Incubator Finances

This incubator’s planning and budgeting processes are based on realistic assumptions and long-term projections. [View]

This incubator’s budgets are reviewed each month against actual revenues and expenditures. [View]

This incubator is financially self-sustaining or has mapped a path to self-sustainability. [View]

This incubator charges appropriately for its service and space offerings. [View]

This incubator’s financial records are audited annually by an independent auditor or other independent third party (university internal audit, board finance committee, etc.). [View]

The incubator’s sponsors and supporters are capable of ensuring its continued operation and effectiveness. [View]

The incubator collects amounts due from its clients, has mechanisms for dealing with slow payment or nonpayment, and consistently uses those mechanisms. [View]

This incubator’s planning and budgeting processes are based on realistic assumptions and long-term projections.

A basic principle of business incubation is that an incubator be a “dynamic model of a sustainable, efficient business operation.” The reason for this principle goes beyond the need to set a positive example for client companies. Financial self-sustainability is essential to an incubation program’s long-term survival; to its ability to grow strong, lasting companies; and to its ability to have a significant positive impact on its community. What’s more, a self-sustaining incubator enables staff to focus on growing new companies and implementing new ideas rather than worrying about finding the cash to pay next month’s electric bill.

In order to uphold this principle, an incubation program must “structure for financial sustainability by developing and implementing a realistic business plan,” a concept NBIA recognizes as an industry best practice. A reliable business plan provides the framework for implementing a consistent budgeting process, using sound accounting methods, continuously monitoring each of these procedures, and making adjustments when necessary. Senior staff should review an incubator’s business plan annually, making sure that financial projections fall in line with the realities of the incubator’s daily operations.

Most incubation programs rely on rental fees as a primary source of revenue, so making educated assumptions about rental income (based on a valid feasibility study and market research) is vital to programs’ financial health. This means determining demand for space, how much space to rent to each client, and what rates to charge. When establishing rental rates, it’s important to remember that below-market rates might help attract clients in the short term but can backfire in the long run. For example, if a key sponsor or subsidy falls through, the incubator might be forced to raise rates and thereby risk losing clients. With this in mind, an incubation program should position itself as a supportive environment in which to grow a successful business rather than a space offering cheap rent.

In addition to rental income, an incubator’s sources of revenue might include fees for services, support from sponsors, and equity or royalty agreements with client companies. Ideally, a program that structures for self-sustainability will reach a point where it no longer needs sponsor support to cover operating expenses (real estate and capital expenditures, administrative costs, staff salaries, etc.). However, sponsors may continue to provide financial support that enables a program to improve or increase its services to clients.

Excerpted from Cammarata, Kathleen, Self-Evaluation Workbook for Business Incubators, NBIA Publications, 2003, p. 42. (Available from the NBIA Bookstore.)

NBIA defines financial self-sustainability as an incubator’s ability to cover expenses with predictable, reliable sources of funding. A self-sustainable incubator generates income that contributes to its operational budget; does not depend on a single source of external support; and makes sure that outside funding it receives is either reliable or replaceable. Some incubation programs take the concept a step further and make it a goal to cover all expenses from their own operations (known as “financial self-sufficiency”).

“Incubators should strive to find multiple funding sources,” says Carol Kraus Lauffer, a principal in consulting firm Business Cluster Development in Menlo Park, California. “It’s like a portfolio theory in finance – you wouldn’t put all of your investments into a single stock.” Jim Robbins, also a principal at BCD and an incubator manager, suggests an incubator should have six to ten revenue streams, which might include rents and service fees, income from contracts, cash operating subsidies or sponsorships, and investment income. The bottom line is: Best practice incubators operate like businesses as much as possible, and the less long-term dependence on financial subsidy, the better.

A subsidy is a significant cash or in-kind infusion from a single source (typically a government entity) unrelated to performance of a specific incubator initiative. The expectation is that the incubator will rely on the funding for a period of time and then move to other sources. The distinction of whether or not income is tied to performance of a specific initiative is key because when a subsidy is not tied to performance it is more like a gift and is reliant upon the good will of the granting agency. (As opposed to a performance-based arrangement, such as an incubator being compensated for business assistance services it is providing via contract.)

Incubation programs that operate as a program of a larger organization (for example, a university or county economic development organization), in particular, sometimes receive cash or in-kind subsidies for expenses including personnel, rent, or building maintenance. Jim Greenwood, president of Greenwood Consulting Group in Sanibel, Florida, and a former incubator manager, says these subsidies allow the programs to operate with much less overhead but can be dangerous when political winds change because they could be terminated at any time for political or other reasons. More than one university has seen a successful incubation program go down the tubes because a new president chooses to make sweeping changes in university priorities.

Chuck Wolfe of consulting firm Claggett Wolfe Associates of Auburn, California, says a possibility for avoiding such problems in a university setting is to establish an “arm’s length” relationship between the incubator and its university sponsor. Although the university ties can still remain close, an incubator might operate under the umbrella of a university foundation or technology park, as opposed to being an actual program of the university. This arrangement can help an incubator “avoid changes in focus or reliance on an institution whose primary mission is not new venture formation and growth.” Additionally, Lauffer says that all incubators, including those that rely upon significant support from a single funder (university, government, or otherwise), need to seek other sources of revenue. “They always need to be prepared for the chance that their major funding source will withdraw its funding,” she says.

Most incubators will require some amount of subsidy for at least a few years and perhaps many years, because most are not able to support themselves with fees collected from rent and services alone. “If a plan for sustainability is being followed, there is nothing inherently wrong with a seven-year plan versus a three-year plan,” Robbins says, noting that most businesses and nonprofits operate in the red at start-up and need some sort of investment or loan to keep them going. “The key is to have a plan for sustainability that doesn’t take too long and to execute that plan.”

NBIA’s 2002 State of the Business Incubation Industry report found that more than 70 percent of respondents’ business incubation programs were receiving some form of subsidy. However, only 23 percent of respondents believed they would have to close their doors if their subsidy ceased, which indicates that the majority of business incubation programs feel confident about their revenue streams.

Not every nonperformance-based subsidy is dangerous, Robbins says. “For example, donation of a building does not tend to get labeled a ‘bad’ type of subsidy, as long as the building meets the incubator’s needs.” Receiving long-term or permanent free use of a building that is appropriate in terms of size, cost to maintain, location, and other factors can help an incubator get off the ground with no debt load, a key to eventual self-sustainability.

Factors such as facility size, ratio of leasable to nonleasable space, debt load, program age (because it takes time to lease up a building), program type (kitchen incubators, for example, must make significant investments in expensive infrastructure and equipment), amount of space designated as common areas, low differential between incubator rental rates and correlating costs to the incubator, and occupancy levels will determine just how much and just how long subsidies are required.

Excerpted from Boyd, Kathleen, Developing a Business Incubation Program: Insights and Advice for Communities, NBIA Publications, 2006, pp.12-15. (Available from the NBIA Bookstore.)

In setting prices for space and services, consider these questions:

• What value am I providing to current and potential clients?
• What value am I providing to current and potential stakeholders?
• What is the market price for each of the services I provide my clients, and what price is my target clientele willing to pay for them?
• Can I establish sufficient value for my current and potential stakeholders and supporters to secure and sustain their financial support?
• Can I sell services independently or bundle them in more attractive packages to stimulate demand, improve the perceived value to the client, and generate more revenue?
• How can I position these items in the marketplace relative to the actual or perceived competition?

On the other side of financial sustainability are the costs associated with providing the value needed to attain the program’s mission and goals. When considering operating costs, it is important to determine:

• The optimum level of services needed to satisfy clients’ and stakeholders’ perceptions of value.
• Opportunities to reduce the cost of administration or service delivery by leveraging other organizations, other programs, and other individuals.
• Ways to minimize fixed costs and maximize variable costs to lower the program’s break-even point.
• The incubator’s ability to provide sufficient value with the funds available. For example, if a key sponsor or subsidy falls through, the incubator might be forced to raise rates and thereby risk losing clients. This is another reason to position your incubation program as a supportive environment in which to grow a successful business rather than a space offering cheap rent.

In addition to client rents and fees, an incubator’s sources of revenue might include support from sponsors (e.g., private industry, government, colleges and universities), contracts to provide services outside the incubator, and revenue from equity or royalty agreements with client companies. (Caution: Incubators should not build their operating budgets around long-term payments that might be achieved partially through equity agreements. These payments will likely be highly volatile and unpredictable.)

Excerpted from Colbert, Corinne, Dinah Adkins, Chuck Wolfe and Karl LaPan, Best Practices in Action: Guidelines for Implementing First-Class Business Incubation Programs, Revised 2nd Edition, NBIA Publications, 2010, p. 33. Also see in this book: "Finances," "Sustainability," "Co-Location With Compatible Programs," "Leveraging Existing Facilities," "Long-Term Financial Planning" and "Multiple Revenue Streams," pp. 32-34, 36-40. (Available from the NBIA Bookstore.)

For further information on incubator budgeting, see:

• Knopp, Linda, “Saving for a Rainy Day: Prudent Planning Helps Incubators Weather Financial Woes,” NBIA Review, December 2006. This article is available free to members in the NBIA Archives or as a PDF Quick Reference document from the NBIA Bookstore ($5/members; $10/nonmembers).
  
• Weinstein, Stanley. The Complete Guide to Fundraising Management,
3^rd Edition, John Wiley & Sons, 2009.

• Boyd, Justin, “Incubator Cash Flow Management,” A Comprehensive Guide to Business Incubation, Completely Revised 2nd Edition, NBIA Publications, 2004, pp. 128-129. This chapter is available as a Quick Reference PDF document from the NBIA Bookstore ($5/members; $10/nonmembers).
  
• “Ideas for Achieving Self-Sustainability,” A Comprehensive Guide to Business Incubation, Completely Revised 2nd Edition, NBIA Publications, 2004, p. 155. This chapter contains 20 tips for raising revenues and conserving funds. It is available as a Quick Reference PDF document from the NBIA Bookstore ($5/members; $10/nonmembers).
  
• Colbert, Corinne, “Pricing Space and Services – Or, what are you worth?” NBIA Review, October 2005. This article details several incubator pricing models, including below-market rent and free services, below-market rent plus flat service fee, market-rate rents plus program fee, and a single flat fee for space and services, along with the incubator manager’s reasoning or market justifications for each. Examples include technology and mixed-use incubators. It is available free to members in the NBIA Archives or as a PDF Quick Reference document from the NBIA Bookstore ($5/members; $10/nonmembers).

This incubator’s budgets are reviewed each month against actual revenues and expenditures.

Many cash flow problems can be avoided with detailed, disciplined, no-assumptions-made projections and planning, incubator managers say, both for the short term and the long term. This means doing a line-item annual budget, broken down month by month and based on previous fiscal years, with flags on anything that may need adjustment.

Cash flow analysis requires tracking annual and monthly inflows and outflows of cash, as well as being clear about what constitutes a truly reliable source of income, says Lisa Ison, president of the New Century Venture Center (NCVC) in Roanoke, Virginia. Ison says incubator managers should never assume that grants will always be available. “[Look] at your actual line items and possibilities for income that you can generate without using those sources,” she says.

Once an incubator has a line-item, monthly budget in place, it must manage cash flow judiciously so that its day-to-day operations reflect its projections, managers say. To achieve this, managers load their actual inflows and outflows into their accounting program regularly (week-to-week, if not day-to-day) to determine how close their actual financial situation is to what the budget calls for. “We rack our budget daily to make sure that we’re on target,” Ison says.

A critical step toward meeting projections is collecting rents, service fees, and other sources of income on time, says Woody Maggard, director of the University of Buffalo Technology Incubator in Buffalo, New York. “For cash flow, you should be very diligent about collections,” he says. “You can’t have any sloppiness in that area. If somebody’s not paying, you need to get on it right away.

At NCVC, delinquent clients pay a 5 percent penalty for being one day late on their rent and/or service fees, Ison says. “If your monthly rent is $500, then you’re going to pay a $25 late charge,” she says. “After a couple times they get popped with that, they don’t pay late again.”

Excerpted from Boyd, Justin, “Incubator Cash Flow Management,” A Comprehensive Guide to Business Incubation, Completely Revised 2nd Edition, NBIA Publications, 2004, pp. 128-131. This chapter contains more tips for dealing with late-paying clients, raising cash, conserving cash and creating rainy day funds. It is available as a Quick Reference PDF document from the NBIA Bookstore ($5/members; $10/nonmembers).

Of 35 single variables, 10 emerge as the strongest predictors of successful outcomes. They include: (1) manager’s hours; (2) manager’s experience; (3) manager’s time with current program; (4) program revenues; (5) program expenditures; (6) client-to-staff ratio (either as proportion or ranked order); (7) budget controls (quarterly, although sometimes monthly); (8) evaluating the program; and (9) evaluating service providers.

Adapted from Lewis, David A., Elsie Harper-Anderson, and Lawrence A. Molnar, Incubating Success: Incubation Best Practices That Lead to Successful New Ventures, University of Michigan, 2011, p. 65.

For further information on incubator budgeting, see:

• Third Sector New England
  Nonprofit Budget Tips for a Healthy New Year
  Advice for creating a good budget
  

This incubator is financially self-sustaining or has mapped a path to self-sustainability.

A basic principle of business incubation is that an incubator be a “dynamic model of a sustainable, efficient business operation.” The reason for this principle goes beyond the need to set a positive example for client companies. Financial self-sustainability is essential to an incubation program’s long-term survival; to its ability to grow strong, lasting companies; and to its ability to have a significant positive impact on its community. What’s more, a self-sustaining incubator enables staff to focus on growing new companies and implementing new ideas rather than worrying about finding the cash to pay next month’s electric bill.

In order to uphold this principle, an incubation program must “structure for financial sustainability by developing and implementing a realistic business plan,” a concept NBIA recognizes as an industry best practice. A reliable business plan provides the framework for implementing a consistent budgeting process, using sound accounting methods, continuously monitoring each of these procedures, and making adjustments when necessary. Senior staff should review an incubator’s business plan annually, making sure that financial projections fall in line with the realities of the incubator’s daily operations.

Most incubation programs rely on rental fees as a primary source of revenue, so making educated assumptions about rental income (based on a valid feasibility study and market research) is vital to programs’ financial health. This means determining demand for space, how much space to rent to each client, and what rates to charge. When establishing rental rates, it’s important to remember that below-market rates might help attract clients in the short term but can backfire in the long run. For example, if a key sponsor or subsidy falls through, the incubator might be forced to raise rates and thereby risk losing clients. With this in mind, an incubation program should position itself as a supportive environment in which to grow a successful business rather than a space offering cheap rent.

In addition to rental income, an incubator’s sources of revenue might include fees for services, support from sponsors, and equity or royalty agreements with client companies. Ideally, a program that structures for self-sustainability will reach a point where it no longer needs sponsor support to cover operating expenses (real estate and capital expenditures, administrative costs, staff salaries, etc.). However, sponsors may continue to provide financial support that enables a program to improve or increase its services to clients.

Excerpted from Cammarata, Kathleen, Self-Evaluation Workbook for Business Incubators, NBIA Publications, 2003, p. 42. (Available from the NBIA Bookstore.)

NBIA defines financial self-sustainability as an incubator’s ability to cover expenses with predictable, reliable sources of funding. A self-sustainable incubator generates income that contributes to its operational budget; does not depend on a single source of external support; and makes sure that outside funding is either reliable or replaceable. Some incubation programs take the concept a step further and make it a goal to cover all expenses from their own operations (known as “financial self-sufficiency”).

The first step toward financial self-sustainability is securing multiple sources of funding. Some incubation experts recommend having six to ten revenue streams, which might include:

• Rents and service fees
• Income from contracts
• Cash operating subsidies
• Revenues from selling conference room or shared services or sponsorships
• Investment income

While subsidies—significant infusions of cash from a single source unrelated to performance of a specific incubator initiative—are fine, they are typically short-lived because they are not based on a perceived return for the investment. This source of revenue can be helpful during the start-up phases of the program when it is establishing its value, but should not be relied upon as an ongoing source of revenue. If it is the sole or even the majority source of an incubator’s revenue, the program has greatly reduced its opportunities for long-term survival. Most incubators will require some amount of subsidy for a period of time—and perhaps for a long period of time—because they are not able to support themselves with fees collected from rent and services alone. A developing or newly opened incubator may rely on such significant subsidies for a time (say, its first four to seven years), but for long-term stability it must move to other sources of revenue or minimize subsidies so they are like the icing on the cake: a bonus to enhance the program’s core value with new or desirable (but not necessary) services. According to NBIA’s State of the Business Incubation Industry surveys, subsidy as a portion of overall revenues has decreased from 57 percent in 1989 to 15 percent in 2006. In the 2006 survey, 32 percent of North American incubators reported receiving no subsidy at all; only 23 percent said they would have to discontinue operations if their current subsidy disappeared.

Excerpted from Colbert, Corinne, Dinah Adkins, Chuck Wolfe and Karl LaPan, Best Practices in Action: Guidelines for Implementing First-Class Business Incubation Programs, Revised 2nd Edition, NBIA Publications, 2010, pp. 36-37. Also see in this book: "Finances," "Sustainability," "Co-Location With Compatible Programs," "Leveraging Existing Facilities," "Long-Term Financial Planning" and "Multiple Revenue Streams," pp. 32-34, 36-40. (Available from the NBIA Bookstore.)

A strong correlation exists between the size of a business incubation program’s budget (both revenues and expenditures individually) and program success (i.e., larger budget = greater success). Of course, one would anticipate that programs with larger budgets have more capacity to deliver critical services and are more stable. However, it is also important to look at revenue sources and how the incubator uses its resources. This research found that receiving a large portion of revenues from client rent and service fees is positively correlated with outcome measures. On the expenditure side, the more programs invest in staffing and program delivery – relative to building maintenance or debt servicing – the higher the probability of improved client firm outcomes.

Adapted from Lewis, David A., Elsie Harper-Anderson, and Lawrence A. Molnar, Incubating Success: Incubation Best Practices That Lead to Successful New Ventures, University of Michigan, 2011, p. 54.

Longtime business incubation managers describe a financially viable incubator as one that is self-sustaining – on sound financial footing, with predictable, reliable sources of funding. Self-sustainability does not rule out financial support from outside sources, making it an achievable and laudable goal.

There are several reasons self-sustainability is so important for an incubation program. First, structuring for self-sustainability can help an incubator that is still in the development stage make important decisions about its future, says Jim Greenwood, president of Greenwood Consulting Group in Sanibel, Florida, and a former incubator manager. “It will really affect the way that you think about how the incubator ought to work, what it’s going to do, [and] what its finances are going to look like.”

Second, pursuing self-sustainability sets a good example for clients. If incubator managers expect their clients to be financially responsible, they have to act as role models and be financially responsible themselves.

Third, and perhaps most important, achieving self-sustainability reduces an incubator’s vulnerability to the changing attitudes of funders. It helps ensure that an incubator will have a significant and long term impact on its community. An incubation program that’s not self-sustaining risks failure if one or more of its sources of financial support disappears.

L. Lorne Ross, former executive director of the Northern Alberta Business Incubator in St. Albert, Alberta, Canada, believes the key to achieving financial self-sustainability is developing a sound budget and sticking to it. “That’s common sense. You have to see what your revenue streams are, you have to understand what your expenses are, and then you have to create the revenue opportunities to meet any shortfalls,” he says.

But don’t expect to achieve sustainability overnight. For the average incubation program, reaching self-sustainability takes several years, according to Greenwood. He says that in the thirty-plus incubator development projects he’s been involved with around the country,” maybe 10 percent” had cash-flow projections that called for being self-sustainable within one or two years. All the others, he says, set the timeframe in four to seven years out before they were going to achieve that goal.

Excerpted from Cammarata, Kathleen, “Ideas for Achieving Self-Sustainability,” A Comprehensive Guide to Business Incubation, Completely Revised 2nd Edition, NBIA Publications, 2004, p. 155. This chapter contains 20 tips for raising revenues and conserving funds. It is available as a Quick Reference PDF document from the NBIA Bookstore ($5/members; $10/nonmembers).

Despite the recent economic downturn, most incubation programs say they’re on solid financial footing. Only 18 percent of 2012 SOI respondents said they would have to cease operations if they lost their cash operating subsidy, a decrease from the 2006 figure of 23 percent.

Excerpted from Knopp, Linda, 2012 State of the Business Incubation Industry, NBIA Publications, 2012, p. 48. (Available from the NBIA Bookstore.)

For further information on incubator sustainability, see:

• “Strategies for Incubator Sustainability,” an NBIA Webinar available from the NBIA Bookstore ($29/members; $49/nonmembers). The 90-minute program was presented by Carol Kraus Lauffer and Jim Robbins, principals of Business Cluster Development of San Jose, Calif.

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This incubator charges appropriately for its service and space offerings.

When establishing rental rates, it’s important to remember that a best practice incubation program provides significantly more to its clients than just space. The strategy of charging below-market rates might help attract price-conscious clients in the short term, but it can backfire in the long run when rental income is insufficient to cover the costs of providing the business development services that are the true driver of your value proposition. Prospects and clients will compare apples and oranges to the detriment of the incubator because the market rents they are comparing you with don’t include any services. Be sure that prospective clients understand your pricing structure and how it compares with mere real estate rental.

Some programs are moving away from a rent model by establishing prices based on the value of the services offered. In some cases, client rates are broken down into rent and services; in others, the program charges a flat service fee that encompasses both space and services. Such an approach establishes the incubator as a program designed to build and grow businesses—not a real estate operation with benefits.

Excerpted from Colbert, Corinne, Dinah Adkins, Chuck Wolfe and Karl LaPan, Best Practices in Action: Guidelines for Implementing First-Class Business Incubation Programs, Revised 2nd Edition, NBIA Publications, 2010, p. 33. (Available from the NBIA Bookstore.)

A strong correlation exists between the size of a business incubation program’s budget (both revenues and expenditures individually) and program success (i.e., larger budget = greater success). Of course, one would anticipate that programs with larger budgets have more capacity to deliver critical services and are more stable. However, it is also important to look at revenue sources and how the incubator uses its resources. This research found that receiving a large portion of revenues from client rent and service fees is positively correlated with outcome measures. On the expenditure side, the more programs invest in staffing and program delivery – relative to building maintenance or debt servicing – the higher the probability of improved client firm outcomes.

Adapted from Lewis, David A., Elsie Harper-Anderson, and Lawrence A. Molnar, Incubating Success – Incubation Best Practices That Lead to Successful New Ventures, University of Michigan, 2011, p. 54.

Ask around about incubator pricing, and you will hear as many pricing structures as there are incubators. Some charge below-market rents assessed by the square foot. Others set their rents at market rate or above. Some bundle the cost of their services into the rent; others charge a separate fee for services.

The wide range of pricing schemes reflects the wide range of variables involved in setting prices. Do you own your facility, do you rent it or does it belong to your sponsoring institution? Does your incubator staff provide business assistance services, or do you have extensive community partnerships with other organizations that provide those services? And speaking of staff, do you figure their salaries into the incubator’s cost of doing business, or pass those costs on to the clients to cover the cost of providing services?

The sheer number of variables makes it impossible to provide a hard-and-fast formula for setting prices. The only common denominator in incubator pricing may be the local market. “You have to do what fits your market,” says Karl LaPan, president and CEO of the Northeast Indiana Innovation Center in Fort Wayne, Ind. “There’s not a one-size-fits-all solution. You have to understand your economic denominator and reflect the community you serve.”

An incubator feasibility study should include a thorough survey of market rental and service rates. Many managers of established programs also check up on market rates annually or every other year to make sure their prices are in line with the competition’s.

It’s the competition that can make pricing tough – especially when it comes to explaining your rates to prospective clients. Your primary competition generally isn’t another incubator, but commercial real estate offered by private developers and landlords. Of course, those developers and landlords are providing only space, not the business counseling, technical assistance, networking opportunities and range of free or discounted professional services that are part of an incubation program.

“The most common challenge is that incubator clients compare the cost of the incubator with the cost of an office,” says Kim Fisher, director of Prologue International, an incubation consulting firm in San Francisco. “The problem is that the incubator provides so much more. The client will say, ‘Down the street the office costs $2 a square foot. How can you charge me $3 a square foot?’”

The answer, these incubator managers say, is to convince clients that they’re getting value. And that starts by making sure that you understand your own worth.

Excerpted from Colbert, Corinne, “Pricing Space and Services – Or, what are you worth?” NBIA Review, October 2005. This article details several incubator pricing models, including below-market rent and free services, below-market rent plus flat service fee, market-rate rents plus program fee, and a single flat fee for space and services, along with the incubator manager’s reasoning or market justifications for each. Examples include technology and mixed-use incubators. It is available free to members in the NBIA Archives or as a PDF Quick Reference document from the NBIA Bookstore ($5/members; $10/nonmembers).

Incubator pricing will always depend primarily on local market rates and the incubator manager’s ability to convince prospective clients that the space, advisory services, contacts, training and other services provided by the program offer value. While incubators use a variety of pricing models (see above), the prices themselves are still dependent on local market factors, whether for space, advice or other services. For example, if an incubator manager can promise a certain number of hours of direct advisory services and the local value of those services is $150 an hour, that could be the basis for discussions about the incubator’s value-add.

Incubation programs should never accept clients that are looking only for inexpensive space. In fact, incubator managers should provide information about the mission of the program and the services it provides up front and obtain assurances that the client is willing to participate fully in the program. Clients that won’t take advice, are not open to contacts with others, and who don’t participate in incubator networking or other events create morale issues for the incubator. Additionally, they are not likely to promote the incubation program with prospective clients. Incubators should accept only companies that can benefit from the services provided by the incubator. Otherwise, the client is taking up valuable space that could be made available to a company that actually needs services targeted to emerging growth companies.

If the incubator needs additional revenues to be sustainable, a portion of the facility’s square footage could be designated for “anchor tenant” space – space provided to mature companies with no promise of business development assistance. In some cases, even anchor tenants are expected to bring value to the incubator, although in others their only contribution is a stable revenue stream.

Finally, incubator managers should avoid giving free space and services, although fees may start off below market and rise annually until they are above market rates (however, some managers begin by charging above-market for space, particularly laboratory space). Any program aiming for success and expecting to create real community impacts must avoid gaining a reputation for being a hospital for “sick” businesses. If the incubator becomes primarily a charitable organization rather than a program that increases community wealth, it cannot achieve desired impacts and gain the support of the local business community, which is required for success.

An incubator manager who cannot run the incubator like a business, who doesn’t require that rents be paid on a timely basis, or who carries clients who are in arrears without a plan for bringing them up-to-date cannot serve as a role model for fledgling companies. Business incubators are not social service agencies; they are primarily investments in wealth creation by the means of growing sustainable businesses.

Dinah Adkins
NBIA President & CEO

For further information on offering anchor tenant space, see:

• Colbert, Corinne, “Well Anchored – Tips for Working With Anchor Tenants,” NBIA Review, April 2006. This article is available free to members in the NBIA Archives or as a PDF Quick Reference document from the NBIA Bookstore ($5/members; $10/nonmembers).

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This incubator’s financial records are audited annually by an independent auditor or other independent third party (university internal audit, board finance committee, etc.).

This best practice may be not applicable if the incubator’s budget is part of a larger organization’s budget that is audited by an independent auditor, or if all financial matters are run through a larger organization’s financial department (with appropriate checks and balances). However, good management practice dictates that stand-alone incubators should have their balance sheet, income statements and supportive documents audited annually. Obtaining an independent audit provides some indication that the incubator’s board and management are exercising appropriate fiduciary responsibility. And though an audit is no guarantee that everything is in good order, it helps to ensure that accounts are properly maintained.

The accountant’s management letter, provided with the audit report, should indicate if there are issues that should be addressed. Given the small staff of incubators, any auditor would most likely ask for incubator staff to ensure “segregation of duties,” as they pertain to handling the organization’s finances. For example, one individual should be entrusted with receiving and recording payments or income, but another should be responsible for depositing receipts and yet another should sign checks; the latter might even require two signatures on checks over a certain amount. This might mean a receptionist would be delegated the responsibility of receiving and recording checks, the incubator manager or another staffer would make bank deposits, and a board treasurer’s signature might be required on all checks above a certain amount. An auditor might also ask for better accounting of grants, ensure the program is meeting grant guidelines, and make sure that purchase orders or travel receipts are submitted.

Putting in place best practice financial management policies and practices – including obtaining an auditor and a management letter – will contribute to the program’s success and lessen the likelihood of fraudulent activity. Unfortunately, newspapers constantly report stories of embezzlement; this is even more frequently the case in small organizations where too much financial management is entrusted to a single staff person with inadequate oversight. Often in these cases the embezzler is well-liked and trusted by the staff and board. Such individuals often seem trustworthy and yet are able to take advantage of the lack of oversight to wreak havoc on the finances of small companies, nonprofits and charitable organizations.

Dinah Adkins
NBIA President & CEO

A great deal of information can be found on the Web about independent auditors and audit committees, but much of this information, though helpful, is geared toward for-profit corporations, including publicly traded companies. For information about independent audits for nonprofit organizations, search the BoardSource Web site under the topics “independent audit” and “audit committee.” Free, for sale and BoardSource member resources are available. This site also notes that a recent survey found that 92 percent of nonprofit boards hire an independent auditor to perform a regular audit.

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The incubator’s sponsors and supporters are capable of ensuring its continued operation and effectiveness.

Incubation programs that operate as a program of a larger organization (for example, a university or county economic development organization), in particular, sometimes receive cash or in-kind subsidies for expenses, including personnel, rent, or building maintenance. These subsidies allow the programs to operate with much less overhead but can be dangerous when political winds change because they could be terminated at any time for political or other reasons. More than one university has seen a successful incubation program go down the tubes because a new president chooses to make sweeping changes in university priorities.

One way to avoid such problems is to establish an arm’s length relationship between the incubator and its larger sponsor. Although institutional ties can remain close, an incubator might operate under the umbrella of a university foundation or technology park as opposed to being an actual program of the larger institution. Large institutions such as universities, some economic development organizations, and local governments usually have missions that are much bigger than business incubation. For example, the university may see its role primarily in education and research, and a city government will likely prioritize justice, water treatment, and public safety above entrepreneur support. Having the incubator report to a smaller government-funded economic development initiative or a university research foundation or research park—an organization aligned more closely to the same interests as the incubation program—may ensure greater sustainability for the program. Likewise, some incubator sponsors have “spun out” the incubators they created to stand on their own feet, with their own nonprofit status and an independent board of directors for which the incubator itself is its first concern. This strategy could ensure the longevity of a business incubation program during management transitions in the parent institution.

Excerpted from Colbert, Corinne, Dinah Adkins, Chuck Wolfe and Karl LaPan, Best Practices in Action: Guidelines for Implementing First-Class Business Incubation Programs, Revised 2nd Edition, NBIA Publications, 2010, p. 37. (Available from the NBIA Bookstore.)

It is important for the incubator board or other sponsors and supporters to recognize their responsibility for ensuring the program’s success. Many contributors to success are covered elsewhere in the information made available by means of this benchmarking tool. They include maintaining the highest commitment to quality client services, hiring the right management, overseeing the incubator’s financial sustainability, and requiring that the program demonstrate positive impacts.

However, the incubator’s board, sponsors and supporters also should concern themselves with the following strategic issues to ensure that the incubator is able to help companies succeed for years to come:

• If sponsors or supporters are represented on an incubator governing board, they (like staff) are legally bound by fiduciary responsibilities, including duties of care, loyalty and obedience. These responsibilities mean they must act in good faith, with the best interests of the organization in mind and taking care such as a reasonably prudent person would use; give undivided allegiance to the organization (not putting personal interests above the interests of the organization); and act in accordance with the organization’s rules and bylaws. A board that fails to act on its essential responsibilities can doom a business incubation program.
• Sponsors and supporters should consider whether sufficient board policies are in place. For example, does the board conduct a review to determine its relevance to the incubator’s current mission? Do board policies require term limits and rotation of board members? Can board members who don’t participate be replaced? Is conflict of interest appropriately managed? Is the full board committed to the program’s success?
• Sponsors, supporters and board also should have policies in place to cover how management would be replaced in the event of illness, departure or termination. Who has responsibility for reporting the departure of management? Who will be tasked with finding a replacement? Has a process been identified? Is the job description easy to access and up-to-date? Do sponsors or board have a clear understanding of its priorities for hiring a manager? Effective succession planning will ensure future boards can hire appropriate management, capable of meeting the program’s mission.
  
• Sponsors and supporters should examine the incubator’s organizational and reporting structure. For example, does the incubator manager report to another organization's board whose concerns lie with the parent organization? Does he report to a single individual (mayor, dean, university vice president) and is the program without a strong set of champions? If that’s so, it is possible that the larger organization’s board or a supervisor might abruptly withdraw support from the program or let it wither. This loss of support might occur if a new dean or agency head is hired, if a financial crisis requires that decision-makers tighten purse strings, or if a politician sees the incubator as the work of an opposing political party. Incubators need sufficient champions who place high value on the incubation program and will work to ensure its continuance.

Incubator sponsors and supporters who do not have governance responsibilities may still have a strong enough voice to influence a program’s longevity. For example, the incubator manager’s supervisor or main champions could assist in developing a strong community-based advisory board that also represents entrepreneurial interests. They might ask for a reorganization so that the incubation program could report to a different board (perhaps a university research foundation) that might have a more closely allied mission. If the program is inordinately dependent on state subsidies, sponsors could help the manager get the incubator’s finances in order and help seek new revenue streams.

The issue here – regardless of whether a governing board is involved or not – is that incubator organizers, supporters and sponsors should consider the long-term sustainability and continuance of the program and all the factors that could detrimentally impact its longevity. Investing in a program that is insufficiently funded, abruptly cancelled or mismanaged is a waste of resources – of time as well as money, and perhaps also community good will.

Over the years, some high-performing incubators have been shut down or have been greatly diminished by not being structured for the long run. New mayors, new university presidents, new economic development agency chiefs, political issues, attempts to grab funds, changes in incubator management, funding cycle downturns, and poorly performing boards – all have resulted in undermining or destroying quality programs when this shouldn’t have happened. There are no guarantees of an incubator’s long term survivability, despite its excellence in serving client companies, unless supporters and sponsors have thought of organizing and building a strong program that will stay around for the future.

Dinah Adkins
NBIA President & CEO

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The incubator collects amounts due from its clients, has mechanisms for dealing with slow payment or nonpayment, and consistently uses those mechanisms.

Letting clients fall behind on rent endangers the financial health, and ultimately the survival, of an incubation program. And besides, it sets a bad example for clients. “If you’re telling your clients to make sure they manage their accounts receivable and you’re perceived as not managing your accounts receivable, then it’s ‘Do as I say, not as I do,’ and you can’t run a good business incubator,” says Ed Hobbs, Toronto Business Development Centre general manager.

Excerpted from Cammarata, Kathleen, “Ideas for Achieving Self-Sustainability,” A Comprehensive Guide to Business Incubation, Completely Revised 2nd Edition, NBIA Publications, 2004, p. 158. This chapter contains 20 tips for raising revenues and conserving funds. It is available as a Quick Reference PDF document from the NBIA Bookstore ($5/members; $10/nonmembers).

Practices most represented among high-achieving programs are having a written mission statement, selecting clients based on cultural fit, selecting clients based on potential for success, reviewing client needs at entry, showcasing clients to the community and potential funders, and having a robust payment plan for rents and service fees. All of these practices are highly correlated with client success.

A strong correlation exists between the size of a business incubation program’s budget (both revenues and expenditures individually) and program success (i.e., larger budget = greater success). Of course, one would anticipate that programs with larger budgets have more capacity to deliver critical services and are more stable. However, it is also important to look at revenue sources and how the incubator uses its resources. This research found that receiving a large portion of revenues from client rent and service fees is positively correlated with outcome measures. On the expenditure side, the more programs invest in staffing and program delivery – relative to building maintenance or debt servicing – the higher the probability of improved client firm outcomes.

Adapted from Lewis, David A., Elsie Harper-Anderson, and Lawrence A. Molnar, Incubating Success: Incubation Best Practices That Lead to Successful New Ventures, University of Michigan, 2011, pp. 7, 54.

Incubator managers occasionally run into difficulties collecting rent and service fees from clients. Some clients place the incubator low on their payment priority lists, so incubators need to establish strict payment expectations, penalties for late or nonpayment, and a process for evicting and taking action against clients for payment problems. In addition to tough language, incubators must follow tough payment collection practices that ensure the manager assesses penalties, declares defaults, and communicates such actions promptly to clients, according to Jim Greenwood, president of Greenwood Consulting Group in Sanibel, Florida.

Greenwood, who has developed and managed incubation programs, allows that managers should use discretion. For instance, if a client informs a manager that he or she cannot pay on time, has a good reason and proposes a reasonable payment plan, the manager should consider waiving penalties. “This rewards clients for practicing mature and honest relationships with their creditors during inevitable cash crunches, which is an important lesson that the incubator can instill in its clients,” Greenwood says. He does have on simple, immutable rule: “No client should ever be allowed to assume a position that jeopardizes the financial viability of the incubator.”

Excerpted from, James, Carol, “Essential Documents; Lease, License and Service Agreements,” Put It In Writing: Crafting Policies, Agreements, and Contracts for Your Incubator, NBIA Publications, 2002, p. 20.

For further information on collecting rent and services fees, see:

• Colbert, Corinne, “Helping Clients Collect Debts from Customers,” NBIA Review, August 2006. This article is available free to members in the NBIA Archives or as a PDF Quick Reference document from the NBIA Bookstore ($5/members; $10/nonmembers).
• Business Owner’s Toolkit
  Accounts Receivable
  Explanation of accounts receivable and tips for handling this aspect of working with customers/clients
  
• All Business
  Setting Up an Accounts Receivable Process
  Tips for setting up an accounts receivable process
  
  

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