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Bright ideas for achieving self-sustainability

by Kathy Cammarata

February 2002

In 1995, an NBIA Review cover story posed the question, "What does a self-sufficient incubator look like?" The not-so-simple answer that followed reflected the diversity of the business incubation industry in the mid-1990s. Definitions of self-sufficiency, strategies for achieving it and even belief in its value varied from one incubator to the next.

Today, with six more years of growth and development under its belt, the incubation industry is even more diverse, so we revisited the question of self-sufficiency. In doing so, the first thing we noticed was that a new question had taken its place.

Rather than talk about self-sufficiency, we now talk about self-sustainability. What's the difference? Self-sufficiency implies that an incubator requires no external subsidy to cover operating expenses. Although a worthy goal, this is unrealistic for some incubation programs, particularly those in underserved communities that may justifiably need outside support for many years. Many communities that support incubation programs consider it to be a worthwhile investment in their economic well being. Self-sustainability, on the other hand, does not rule out financial support from outside sources, making it a more realistic, but still laudable goal. A self-sustaining incubator is one that is on sound financial footing, with predictable, reliable sources of funding. (See What's a reliable source of funding?)

Why pursue self-sustainability?

NBIA recommends that all incubation programs make self-sustainability a goal and has done so since 1996, when the NBIA board of directors approved it as best practice #3, "Structuring for financial self-sustainability by developing and implementing a realistic business plan."

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, Fla., and 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.

Although self-sustainability is an important goal, incubators have to be careful about how they pursue it. One potential pitfall is placing too heavy a financial burden on clients, says Tom Lyons, director of the Center for Research on Entrepreneurship and Enterprise Development at the University of Louisville. "A lot of self-sustainability strategies are based on charging the entrepreneur, but we have to think of clients' readiness or willingness to pay, as well as their ability to pay."

Another potential pitfall is placing too much emphasis on generating money and too little emphasis on what should be an incubator's first mission – serving entrepreneurs and helping them grow viable companies. Incubator managers must strike a balance between their roles as financial managers and their roles as business advisors.

The first step is common sense

Lorne Ross, manager of Canada's Northern Alberta Business Incubator (NABI) in St. Albert, 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 self-sustainability overnight. For the average incubation program, reaching self-sustainability takes several years, according to Greenwood. "In the 30 [incubation development] projects we've done around the country, maybe 10 percent of them had cash-flow projections that said, 'This incubator will be [self-sustainable] within one or two years.' All the others were four, five, six or seven years out before they were going to achieve [self-sustainability]," he says.

There are scores of strategies and activities that can help an incubation program achieve self-sustainability. The following list is by no means exhaustive, but it offers some proven tips from incubation professionals.

Don’t pay rent

The Bessemer Business Incubation System (BBIS) in Alabama occupies two facilities, the Bessemer Business Center and the Downtown Entrepreneurial Center, and pays no rent. Its parent organization, the Bessemer Industrial Development Board, owns both facilities debt-free.

This has been a huge advantage for the incubation program, because a lease payment, which for most programs is the largest fixed cost, is nonexistent, says Devron Veasley, executive director of the Bessemer Business Center. "I can then pass a portion of the cost savings to my resident businesses in the form of lower lease prices or service charges. Not having a large lease payment also means variable costs are the largest portion of my operational expenses. Also, if bank funding is needed to expand my program, the buildings become a great source of collateral due to the 100 percent equity position I have to negotiate with."

The industrial development board strongly supports the incubation program as part of the overall business development effort for the area and has a mission to support business growth and development in all forms. So, BBIS has the long-term commitment an incubator needs when another entity, such as a corporation, government or university, owns its facility.

Insure for catastrophes only

Take a look at your insurance policies if you haven't recently. Greenwood reviewed the Los Alamos Small Business Center's insurance policies when he managed the incubator and discovered that "we had basically said, without knowing it, that if there was ever a crack in any window, we could get it repaired and replaced, and the insurance would pay 100 percent of it," he says. It sounds like a great deal, but the incubator was paying a hefty premium. "So, instead, we said so let's assume we can handle an occasional BB or crack in a window. But what if somebody went on a rampage and just came down with rocks and just knocked out all of the windows? What would that cost – maybe about $25,000?" Greenwood decided that the incubator could handle paying the first $5,000 worth of damage, and then insured only for damage higher than that. "So we insured for the catastrophic situation and cut our premiums considerably," he says.

Don’t be the best-kept secret in town

When Ed Hobbs took over as general manager of the Toronto Business Development Centre (TBDC), he was pleased with the incubator's location on King Street, one of the busiest streets in Toronto. But he soon discovered that the prime location wasn't enough to make the community aware of the program. "I got tired of everybody telling me that we had the best-kept secret in town," he says.

He quickly realized that signage – or lack thereof – was part of his problem. Anyone approaching the incubator from the east would see its name on the building, "but if you came from anywhere else you wondered what the hell the building was all about."

Hobbs kicked a promotional plan into high gear. When he bid out a job for painting the incubator's interior, he negotiated a contract that included painting the program's name and logo on all sides of the building. He also made a deal with a billboard advertising company to hang a sign on the building for the regular annual fee, but in addition, the company agreed to supply and install new lighting for the sign. The changes have been highly effective in making the incubator more recognizable in the community, Hobbs says. "Our walk-in traffic has more than tripled over the past year."

Fill 'er up

You don't want your incubator to be the cheap alternative in town, but experts agree that it's important to maintain a high level of occupancy. Without a significant amount of rental income, it will be difficult, if not impossible, to achieve self-sustainability. "If you come from a retail background, you'll understand that sometimes volume cures all ills. Well, so does occupancy," Ross says. His program has a graduated rent schedule to help bring clients into the building. "Once they're in the building, they're paying for some of the other services right away and sharing those costs," he says.

Greenwood suggests that managers make concessions on rent if occupancy is consistently low. "Seventy-five percent of the building leased at $8 a square foot beats 25 percent of it leased at $12 a square foot," he says. "If you have a building that's only 25 percent occupied, then you may have to review your prices. It may make more sense to cut them, and get a lot more people in there." However, reducing rates is a short-term solution. You don't want to lock yourself in to charging too little for value-added space.

Make your incubator big enough

Greenwood says that the current rule of thumb for incubator size is 30,000 square feet, with no more than 25 percent dedicated to common areas – that includes conference rooms, hallways, restrooms and even the space occupied by incubator management. "If you get much below [30,000 square feet] you don't end up with enough space to rent so that you can make the money that you need off of rental revenue."

However, if a community is not able to support an incubator that size, there are ways to operate in a smaller building. How do you do it? "You look at a lot of things," Greenwood says. "You share jobs. You don't have a full-time manager. You have a manager who's sharing responsibilities between the incubator and some other function, so you're not carrying that full cost." Taking these and other factors into consideration, it's possible for even a 15,000-square-foot incubator to establish a reasonable plan for reaching self-sustainability, he says.

Assert your value proposition

Early in his tenure with the TBDC, Hobbs found that a number of clients had been in the program for years taking advantage of the cheap rent without making significant progress with their businesses. He decided that the quickest way to graduate them was to raise the rent. "Amazing how they graduate – very quickly," he says.

If an incubator is going to charge market-rate rent, however, it has to make its services count. It's important to provide offerings entrepreneurs can't find anywhere else, such as opportunities to network with other entrepreneurs. "We charge now the same rents as you can get around the corner in downtown Toronto, and we're an old building and we have cement floors," Hobbs says. "However, what we do have is an entrepreneurial spirit in the building; people get to talk to people, and that's part of the value added."

Include lease clauses for utilities

Utilities have taken on incredible importance for business incubators in the past couple of years with higher-than-usual energy costs. Incubators run the risk of losing a lot of money by putting fixed prices on utilities. Be sure to include clauses in client leases that allow you to pass on energy surcharges. (See The cold reality of high energy costs in the June 2001 issue of NBIA Review.)

Seek sponsorship for incubator activities

One way to decrease costs and increase revenues is to find local sponsors for incubator events. "We tend to look for sponsorship in a lot of the things that we do," Ross says. For example, NABI gets its local Rotary International Club, an organization of business and professional leaders, to sponsor all of its course presentations and seminars. "They pay for the advertising, the speaker and things like that," he says. The incubator is then able to take all of the revenue from these programs.

Ross also finds sponsorship for NABI's elaborate, once-a-year open house, which acts as an unofficial local kick-off to Canadian Small Business Week. He advertises the event through the local media and even sends invitations. The program's yearly graduation ceremony takes place during the open house, and so does a small trade show – local businesses can rent five-foot tables from the incubator for $50 apiece and display their wares in the hallway. Food, live music, door prizes (donated by clients and local businesses), and costumed guides make it a festive occasion and help bring the community into the incubator. (And the incubator doesn't spend a dime.)

Be a stickler with rent

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," Hobbs says.

Get community buy-in

"At the beginning, we didn't have very much community support," says Judy Sander, business advisor and manager of the Northwestern Ontario Technology Centre in Thunder Bay. Gaining support, she says, has been a process of finding board members who can link the incubator with community members who recognize the value of the program and are willing to fight for it. "I think something a young incubator should be conscious of is the amount of time you should spend getting that awareness up in [the community] and profiling what you're doing so that there's an understanding," she says.

Sander believes it's worth the effort to apply for even small amounts of local funding, because the benefits go beyond the financial. "Even if it isn't a large dollar amount, take it and at least get some buy-in and involvement in what you're doing," she says.

Wait to take equity in lieu of rent

"I very seldom see a cash-flow projection for a brand-new incubator that can afford to take equity rather than get cash," Greenwood says. He recommends waiting until your program is at least breaking even to consider taking equity in lieu of rent. "You need the cash in the early going … to make ends meet or get close to making ends meet," he says.

Don’t duplicate programs

Offering programs that other organizations in your community already offer is a waste of incubator resources. Rather than duplicate efforts, create programs tailored to your clients' needs and develop relationships with other local organizations so that you can share common programs.

Stay lean and mean

Many incubator managers say that one way to keep costs down is to keep the number of incubator staff at a minimum.

"I have a shared position for a receptionist and secretary, and [I have] myself," Ross says. Keep in mind that this is not a place to be penny-wise and pound-foolish.

A one- to two-person staff is certainly not unusual for a nonprofit incubator, but making a program effective with such a small staff demands resourcefulness. (See The skinny on staffing: Why and how to begin beefing up your team in the April 1999 issue of NBIA Review.)

Business-assistance professionals are a necessity, but Ross puts his board of directors to work, too. Not only does the board fill in for him in a managerial capacity, they aren't afraid to get their hands dirty hand-ling odd jobs around the incubator. "We had to repaint the lower level of our building, and that was done both by our clients and our board," he says.

Track your successes

If you plan to establish long-term relationships with funders, you have to show them what they're getting for their investments. "You have to provide something in return," Ross says. "Whether you do it with pen or pencil — you don't need a software program — track the results." Carefully tracking your incubator's progress and the progress of your clients and graduates can show stakeholders that they're getting their money's worth and more. Ross says that prior to meeting with a potential investor, an incubator manager should consider why that individual, government, company or other organization might want to invest in the incubation program, and then have the most relevant statistics ready to help prove the program's track record and credibility.

Market smart

Take advantage of all low- or no-cost opportunities to market your program. Hobbs arranged for the more than 100 libraries in the Toronto area to promote TBDC's incubation services and fee-based training programs. "We send them our brochures monthly, and they distribute them to people who may be interested in any of our services. Our incubator client-services manager makes periodic visits to thank them and make sure our info is front and center," he says. Attendance at the incubator's evening seminar series has increased dramatically as a direct result of the effort at the libraries; "however, we are still early on in this experiment and are still busily tracking the payback," he says.

Trade with clients for services

"We certainly barter for services," Ross says. For example, he asked a client company in public relations to produce a newsletter for the incubator. In return, the company received a sizeable ad in the newsletter, which the incubator distributed to home-based businesses in the area.

Clients who help out the incubator might also get free use of the incubator's Smart Board (an interactive white board) and digital projector – all told about $10,000 worth of equipment – which they normally would have to rent to use for presentations. The incubator also rents the equipment to nonclients who want to use it.

Rent your facility to outsiders

Although you want to be sure that your incubator has enough leasable space to generate sufficient rental income, don't get rid of your conference room. Instead, generate some revenue by renting it to community members who might need meeting space in the evening or on weekends. Another option is to offer the space free to individuals or groups offering business-related courses and then share in the revenue from those courses, as NABI does. "The bottom line is we try to maintain a high level of flexibility in everything," Ross says.

Contract out work

Frequently, an incubator needs certain types of work done only sporadically, such as clerical and maintenance work. Rather than hire full- or part-time staff to handle these jobs, think about hiring workers on a contract basis. That way, you're paying them only when you need them, rather than 40 hours a week plus benefits.

A need to contract out work might even be an opportunity for creating a new business, as Greenwood discovered when he managed the Los Alamos Small Business Center in New Mexico. He wanted a secretarial support function for the program but didn't want the cost and management responsibility associated with it. So he put a want ad in the local paper offering someone the chance to lease space in the incubator and fulfill its secretarial support needs. Three people responded to the ad, and one started a new business in the incubator. Greenwood says it was a win-win-win situation. "Our other [clients] got secretarial support on site, we got a paying tenant, and we got credit for helping them start their business."

Ask graduates for support

You may find incubator graduates to be untapped but willing sources of event sponsorship or even donations. One easy way to get started is to ask them to donate their rental security deposits to the incubator when they graduate. "It doesn't cost them anything [much]. It was something they gave to you years ago, and it's cash that you don't have to come up with to give back to them," Greenwood says. Plus, it's a nice way for graduates to contribute to the incubator.

Fine-tune your financials

Create five-year cash-flow projections from the beginning and do them over and over, Greenwood says. "When you do it the first time, you have to make assumptions. As time goes on, you get more information and can keep refining and refining those numbers."

This story was adapted from a presentation at the 2001 International Conference on Business Incubation in San Jose, Calif.

What's a reliable source of funding?

It's tough to provide a definitive answer to this question, because the reliability of a funding source will vary from incubator to incubator. JoAnn Rollins, NBIA director of membership offers this definition: "Reliability is a reflection of the depth and commitment of the funder and the funder's own financial security."

For example, a program might receive funding from a community college, university or local government entity where it has a single champion, such as a dean or other administrator, who makes sure the incubator receives funding each year. But when that champion leaves, the subsequent administrator may have a different agenda and cut off funding to the incubator.

What's the alternative? "It's better when the funding institution has multiple champions and expressions of long-term support for supporting the incubator," Rollins says. "Also, truly soft money – such as grant funding – is often for a predetermined period of time, and the incubator shouldn't assume it will be able to get another grant."

Jim Greenwood, president of Greenwood Consulting Group in Sanibel, Fla., agrees and recommends that all incubator managers should sit down and think about the sources of the funding their incubators receive and determine which ones are uncertain. "They should then act to either phase out these sources for other, more reliable ones, or add … sources that are reliable so they're not depending on the flaky ones."—KC

The bottom line

We've said that most programs realistically can achieve self-sustainability, but that doesn't mean they can't strive for self-sufficiency. Steps that Lorne Ross has taken as manager of the Northern Alberta Business Incubator (NABI) in St. Albert, Alberta, Canada, have helped the incubator reach a point where it can generate enough revenue to cover all of the program's costs internally.

NABI meets more than 50 percent of its C$200,000 (US$127,000) annual budget through rental fees. The rest comes from revenues the incubator generates through services to clients and the business community. But getting an incubator to this point isn't necessarily easy, Ross says. For him, it's taken true dedication to the cause. "The will to be self-sustaining is not good in itself. … I have to have the will to work hard. I have to have the will to be the poor cousin and to spend my money wisely. And I have to have the will to have a creative sense about me so that I can develop new programs and new revenue streams," he says.

But the rewards can be satisfying. As a self-sustaining incubator, NABI applied for and received a $150,000 grant for capital improvements from the Western Economic Development and Diversification agency of the Canadian federal government. "Once you've achieved self-sustainability, go and ask for funding," Ross says. "It's like going to the bank; if you can prove you don't need it, they'll probably give it to you."—KC

Keywords: budget -- incubator, financial management -- incubator, funding sources/fundraising -- incubator, self-sufficiency, self-sustainability, sponsor, subsidy

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