04 Oct So You Think You Want An Incubator
Business incubators are a popular target for communities working to boost activity for entrepreneurs, startups and small businesses. The concept has a proven track record and can be applied to virtually any type of industry in communities of all shapes and sizes. Because they typically have a bricks-and-mortar component, they are also popular projects for foundations and other granting entities that prefer concrete measures of successful program implementation. Additionally, virtually every community has some form of vacant or underutilized space just crying out for a tenant, as well as any number of small and struggling businesses.
If your community is considering entering the entrepreneurship realm, there are a few elements which should be considered up front that will significantly influence the type and success of the ultimate program. These startup considerations include market demand, facility needs and ongoing operational support. Many of these aspects can be determined by working with local agencies, but others may require outside assistance to test market feasibility, structural suitability and development of sustainable longer-term capital and operating plans.
To identify and effectively serve the local entrepreneurial population, the first step is to identify and quantify individual groups which make up this demand. Many communities feel that they know their small business population, but many targeted individuals and groups operate outside of the existing business network. Research by the Small Business Administration (SBA) indicates that nationally, 5 percent of employment is attributed to emerging companies, or those with 1-4 employees. These are the businesses typically targeted by incubators. However the same 2009 SBA study found that an additional 15 percent of workers are actively doing business as non-employer firms, which many times present opportunities for growth that are just as real as the ‘emerging firms’. These numbers hold true for urban and rural areas alike, with rural areas typically possessing more non-employer businesses than urban areas. Therefore, determining market demand for an incubator involves more than just counting the number of small businesses and business startups in a community.
The industry type and life stage of businesses which are likely candidates are also key drivers of market demand, and will influence the type of space needed. In the simplest sense, industrial spaces are very different from office spaces, which are different from artist lofts or tech spaces. One space that tries to accommodate all types of businesses isn’t likely to serve any of them well. Key elements of a market demand study include a detailed understanding of the local trade area and laborshed, an identification of existing industry clusters, new business creation in individual industries, degrees and patents awarded in the trade area, and an assessment of local workforce skills. A thorough analysis will incorporate not only trade area data but also interviews with key individuals in the business, economic development and education trades to identify common local barriers to small business success. The appeal of incubators is in large part due to the ability to facilitate discussion and idea sharing among like-minded individuals facing common situations. Creating an environment which targets a specific set of individuals and effectively encourages networking among tenants is more likely to drive this shared success. The many names for incubator-type facilities, including hacker space, co-working, innovation centers, etc., are based on this need to market to targeted audiences within the community for whom services are specifically designed.
Depending on the type of industry identified by the feasibility study, companies will have unique space and infrastructure needs. An incubator must be designed to meet these needs in a cost effective manner in order to have relevance to the target businesses. While the role of an incubator is not just to offer subsidized space for businesses, the ability to meet some capital-intensive needs through shared service arrangements is a compelling argument for locating in an incubator facility. The two top costs for nearly all businesses are human capital and real estate. By allowing businesses to share administrative support (accounting, receptionist, marketing) and common real estate (copy room, conference room, loading bay), incubators can offer dramatic cost savings. By further focusing on unique needs of the industries present, this benefit can be expanded – for instance, offering prototyping or laboratory equipment for advanced manufacturing space, regulatory or intellectual property assistance for high tech, bioscience or other emerging fields. This focus can result in highly specialized space, such as kitchen incubators, but more frequently helps inform design of the incubator to accommodate space build-out that meets specific size and amenity needs of the target population while also incorporating the flexibility to adapt to tenant growth requirements and emerging trends.
There are generally three key knowledge areas that entrepreneurs must tackle in order to grow a successful business. These core competencies include industry, finance and marketing. Of course, there are many other intangible and personal qualifications, but the three competencies represent core areas that can impinge growth potential at various stages in the business development process. Entrepreneurs typically have significant talent in one, or perhaps two of these areas which have provided early stage success, but could benefit from assistance in other areas. Building on these platforms for operational assistance as part of the team is essential to building capacity within tenant companies and achieving the goal of the incubator, which is to grow businesses. The need for this type of expertise and assistance is the reason that many incubators are co-housed with workforce centers, economic development offices or other entities in order to capitalize on existing knowledge bases.
Identifying partners within each of these knowledge buckets is a critical planning aspect. It can also provide significant financial benefits, as each organization has its own timing, mission, goals and funding sources, which can be brought to bear on the project if identified during the planning stage. Feasibility studies should always include an outreach component which is geared toward identifying and accommodating the needs of these strategic partners. The second component of operational planning is the development of a long-term operation plan and budget. As is the case for all businesses, operational funding is much more difficult to obtain than startup or capital assistance. While incubators typically provide some type of subsidy for businesses during the start-up period, the comprehensive business model needs to identify ways to grow revenue as well as companies. One method is to offer saleable services to program graduates or other companies, whether through a seminar structure or virtual incubator model.
As you can see from this overview, building or retrofitting a building is in many ways the simplest component of incubator planning. Ultimately, it will be the long-term operating strategies and partnerships developed during this planning phase which will ensure that the physical space not only supports startup activities but also fosters ongoing business growth and expansion are key to translating a culture of entrepreneurship into the community as a whole. This planning and feasibility study period may take six months or more to complete, but will ultimately result in a more targeted, more efficient and more saleable program which meets the needs of the local entrepreneurial population in a meaningful way.