Starting & Developing a Successful Incubator

Jim Greenwood, PresidentGreenwood Consulting Group, Inc.

Sanibel, Floridagail-jim@g-jgreenwood.com

www.g-jgreenwood.com

Copyright © 2012 by Greenwood Consulting Group, Inc.

Factors for Start-up Success

Consider 6 factors1. Is the market adequate?2. Is there stakeholder/community support & a

champion?3. Is there a suitable location?4. Can the incubator provide key services needed

by entrepreneurs?5. Is the development cost reasonable, and can we

identify funding sources?6. Can the incubator be financially self

sustainable?

1. Is the market adequate?

• Without an adequate market, the incubator will fail

• Adequate=– Large enough– Compatible– Willing to pay– Interested in incubator environment

1. Is the market adequate?

• Recommendation: do market survey– Collect relevant data

Industry Stage of developmentService needs Location preferencesInterest in becoming incubator tenant or service user

– Disseminate widely– Post on internet and mail out paper copies– Make it easy to complete– Include contact information for the respondent

1. Is there an adequate market?

• Consider incubator tenants & service users in 4 categories

Creation of new businesses

Attraction of firms from elsewhere

Retention of existing local firms*

Expansion of existing local firms

*including those going through downsizing

1. Is there an adequate market?

• Importance of CARE– If you only consider new businesses, you will • Underestimate the market for your incubator• Reduce its potential impact

And therefore diminish the incubator’s chances of success

2. Is there stakeholder/community support & a champion?

• Stakeholder contributes money, building, tenant services, credibility

• Community is the general population– Stakeholder support more important than community

support• Champion is entity that leads the incubator’s

development & operations– Must be

• Willing• Capable• Accepted by stakeholders

3. Is there a suitable location?

• Don’t overemphasize the building– Incubator is more than a multi-tenant facility– Entrepreneurs should focus on growing

businesses, not on their office space– U.S.: Managers traditionally spend too much time

on facility, and not enough on services to clients

3. Is there a suitable location?

• Don’t underemphasize the building– It is your largest financial commitment– If you pick the wrong one, it will be your downfall• Common mistakes: too small, too little leasable space,

wrong location, wrong kind of space– If you do not pay attention to it, it will be your

downfall– It is the visible sign of your incubation program:

make a good impression with potential tenants, stakeholders & community

4. Can the incubator provide services needed by entrepreneurs?

• Do not duplicate services that others are providing to entrepreneurs if they are– Competent– Affordable– Accessible

• Such competition is wasteful, reduces support for the incubator, reduces incubator’s impact

4. Can the incubator provide services needed by entrepreneurs?

• Identify services not provided by others– Or not provided competently, affordably, accessibly

• Key source of information on needed services?– The market survey

• Other ways to identify needed services– Interview bankers, attorneys, business leaders– Identify gaps in existing service offerings

• Example: Lending small amounts for short terms to entrepreneurs without a credit history

4. Can the incubator provide services needed by entrepreneurs?

• Focus on services that the incubator can provide– Competently– Affordably– Accessibly

without bankrupting the incubator program

4. Can the incubator provide services needed by entrepreneurs?

• Provide services needed by the market served by the incubator

• Examples– Shared kitchen for food producers– Loan fund for undercapitalized entrepreneurs– Patent attorney for high tech companies

5. Is the development cost reasonable, and can we identify funding sources?• Development costs– Purchase of land or building– Construction of new building– Renovation of existing building– Equipping & furnishing common areas

• Reception area• Conference room• Work room• Lunch room

– Anticipated operating deficits before incubator reaches break even

5. Is the development cost reasonable, and can we identify funding sources?• Why include anticipated operating deficits in

development cost?– If you raise this money up front, then incubator focuses on

tenants and services when it opens– If you don’t raise it up front, then incubator must focus on

raising it after start up, when it should be concentrating on tenants and services

5. Is the development cost reasonable, and can we identify funding sources?• Identify potential funding sources

– Grants• Federal, state, local government• Foundations• Corporations• Other: _____________________

– Loans• Bank, consortium of banks• Local government through “bonding”• Building sellers• Private parties• Other: ______________________

– Donations• Furniture & equipment from banks, corporations• Use of vacant building at no charge by owners, universities, government• Free/reduced cost services from architects, engineers, construction

contractors • Other: ______________________

5. Is the development cost reasonable, and can we identify funding sources?• Expect to use multiple funding sources

• Be creative: no 2 incubators are funded alike

• Don’t avoid loans if you can afford the payments

• Look for special opportunities– If a local firm is going out-of-business or moving out-

of-town, ask them to donate their old building to the incubator as “atonement for sin”

• Consider naming incubator or an office or the conference room for a big donor

6. Can the incubator become financially self sustainable in its operations?

• Self sustainable: incubator’s revenues ≥ operating costs

• Why is it desirable?– Stakeholders don’t want to cover perpetual subsidies– Incubator should focus on tenant services, not on

raising subsidy money– Be a good role model: your tenants can’t survive if

they can’t cover their operating costs

6. Can the incubator become financially self sustainable in its operations?

• Is it possible to be self sustainable?– Yes, if you focus on:

1. Charge market rate rent (incubators are not cheap space) 2. Collect rent like a “real” landlord3. Keep operating costs under control (esp. # of staffers)4. Choose a financially viable building

– Large enough– At least 75% leasable space– Not a high energy consumer– Not requiring constant repairs

5. Identify profitable services the incubator can provide6. Include affiliates who pay monthly fees7. Don’t take on too much debt

6. Can the incubator become financially self sustainable in its operations?

• Is it possible to be self sustainable?– Even if you can’t achieve it, strive to be as self

sustainable as possible

– Ideal: be self sustainable, but still accept “soft” money to do special programs and projects• If the “soft” money goes away, then it doesn’t

jeopardize the viability of your incubator

EVOLUTION OF A SUCCESSFUL INCUBATOR

Major Steps in Developing a Successful Incubator

1. Decide small & start-up businesses are key to your economic development goals– If you have no goals, then formulate those first

• Why do you want to change your local economy?• What are you trying to emphasize (diversification, job

creation, wealth creation, tech transfer)?2. Convene key stakeholders to decide how to help

small & start up businesses– An incubator might be one thing that would help– Develop a comprehensive program of support, with the incubator being

one component3. Conduct a feasibility study

– Answer the question “will an incubator be successful in our community?”– Focus on the 6 success factors discussed above

4. Prepare a business plan– Answer the question “now that we know the incubator is feasible, how

do we develop and operate it?”

Major Steps in Developing a Successful Incubator

5. Secure financing– A sound feasibility study & business plan will be key

6. Find & secure the building– See discussion above on what to look for

7. Secure tenants, establish services– Market survey in feasibility study will be key

• Names, contact information of potential tenants• Services that they want at the incubator• Location that they prefer

8. Open the doors– Begin operations, admit tenants before the grand opening– Make it a significant media event

Major Steps in Developing a Successful Incubator

9. Make adjustments as necessary– Tweak pricing, services, thermostats, etc

10. Monitor progress of incubator & clients– See my session on Tuesday afternoon for ideas

11. Make adjustments as necessary– Continue to tweak if progress is significantly behind the goals

12. Make changes as conditions change (economy, econ devel goals, modern business practices, emerging opportunities, etc.)– The incubator must evolve as business practices do– Constantly seek better ways of doing things, new ways to

serve your tenants and community

• Questions??