Frequently
Asked Questions about Business Incubation
What
are business incubators?
Business
incubators nurture the development of entrepreneurial companies, helping them
survive and grow during the start-up period, when they are most vulnerable. These
programs provide their client companies with business support services and resources
tailored to young firms. The most common goals of incubation programs are creating
jobs in a community, enhancing a community's entrepreneurial climate, retaining
businesses in a community, building or accelerating growth in a local industry,
and diversifying local economies.
How
do business incubators differ from business accelerators?
There are generally
5 recognizable stages in a company's growth: 1) Idea; 2) Product; 3) Paying Customers;
4) Operations & Scaling and 5) Creating Enterprise Value. A Business Incubator
develops companies at the Idea stage (1) while a Business Accelerator starts at
the Product stage (2). North Fulton's Business Accelerator is focused on companies
once their idea is developed into a product. Please remember that product could
be a service because service is usually recognized as a product.
Is
business incubation a new industry?
No. The term "business incubator"
gained popularity in the media with the explosion and subsequent demise of so-called
Internet incubators between 1999 and 2001, but the business incubation model traces
its beginnings to the late 1950s.
How
many business incubators are there?
As of October 2006, there were over
1,400 incubators in North America, up from only 12 in 1980. Of those, 1,115 were
in the United States, 191 were in Mexico and 120 were in Canada. NBIA estimates
that there are about 5,000 business incubators worldwide. The incubation model
has been adapted to meet a variety of needs, from fostering commercialization
of university technologies to increasing employment in economically distressed
communities to serving as an investment vehicle.
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What
are the different types of business incubators?
Incubation programs come
in many shapes and sizes and serve a variety of communities and markets:
Most
North American business incubators (about 90 percent) are nonprofit organizations
focused on economic development. About 10 percent of North American incubators
are for-profit entities, usually set up to obtain returns on shareholders investments.
- 47
percent are "mixed-use," assisting a range of early-stage companies.
- 37
percent focus on technology businesses.
- 7
percent serve manufacturing firms.
- 6
percent focus on service businesses.
- 3
percent concentrate on community-revitalization projects or serve niche markets.
- 44 percent of business incubators draw their clients from urban areas, 31 percent from rural areas and 16 percent from suburban areas. Nearly a tenth (9 percent) of all programs draw clients from outside their region or from outside the United States.
Who
sponsors business incubators?
Incubator sponsors - organizations or individuals
who support an incubation program financially - may serve as an incubator's parent
or host organization or may simply make financial contributions to the incubator.
" About 25 percent of North American business incubators are sponsored
by academic institutions.
" 16 percent are sponsored by government entities.
"
15 percent are sponsored by economic development organizations.
" 10
percent are sponsored by for-profit entities.
" 10 percent are sponsored
by other types of organizations.
" About 5 percent of business incubators
are "hybrids" with more than one sponsor.
" 19 percent of incubators
have no sponsor or host organization.
What
makes a business incubator successful?
To lay the groundwork for a successful
incubation program, incubator developers must first invest time and money in a
feasibility study. An effective feasibility study will help determine whether
the proposed project has a solid market, a sound financial base and strong community
support - all critical factors in an incubator's success. Once established, model
business incubation programs commit to industry best practices such as structuring
for financial sustainability, recruiting and appropriately compensating management
with company-growing skills, building an effective board of directors, and placing
the greatest emphasis on client assistance.
How
do incubators help start-ups get funding?
Incubators help client companies
secure capital in a number of ways:
- Managing
in-house and revolving loan and microloan funds
- Connecting
companies with angel investors (high-net-worth individual investors)
- Working
with companies to perfect venture capital presentations and connecting them to
venture capitalists
- Assisting companies in applying for loans
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How
do incubators contribute to local and regional economies?
Incubator graduates
create jobs, revitalize neighborhoods and commercialize new technologies, thus
strengthening local, regional and even national economies.
- NBIA
estimates that North American incubator client and graduate companies have created
about half a million jobs since 1980. That is enough jobs to employ every person
living in Denver, Colo.
- Every
50 jobs created by an incubator client generate approximately 25 more jobs in
the same community.
- In
2001 alone, North American incubators assisted more than 35,000 start-up companies
that provided full-time employment for nearly 82,000 workers and generated annual
revenue of more than $7 billion.
- Business incubators reduce the risk of small business failures. Historically, NBIA member incubators have reported that 87 percent of all firms that have graduated from their incubators are still in business.
Why
are business incubators worthy of government subsidies?
Government subsidies
for well-managed business incubation programs represent strong investments in
local and regional economies. Consider these returns:
- Research
has shown that for every $1 of estimated public operating subsidy provided the
incubator, clients and graduates of NBIA member incubators generate approximately
$30 in local tax revenue alone.
- NBIA
members have reported that 84 percent of incubator graduates stay in their communities
and continue to provide a return to their investors.
- Publicly supported incubators create jobs at a cost of about $1,100 each, whereas other publicly supported job creation mechanisms cost more than $10,000 per job created.
Do
business incubators that receive local funding and/or tax abatements compete unfairly
with local landlords?
No. Business incubators actually contribute to the
long-term viability of the local real estate market. Incubation programs graduate
strong and self-supporting companies into their communities, where these companies
build, purchase or rent space. Because incubated companies are more likely to
succeed than nonincubated firms, landlords of incubator graduates face far less
risk than they otherwise would. Also, while they're in the start-up phase, incubator
client companies can obtain flexible space and leases that are more appropriate
to their stage of growth than they could on the commercial market.
How
do business incubators differ from research parks?
Research parks (sometimes
called science parks or technology parks) are property-based ventures consisting
of research and development facilities for technology- and science-based companies.
Research parks often promote community economic development and technology transfer.
They tend to be larger-scale projects than business incubators, often spanning
many acres or miles. Research parks house everything from corporate, government,
and university labs to big and small companies. Unlike business incubators, research
parks do not offer comprehensive programs of business assistance. However, an
important component of some research parks is a business incubator focused on
early-stage companies.
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How
do business incubators differ from SBDCs?
The U.S. Small Business Administration
administers the Small Business Development Center (SBDC) program to provide general
business assistance to current and prospective small business owners. SBDCs (and
similar programs) differ from business incubators in that they do not specifically
target early-stage companies; they often serve small businesses at any stage of
development. Some business incubators partner and share management with SBDCs
to avoid duplicating business assistance services in a region.
How
do communities
decide if business incubators are "value-added" services?
State and local policy makers must choose appropriate economic development strategies for their communities. To make informed choices, they must compare the relative impacts of an array of development strategies.
It is possible, based on the impact analysis completed for the Decator, IL and Hutchinson, KS incubators, to compare the cost of creating jobs through the incubator to the cost per job associated with the recruitment of major manufacturing plants-a primary focus of most state economic development programs. In a review of several industrial locations involving automobile manufacturing plants, the Study found that the cost per job created ranged from a low of $11,000 at the Nissan plant in Smyra, TN, to a high of $50,588 in the Subaru-Isuzu plant in Lafayette, IN.2
The cost per job created in the Decator, IL incubator, over its seven years of operation, was $6,580, considering only the 319 direct jobs created by the incubator, as was done in the industrial recruitment study. In Hutchinson, KS, 50 jobs were created over seven years at a cost of $8,400 per job.
Although these figures cannot be generalized to all communities, the comparison suggests how the costs of job creation through a successful incubator compare favorably to those associated with the successful recruitment of a major manufacturer.
Other
than the NBIA research, what research has been done and what has it shown?
A
study by the University of Michigan Business School of 50 business incubation
programs found that:
- Incubated
firms help create many new jobs. Incubators reported that in 1996 each firm, on
average, created 13 jobs.
- The
estimated public subsidy cost per job created was $1,109.
- Business
incubation programs produce graduate firms with high survival rates. Eighty-seven
percent of firms that graduated from their programs since inception5 were still
in business in 1996.
- An
average of 84 percent of graduating firms remain in their local communities.
- Incubation
contributes to a client firm's success and expands the community's entrepreneurial
resources. Sixty-six percent of incubated firms rated the incubator as important
or very important to their success.
- Community stakeholders and incubator managers unanimously rated incubators as effective in improving community and neighborhood image. They reported that incubators made positive impacts beyond direct incubator activity. These included retaining healthy businesses in the community, strengthening opportunities for student jobs and internships, and enhancing the area's business climate.
In 2005, the Business Incubator Center in Grand Junction, Colorado, supported 44 Client Companies that created 158 jobs and generated $17 million in revenue.
Appalachian Regional Incubators have graduated almost 1,300 businesses. Since portions of 12 states and West Virginia lie within the ARC service area, this represents an average of almost 100 companies per state that have left the incubators and established permanent operations. Additionally, survey results indicate that Appalachian incubators have created almost 25,000 jobs through their graduated tenants as well as through companies they are currently housing. This is an average of 344 jobs per incubator, or almost 1,900 jobs per state.
Based on estimated employment multipliers, an approximation of the number of additional, indirect jobs created by the Appalachian incubators in this survey, a weighted average employment multiplier of 1.55 suggests an additional 13,450 jobs have been created indirectly by the Appalachian incubators, for a total job creation of almost 38,000 jobs in the ARC Region. This translates into an average of 534 jobs created per incubator, or more than 2,900 jobs created in each state in the ARC Region. It should be noted that these are understated estimates of total job creation, as the employment multiplier considers only indirect jobs created within the immediate geographic area of the incubator, and does not include jobs created in more distant communities.
Source:
Information from the NBIA (National Business Incubator Association)
www.nbia.org
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