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Do Business Incubators Spell EB-5 Opportunity?
By: Adam Green
When you think, “EB-5 visa project,” what comes to mind? For many, it’s hotels, ski resorts, and other commercial real estate developments.
But those projects aren’t all that the program has to offer – far from it. In fact, one of the more innovative uses of EB-5 funds we’ve seen involves financing new companies through business incubators.
A few regional centers already do this. In Texas, Ohio, North Dakota, and a smattering of other locations, we know of several new EB-5 efforts seeking capital from foreign investors for the purpose of funding start-ups. In some cases, the money will flow through technology accelerators that help business leaders identify promising new concepts.
The Cincinnati Accelerator
Last month, we included the University of Cincinnati Technology Accelerator in our list of exciting new EB-5 concepts. The Midwest EB-5 Regional Center, which is handling foreign investments in the accelerator, will help fund research into promising new technologies.
Lynn Allen, who raises seed and early start-up capital for incubators through her company, Capital Innovations, thinks projects like this can be a great concept for EB-5. Accelerating job growth through innovation is a high priority in this country, she argues, but job creation will influence the kinds of companies EB-5 funds can create.
“Biotech might not be the right company” for EB-5, she says, because “it generally takes longer to develop and hires fewer people in the short term.”
On the other hand, Allen believes that if a start-up company incubator is part of a larger mixed-use project and the incubator includes young companies that can anticipate scaling up quickly in revenues and employees, EB-5 could be a good fit. The most pressing question, she thinks, is how regional center planners will protect the investor’s downside.
“It can be 7 to 10 years before a young company exits,” says Allen. One way to mitigate the investor’s risk is to package the incubator as part of a larger mixed use project that can offer more downside protection in the event some incubator companies take longer to exit, something the University of Cincinnati accelerator is doing.
Another thing she emphasizes is the importance of university research in developing successful concepts. After all, investors are attracted to university-related projects, and many incubators develop companies from a university’s most commercially attractive technologies..
Up until now, EB-5 has mostly financed existing ventures. A big question for the future might be whether we can use EB-5 to finance growth of seed or early-stage companies. Funds for new facilities or direct investments in companies that meet a an “EB-5-friendly” job creation profile are all possibilities.
A few EB-5 hurdles
In North Dakota, another EB-5-funded innovation effort is already well underway. The North Dakota-Northwestern Minnesota EB-5 Regional Center is using foreign direct investment to augment other funding it already receives for entrepreneurial innovations.
Since it’s linked to the University of North Dakota, the regional center is focused on industries like advanced manufacturing, IT, aerospace, bioscience, electric power generation, and agriculture that currently offer many opportunities in the region. Although its principals, Bruce Gjovig and Rodrigo Cintra, want to develop new companies from the incubator side, they admit that they’ve begun following a more “traditional” EB-5 approach in order to expand the program.
“We’re working with some hotel developers in our region,” says Cintra. “The Western part of the state is facing a significant housing shortage, and these types of developments can help us grow the the EB-5 program in our region and keep operations moving forward.
But the regional center doesn’t want to “just be hotels,” he emphasizes. Despite what Cintra says is plenty of demand for what they’re doing with the incubator element, at this point there just aren’t enough companies with the right financial, operations, and market characteristics needed to participate in the program. That, he says, and the fact that many of the ideas they’re seeing won’t create enough jobs.
“The program is complex and making sure you work with strong projects and mitigate the job creation component of it is crucial,” he says.
Until the regional center can clear those hurdles, it will probably keep working with projects in industries such as manufacturing, real estate, energy generation, and agribusiness. Other stewards of EB-5 funds should be mindful of these issues before pursuing an incubator-based plan. Not because such plans aren’t worthwhile – when done right, they certainly are – but because these are just some of the challenges they’ll likely encounter along the way.
Still, the North Dakota duo is extremely optimistic. As one of only four states that was able to recover all of the private sector jobs it lost during the recession, Gjovig and Cintra can make a pretty compelling argument that North Dakota is a good place to invest.
“By July, we’d like to have some of our current projects completed,” says Gjovig. “We’ve got a really healthy pipeline, and we’re energized by the attention we’re receiving from domestic and international investors in a variety of different sectors.”