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Failed Incubators

Direct communication with:
George E. Koklanaris - Associate Administrator - U.S. Small Business Administration - Office of Small Business Development Centers
Mr. Koklanaris:
I  was chair of the committee that comprised the guidelines for the SBDCs at The White House Conference on Small Business  in 1986. You’ll find my name on page 74 of that report.
SBDCs, founded because of the severe economic recession at that time, were to be temporary in nature and there was to be no competition with private sector businesses.
SBDCs do compete, however.  Two easy to confirm examples:
#1) Our local SBDC provides meeting rooms for rent to the dismay of hotels, executive suites and co-working spaces that provide same by the hour, day, week or month.
#2) I can give you numerous examples of large and small businesses that provide instructional workshops, courses and seminars of exactly the types the SBDCs promote.
Please stop SBDC direct competion with tax paying business.

In Houston, a tax subsidized small business development group (University of Houston Small Business Development Center (see footnote #1) attempted to extend its reach (and therefore qualify for more public funding) to include small business incubation using the same inexperienced personnel it uses to provide startup business assistance. Those three incubators, Venture Center One in Houston and satellite incubators in Stafford and Victoria, failed.

Upon failing, the SBDC attempted to justify its incompetence by blaming the failures of its incubators on the startup business clients it was providing assistance to, saying the "businesses didn't grow" and "Houston doesn't need a business incubator."

Now isn't that just a crock? Considering that Houston, since 1999, has had more business starts than any other city in the country makes this just another example of how SBDC staff are totally unconnected with the startup business environment.

And, those unfortunate startup companies were lured into the SBDC incubators with the promises (from SBDC staff) that they would grow. What irony that the SBDCs then blamed the business failures on the startup business clients.

Wait. The saga isn't over yet. Needing a "win," the same SBDC convinced NASA to allow it to commercialize technologies developed for the space program. Guess what? More funding. Guess what again? The SBDC's fourth incubator failure!

And, in true bureaucratic fashion, rather than have to accept any professional responsibility for gross mismanagement and failure of the incubators, the SBDC director was conveniently transferred to head the SBDC in another state.

Unfortunately, there is still more. The SBDC also convinced NASA to lend shuttle engineers to assist with small business startups. With the loss of the Columbia, what an absolute travesty, disgrace and national tragedy that became.

Further, as indicated by this email, NASA still doesn't seem to get the picture that its funding is to provide a space program with engineering focus on mission safety, not on small business development:

From :  Richard Smith <richard@bayareahouston.com>
Sent :  Monday, January 12, 2004 11:21 AM
To :  <service@servicesca.org>
Subject :  NASA's technology outreach
Go to previous message | Go to next message | Delete | Inbox

I am a senior project engineer for a NASA funded program named the Space Alliance Technology Outreach Program.  We provide free technical and engineering assistance to entrepreneur's and small businesses.  Perhaps you would be interested in meeting with me to discuss how our organization can donate free support to your members.  Please give me a call or email me to discuss.

Thank you,
Richard Smith
Project Engineer
Space Alliance Technology Outreach Program

(footnote #1) Small Business Development Centers were funded by Congress in the early 80's when the U.S. economy was experiencing a severe recession. Many Americans were forced to self-employment because there were so few available jobs in the workforce. Training former employees into becoming self-employed was in the nation's best interest and was the only option for hundreds of thousands of unemployed people who were not likely to be rehired. However, Congress purposely designated SBDC funding to avoid competing with tax-paying private sector consultants (see footnote #2) and the 300+ SCORE chapters (Service Corps Of Retired Executives - established 1964) around the nation that were already doing an excellent job at minimal tax-payer expense. Therefore, by grand design, the mission of  the SBDCs was limited by Congress to provide free counseling as a temporary charity:
A) " . . . only to those who could not afford to pay a professional . . .";
B) " . . . only in suburban and rural areas where professionals (and SCORE chapters) were unavailable . . ." ;
C) " . . . only experienced business owners were to provide consulting services. . . ";
D) " . . . only to those who were becoming startup business owners because they were unable to return to the workforce . . ."

Check with your local Small Business Development Center to see how many of these stipulations are met. Chances are, if you are in an urban location, none of them are.

In the first few years of operation, SBDCs in urban locations started to run into trouble for numerous reasons. Here are the top five:
1) The majority of the funding was being used by SBDC administrators (starting annual salary in 1987 for a mid-level SBDC administrator was $60,000+benefits) and to promote, publicize and advertise the SBDCs, leaving very little with which to pay the actual business counselors, resulting in a very low business skill level of counselors and many (most or all in some SBDCs) with no actual small business ownership experience. Today, the offer of the free SBDC counselor is primarily used as the loss leader to enroll clients into taking classroom courses provided by the SBDC, which, interestingly, also compete with numerous courses provided by numerous private sector companies and community colleges. For instance: Houston had a very successful private sector company named Leisure Learning Unlimited which had been in business for decades. It provided hundreds of classes and presentations monthly given by private sector business owners on topics of interest to startup companies and small businesses wishing to grow. It published a quarterly calendar of upcoming courses which was distributed at more than 1,000 locations across Houston. The Houston SBDC, under the knowledge and direction of SBDC local management, had its staff contact those business owners who were presenting classes/courses via Leisure Learning Unlimited and offer the SBDC facilities at no charge and promising a large turnout. Leisure Learning Unlimited went out of business because of the SBDC competition.
2) Neither the skill level nor the mindset (go home at 5:00 p.m., take regular breaks and full lunch, don't work weekends, evenings or holidays, max out on paid sick days, inability to understand and operate at risk,  motto: "to have a successful business, all you need is a business plan," etc.) of the SBDC counselors met the needs of the startup entrepreneur, generating a negative response to the SBDC program, specifically because it was operated as a charity and staffed with personnel having no hands-on business experience (See Incubator Startup Notes), requiring the SBDCs to hire more staff for promotion, spend more for advertising and (you've gotta love this) establish local, regional and national SBDC councils so SBDC administrators could travel all over the country (at tax-payer expense, of course) to see what the problem was that SBDCs couldn't grow businesses like the SCORE counselors or private sector consultants could. When the lack of experience of the SBDC counselors became evident to even the SBDC administrators, the SBDCs then solicited larger businesses to donate experienced managers to volunteer time as SBDC counselors, which interestingly, also competed with another successful group called ACE (Active Corps of Executives) which is not tax funded.
3) The SBDCs had little or no accountability or accuracy in reporting of results. A well-documented example was the SBDC business fair conducted, jointly, by ten different SBDC sub-centers (under the main center in Houston) which had 150 total people attending. Yet, each of the sub-centers reported the same 150 people as unique clients and the main center reported the grand total of 1,500 people as clients. When an independent auditor asked for verification of data for that job fair, the original records were (as said by the SBDC representative) "unfortunately lost due to a hard disk failure" and could not be produced.
4) When SBDCs could no longer draw people to SBDC events because of absence of substance, SBDC personnel were universally "volunteered" to staff the registration tables of economic development events (trade fairs, conferences, workshops, seminars, networking groups, etc.) sponsored by other organizations, including those conducted by private sector, then take the attendee list and report the people attending as SBDC clients. Now, SBDCs seldom sponsor events and are rarely asked to co-sponsor or participate.
5) Even in the best environments, startup businesses often take many years to produce significant revenues or employees. When budgetary questions were raised in Congress for such matters as administrative costs of the SBDCs vs. number of jobs produced or return taxes generated as a prelude to eliminating SBDC funding entirely (please remember, it was only an emergency, temporary charity program brought about by the negative employment growth of the 80's), it became even more glaring that the SBDCs weren't producing at nearly the same levels of efficiency as the SCORE chapters or private sector consultants. To overcome this loss of funding, SBDCs began to operate completely outside their charters and:
A) . . . Provide free services to large and/or solidly established, profitable businesses (that could well afford to pay private sector consultants) solely so that the SBDCs could report the employees and taxes of those companies as statistical data to justify continued SBDC funding;
B) . . . Offer door prizes or gifts as incentives - our tax dollars at work - to have people attend SBDC functions, seminars and workshops;
C) . . . Recruit private sector companies to conduct workshops on topics of popular interest, for which the company presenters were not paid or paid minimally with the promise of a large target audience to sell to and so that the SBDC, solely, could charge the attendees a fee AND claim the attendees as clients;
D) . . . Failed to disclose the SBDC quote: "unbiased statistics by a highly respected, independent third party" as reported by the SBDC for many years as proof of economic development results from its startup small business support activities to justify continued funding were actually compiled by a former SBDC staff member, not an independent auditor as claimed by the SBDC. When asked to supply the original data, the former staff member refused, citing "client confidentiality." Consequently, the Freedom of Information Act was evoked to obtain a copy of the report, which revealed: "... 61% of SBDC clients were not startups, but established businesses, with about 82% having sales of up to $1M, 14.5% having sales of $1M-$5M and 3.5% having sales greater than $5M. When established business clients and clients able to pay for services are removed from the statistical base, SBDC return is less than 5% of the SBDC tab. Job generation statistics are also dramatically lowered when clients able to pay are removed, making SBDC costs per job created among the highest (if not the absolute highest) of any federal or state employment generating program in the United States. Further, this SBDC sponsored study does not indicate loss of tax revenue contributions from the private sector when SBDCs divert those clients able to pay from the private sector. If those clients able to pay were serviced only by private sector, the return to the tax base would significantly exceed SBDC tax data because the private sector pays taxes on those revenues, whereas SBDCs do not."

(footnote #2)
: "Unfair competition – enact legislation to prohibit government agencies and tax exempt and anti-trust exempt organizations from engaging in commercial activities in direct competition with small business.”  A resolution unanimously passed at The Texas Governor's Conference on Small Business - May 16 & 17, 1996, specifically directed to SBDCs in Texas actively competing with private sector.

Virtually every state continues to address the issues regarding SBDCs competing with local service providers, inability/unwillingness to provide audited statistics, refusing independent third-party oversight and repeatedly suppressing activities by other economic development groups attempting to replace costly, ineffective SBDC support with other forms of small business assistance.

SBDC funding was intended to be matched, dollar for dollar, by the host establishment. However, almost exclusively, hosts provide only in-kind support rather than cash. In-kind support is generally spare offices, equipment, personnel, a share of the host's infrastructure costs, etc. SBDCs are operated as lucrative profit centers for their host establishment, which is typically a university or college.

SBDC statistics are so distorted that the program has been identified as pork. Just for fun, ask your SBDC how many alumni of the sponsoring college or university are on the SBDC payroll, or how much tax funding is used by them to produce a successful business from startup, or how many of their business counselors have actual hands-on successful business experience rather than being employed by the SBDC after having their own business just fail, or exactly how much is it costing the U.S. tax-payer to provide that hour of "free" counseling, or what the factual ratio is for having startups become successful.

Continued major issues regarding SBDCs:
1) Continued insistence by SBDC counselors that a business plan is mandatory to have a successful business.
2) Persistent rumors of SBDC counselors requiring "under the table" referral fees to recommend specialists to SBDC clients.
3) SBDC services provided to larger, profitable companies as political favors for having made campaign contributions.
4) Continued hiring of business owners of failed businesses as SBDC counselors.
5) SBDC requesting a million dollar contract to provide oversight on itself. (Can you believe - fox guarding the hen house, eh? ) And the Houston SBDC was given a grant of more than $3,000,000 by the Federal Government in order to "help start businesses." (That's what SBDCs are supposed to do: "help start" businesses.)

See Successful Incubators, Flawed Development Methodology, Letter to Washington, Incubator Startup NotesGovernor's Conference Resolution, Free Consulting, Memo to SBA, Letter to Select Committee for Deficit Reduction

Editorial by C. Dean Kring, who bears sole responsibility for content.

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