The Pasadena Venture Centre

When federal operational support for their business incubator ran out in March 1989, the Pasadena Economic Development Committee had to turn to the provincial Department of Development for assistance. Provincial officials had shown little interest in the Western Newfoundland facility, however, and the Pasadena Committee knew they would have to increase their revenues from rentals if the Venture Centre, as it was called, was to survive. By so doing, though, they would jeopardize the very benefits the facility offered - both to individual firm success and to economic development of the region. Could a locally-based committee succeed in promoting small business development if they had to charge commercial rates and attract established firms to the facility?

The Region

Pasadena is located in the Humber Valley, the region stretching from the headwaters of the Humber River, just south of White Bay, along Deer Lake, and out to the Bay of Islands on the province's west coast (Exhibit 1). Historically, the region was integrated as an economic unit based on the forest industry.

This one was prepared by Professor Robert Greenwood of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this can is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.

Comer Brook, at the mouth of the Humber River, had been the location of a paper mill since 1915. The Town of Deer Lake, fifteen miles east of Pasadena, grew around a hydroelectric plant constructed to power the mill. Most other communities in the valley were based on logging, although those, on the coast took part in the fishery like virtually all coastal Newfoundland communities.

Pasadena was an exception, due to its good quality agricultural land - a relative rarity in Newfoundland. A St John's businessperson and part-time farmer acquired some 2,500 acres of land adjacent to the rail-line in the 1930s to establish a farming operation. The Commission of Government which replaced responsible government in Newfoundland during the Depression attempted to resettle fishermen in the region with land grants, but lack of agricultural knowledge and alternative employment in American bases during World War II, meant few farms continued into the 1950s. Instead, Pasadena benefited from its easily developed land and location midway between Comer Brook and the region's airport in Deer Lake. From 450 residents in 1955, the year it was incorporated, Pasadena's population grew to some 3,500 people by 1989 as a result of immigration and amalgamation with a neighbouring community.

Pasadena also benefited from its proximity to Comer Brook, which expanded from a single industry null town, to a regional service centre. However, mechanization of the logging industry greatly reduced the number of logging jobs in outlying areas and modernization of the mill and international competition in the paper industry throughout the 1980s reduced employment levels in Comer Brook. With increasing government restraint during the same period, finally, even public sector employment was being threatened. From 1981 to 1986, the population of the region declined by 2.9 percent, to a level of 47,970 people, and unemployment rates topped 20 percent.

Local Leadership

Largely because of its agricultural origins, with sub-division of land based on agricultural plots, Pasadena was one of the first Newfoundland to establish a town plan, one component of which was economic development.

The town's Economic Development Committee included representatives of the local business community, as well as the mayor and a member of the municipal staff. Between them, these individuals represented a significant body of expertise and experience. The Chairman of the Committee was a retired school teacher who now worked in financial planning and who had been one of the leaders of the rural development movement in Newfoundland. The Committee also included the town Mayor, employed at the Comer Brook paper mill as a computer programmer, the town Manager, trained as an accountant, two local businesspeople, involved in retail and convenience stores, and the provincial government's Director of Forest Management for the region, who also operated a private silviculture business.

The driving force behind the establishment of the Venture Centre was Bill Pardy, in his roles as mayor in the late 1970s and early 1980s, and as the municipality's Economic Development Officer from 1985 to 1990. Pardy had a diverse employment background. He had worked in electronics early in his career, moved into management in an engineering firm, and then used his substantial communications skills in public relations. Throughout this period, he had been active in voluntary organizations and community groups, party politics, and municipal government. He also held a certificate in economic development and was active in the Industrial Developers Association of Canada.

As manager of the Venture Centre and Economic Development Officer for the Town of Pasadena, Pardy reported to the Economic Development Committee. As the full-time staff person, though, he exercised considerable influence with the Committee, and provided the initiative and networking skills to become the key player in the drive to develop small business and entrepreneurship in the Humber Valley.

Local Development Strategy in Pasadena: Small Business Incubators

As municipal mayor, Bill Pardy researched the small business incubator concept which was finding supporters throughout North America. Small business incubators were developed in Britain as a response to declining employment in traditional industrial sectors. The same factors spurred application of the concept in the United States, particularly in regions hit by industrial restructuring. Incubators provided new and expanding small businesses with rental space, shared office services, and business consulting support. Many incubator facilities were established by private sector corporations and investor groups, or by universities and vocational-technical schools. Most were promoted by non profit development organizations and local governments as a source of job creation and economic diversification.

Incubators were an attempt to provide resources and specialized services to independent small firms. Rental space was often provided at below market cost. Support services, such as office staff and equipment, were shared by a number of firms. On-Ate business consultants assisted with the creation of business plans, helped to access private and public financial support, and provided other professional services, ranging from accounting and legal consulting, to patent and marketing assistance.

A further benefit of incubators was that dose daily contact between firms housed in the same facility often reaped unexpected results, as firms shared product, process and market knowledge and ideas. Some incubators targeted business candidates who could potentially complement existing tenants, enhancing the likelihood of such synergies and innovation. Publicly-sponsored incubators, nevertheless, were always in danger of accusations that they were supporting businesses which competed with independent private firms, so measures were usually built into rental agreements to induce firms to leave the facility once they had been 'incubated.' Escalating rental costs, which ultimately went above market rates, was the most common device used.

By assisting small firms during the high-risk start-up phase, proponents believed that more small businesses would survive the first two years, the period which accounted for most failures. Once they had been 'incubated' for the first few years, small firms would be able to survive on their own in the open economy' Early studies acknowledged that more time would be required before success rates could be measured, but indications were that incubators made a positive contribution to small business success rates.

An Incubator for Pasadena: The Venture Centre

Based on Pardy's research, the Pasadena Economic Development Committee saw the potential of applying the incubator concept in their community. A location between the urban centre of Comer Brook and the airport in Deer Lake could make the facility a regional asset. The municipality controlled zoning regulations and local business taxation, however, it lacked the financial resources necessary to construct an incubator on its own.

Pardy was active in federal and provincial politics, and he lobbied both levels of government for support. The provincial Department of Development showed little interest, as incubators were untried in the Newfoundland context and municipalities were relatively new to economic development. Pardy requested the provincial Cabinet to allow Pasadena to approach the federal government for financial support. Municipalities were under provincial control, so direct federal-municipal relations were unusual.

With permission granted, Pardy focused his efforts on the federal Department of Regional Industrial Expansion (DRIE). In 1983, Pasadena was one of two Newfoundland communities awarded funds under the federal Industrial and Regional Development Program (IRDP) to construct incubator facilities. Pasadena's facility was to be located in a privately-owned industrial park in the community. Protracted negotiations were required before the province agreed to purchase the land for the facility, while the federal government funded construction at a cost of $ 2.9 million. Upon completion, the assets were to be controlled by the Newfoundland and Iabrador Housing Corporation (NLHC), a provincial government agency with the primary mandate of providing subsidized housing in the province. Other than administering industrial parks for the provincial government, NLHC had no other direct involvement in economic development activities.

Construction of the Pasadena incubator mall, named the Venture Centre, began in 1985 and the facility was open for business in the Spring of 1986. A management committee was established to control the operations of the Venture Centre, consisting of municipal representatives and employees of the provincial Department of Development and the NLHC. The Committee's mandate was to set goals and objectives for the Venture Centre, screen potential clients, evaluate proposals from potential tenants and businesses, and provide general direction to the staff of the facility.

The Chairman of the committee, who was the Director Of Industrial Operations with the provincial Department of Development, soon made it dear that the Department

was not supportive of the Town of Pasadena's efforts, nor of the Venture Centre itself The provincial Department was unaccustomed to municipalities initiating development projects, and departmental officials believed that political influence had been used to by-pass the provincial authorities to gain federal support. The Chairman indicated that Pardy and the town would have to succeed without provincial assistance, and after two meetings, the management committee ceased to meet at all for the next two years.

Management of the newly-constructed facility soon fell to the town and its Economic Development Committee. Indicating continued federal support (significantly, at a time when the federal and provincial governments were involved in bitter disputes over fisheries management and offshore oil jurisdiction), DRIE provided $ 250,000 to cover operational and promotional expenses to the Town of Pasadena for a three-year period (1 April, 1986 - 31 March, 1989). The town assumed responsibility for contracting Venture Centre staff, and Pardy, who had stepped down as mayor, was hued as economic development officer.

The Venture Centre in Action

The Venture Centre consisted of an 'L'-shaped building of 40,O00 square feet, sub-divided into twelve business areas incorporating workshop space and office space (Exhibit 2). Three sizes of unit were available: 2,000, 2,500 and 4,000 square feet each, although flexibility was designed into the structure to allow varying sizes according to individual business needs. A central office core area provided space for common administration and promotional activities, including a board room available to business tenants. Common office services included secretarial support, computing assistance and telefax and photocopier access, available on a cost-shared basis.

As Manager of the Venture Centre and Pasadena Economic Development Officer, Bill Pardy was available to assist tenants and prospective clients with business plans, funding applications and technical problems. His efforts were supplemented by more specialized assistance from a technical advisory committee (consisting of local engineers and technicians, as well as staff in the regional community college and the Comer Brook campus of Memorial University), and a business advisory committee (including a lawyer, an accountant, a banker and three experienced local business people).

The Venture Centre explicitly adopted the incubating concept, explaining in one promotional document that- 'During the time the business is in The Venture Centre it is expected that, with lower rentals, support, and common user services, the business will develop to the stage where it can leave and move into a multi-user industrial building or a building of its own.' To insure firms moved out, the Centre established a sliding rental rate. From 25 percent of market rates in the first two years, rents increased to 50 percent in the third year, 75 percent in the fourth year, and 110 cent in the fifth, thereby providing 'a disincentive for businesses becoming too comfortable and remaining in the centre.'

While the Pasadena. Economic Development Committee essentially took over management of the facility after the tripartite management committee became dormant, it observed selection criteria set down by DRIE and the provincial government. Tenants were required to meet one or more of the following conditions:

  1. Manufacture products not currently made in Newfoundland;
  2. Use new technology in manufacturing or provide a service not already available in Newfoundland;
  3. Experiment with and develop new Product lines by existing manufacturers,
  4. Expand a 'cottage' industry to commercial production;
  5. Establish any potentially viable business in the secondary manufacturing or processing sector which may need special incentives or assistance.

These criteria helped to guide the Economic Development Committee's approach to filling the Venture Centre. An Economic Development Plan was instituted for the town, targeting specific sectors: food processing (to develop outputs from the region's agricultural and fishing industries), wood products (linked to the region's forest resources), plastics (to manufacture inputs for the fishery), and metal work (as a subcontractor for the Comer Brook paper mill).

Pardy rejected. the idea of offering incentives to outside firms to move into the Venture Centre as an 'outdated economic development approach! More and more manufacturing was conducted by small firms, he contended, which were more likely to be locally owned. In a region traditionally dependent on forestry and agriculture, though, few people seemed to be interested in starting their own small manufacturing firm. The state-of-the-art facility was open, but no local entrepreneurs were banging on the door to get in.

Pardy approached the problem from several angles simultaneously. He set out on an ambitious project to increase entrepreneurial awareness in the Humber Valley (described in AEI Case 'Awakening Entrepreneurial Spirit in the Humber Valley). He also organized seminars on the various sectors targeted in the town's Economic Development Plan, and held workshops for potential entrepreneurs in the area on possible business opportunities. While the entrepreneurial awareness project gained most of the publicity - and additional federal funds - the sectoral and market strategies reaped results for the Venture Centre almost immediately.

By the time the official opening of the Centre was held in June 1986, three months after construction was completed, the first tenant was in place. Viking Stone filled a local market niche in the manufacture of artificial stone products for house and building decoration. Such relatively low-value added, heavy products were expensive to transport, providing the local manufacturer - enjoying subsidised rental - an immediate competitive advantage over imported products. A similar advantage was gained by another local firm to start up in the facility, West Newfoundland Marble. This firm manufactured and installed marble counters and washroom basins, which were more expensive to import in pre-assembled form. As a local manufacturer, it was also able to tailor products to specific customer requirements.

A local market niche was also filled by a meat processing company using local inputs and catering to local tastes. With Pardy's assistance, Country Meats initially targeted salt beef production, a traditional Newfoundland meal which had previously been manufactured in Eastern Newfoundland only. Once established, the firm produced sausages and other meat products, building a reputation as a quality local producer. The meat processor was soon Joined by two small seafood processing companies, using local inputs in the manufacture of ready to-serve seafood dishes.

While most of these firms met the Venture Centre's manufacturing and sectoral criteria and targets, wherever they catered to local markets - rather than producing for export - they displaced products manufactured elsewhere in Newfoundland. For the local economy this was without doubt a positive example of import substitution. For provincial economic development officials, however, it did not represent a net gain, as the Humber Valley's gain was another region's loss - usually the relatively prosperous St John's area. Promotion of manufacturing to cater to local niche markets was clearly an 'economic development niche' best filled by local groups such as the Pasadena Economic Development Committee.

The largest and best publicized firm to enter the Venture Centre was less dependent on local markets, but it competed with a pre-existing firm in St John's. To make matters worse - in the eyes of provincial government officials - the firm came from outside the province, and was attracted by the incubator's low-cost industrial workspace and shared facilities. Newfoundland Polybag, a manufacturer of polyethylene film and bags, was owned by a Chinese investor who operated a similar company in Ontario. Pardy had interested him in locating in the Venture Centre during one of the Centre's seminars on potential plastic industries for the region. While inward investment was not one of Pardy's stated goals, a manufacturer meeting one of the Economic Development Committee's sectoral targets who would employ over twenty people was too good to refuse.

Indeed, within two years of its opening, the Venture Centre needed to expand to keep up with its growing list of tenants. Newfoundland Polybag, in particular, required more space, so in 1988 the Town of Pasadena applied to the Atlantic Canada Opportunities Agency (ACOA) - DRIE's small business-oriented successor - for funding to build an annex. Indicating the provincial government's lack of interest (exacerbated during a period when federal-provincial relations were strained by a dispute over offshore oil Jurisdiction), the municipality bought the land, ACOA provided $ 850,000 for construction, and the annex became the property of the Town of Pasadena.

Despite this apparent success, the Venture Centre failed to actually incubate firms to the point where they were ready to go it alone. In fact, the facility had the opposite effect of establishing co-operative relations between some of the co-tenants, which likely militated against a desire to move to another location. The daily contact between managers and employees of different firms resulting from close physical proximity, led to emerging inter-firm linkages and product innovations. Country Meats and one of the fish processors soon developed a new product by combining their production knowledge - fish sausages Both firms also established linkages with Newfoundland Polybag.

The polyethylene manufacturer worked with the smaller firms in developing packaging suited to their specific needs, providing them with cost savings in packaging and improved product presentation for marketing purposes.

As mentioned above, some incubators attempted to foster such synergies and innovation by targeting specific types of firms to share facilities. In Pasadena's case, it was more a fortunate byproduct of the sectoral strategy adopted by the Economic Development Committee. In time, such symbiotic relations could result in product and process innovations which lead to the emergence of a regional economic specialization and competitive advantage for local firms. Unfortunately for the Humber Valley Region, such was not the case with the Pasadena Venture Centre.

Incubation or Permanent Subsidization?

Despite the Pasadena Economic Development Committee's explicit intentions, the Venture Centre did not succeed in setting independent offspring on their way within the four years of subsidized rental. The positive synergies occurring between some of the facility's tenants were not sufficient to counterbalance the fact that they were operating in a period of economic stagnation and industrial restructuring.

General economic constraints were compounded by design and organizational limitations within the Venture Centre. The federal Department of Public Works had provided the architectural design for the facility based on larger manufacturing spaces in urban centres. Small tenants found heating costs excessive due to high ceilings. When they fell behind on their rent, it was the Newfoundland and Labrador Housing Corporation who served as a distant landlord, not the Venture Centre staff or Economic Development Committee. Pardy claimed that the Venture Centre often did not find out that a tenant was behind on rent until the tenant received an eviction notice.

Pardy extended the period of subsidized rentals, at the various levels, longer than stipulated to cushion the 'growing pains' of the firms in the facility. He recognized that the Venture Centre was unlikely to become economically self-sustaining if it was to continue to provide subsidized rentals, Joint services and business consulting The Town of Pasadena could not afford to subsidize the operation from its existing tax base, but as long as the Venture Centre could be 'a net generator of funds for the Town' - by attracting additional federal funding - its operation would not be in jeopardy. Funds raised through the entrepreneurial awareness projects, in particular, meant that DRIE's original operational funds could absorb higher subsidies.

By the spring of 1989, however, the DRIE operational funds were due to expire, and with them Pardy's own position as Manager of the Venture Centre was in question. The provincial Department of Development, which had resumed management committee meetings from January 1988, agreed to provide the necessary operational funds on an interim basis, while a new provincial government agency was being established which would take over responsibility for regional development initiatives in the province. Enterprise Newfoundland and Labrador (ENL) was a crown corporation established by the provincial government by amalgamating several departmental development agencies and divisions, with an existing crown corporation. Whether EML would be any more supportive of the Venture Centre than the Department of Development remained to be seen.

Complicating matters even further for the Pasadena Economic Development Committee during this period of flux was the imminent demise of Newfoundland Polybag, the Venture Centre's largest tenant. The foreign-owned firm had experienced difficulties getting some of its equipment approved by a national safety standards body. Combined with this, the firm's employees in Newfoundland had just voted in favour of union certification, diminishing the foreign investor's commitment to the Newfoundland plant. All this was compounded by a downturn in sales due to the Atlantic fisheries crisis and the economic stagnation which lingered in Atlantic Canada.

The second component of the entrepreneurial awareness project - funded by the federal Department of Employment and Immigration and ACOA - would keep Pardy and a staff of four occupied until the end of 1990, but then the issue of funding would finally come home to roost. Pardy advised the Development Committee that he had reached an agreement with ACOA to move to Halifax in December 1990, as their Regional Director of Community Development. The Committee, and the Town Council, realized that Pardy's innovative development initiatives and creative fund raising would be difficult to replace.

With the annex now about to be vacated by Newfoundland Polybag, and some of the spaces in the original building vacated by firms which had already ceased operations, the Pasadena Economic Development Committee had to face some difficult choices. To maintain revenues, subsidized rentals had to be reduced, yet by doing so existing firms might not survive. If the manufacturing orientation was relaxed, service sector firms might be attracted, but this could undermine the potential synergies which had evolved between some of the original tenants. A. Comer Brook physiotherapist was interested in moving into one of the vacant office spaces, and three firms were enquiring about the use of workshop space for storage - at full market rental rates. How could an industrial incubator justify such operations in a publicly-funded facility? How could a locally-based committee best utilize the Venture Centre for small business development in a time of fiscal restraint? And did they need an innovative community entrepreneur like Pardy, or could a committee of volunteers meet these challenges?

Exhibit 1

The Humber Valley

Exhibit 2

The Venture Centre Layout