarding Parking Panda's departure from Baltimore, many entrepreneurs see the lack of an accelerator as impeding Baltimore's competitiveness.

Some Questions Raised. What really makes an accelerator successful? Is it engaged entrepreneurs? Is it attracting the strongest class? Is it funding support at demo day? Should an accelerator be accretive to existing incubators? If housed in an incubator, would the programs and services be delivered in essentially the same manner? Can an accelerator be structured successfully as a for-profit, or should it be oriented entirely toward economic development goals? Is an accelerator sustainable in Baltimore?

The Take Away. It's an exciting time to be thinking through (and rethinking, in the case of incubation) these space models. There is no shortage of experiences to learn from. But what is problematic is that many conversations currently playing out in Baltimore start with how to tweak an existing program (or organization) to implement one of these concepts. While such accretive thinking might work, we may be missing the opportunity to have a broader, more fundamental and strategic discussion of what's best for Baltimore's future vs. how to shore up yesterday's impeded models. I hope the right conversation is gaining traction.

For comments about this article or thoughts on future conversations, let me know at: nfowler@rosenbergmartin.com

With more than 25 years experience in law and business, Newt Fowler advises many of the Greater Baltimore region's entrepreneurs and technology companies, guiding them through all aspects of business planning, technology commercialization, and M&A and financing transactions.