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Self-sustainability: How much is enough?

by Sally Hayhow

February 1999

The last two major research projects on business incubation returned results that certainly should shatter any lingering doubts about the industry's effectiveness. That goes double for NBIA member incubators, which made a better showing in the studies than nonmembers whenever the two were compared. NBIA members, it appears, have taken seriously the principles and best practices they drafted and adopted in 1996.

That may be true in general, but what about best practice No. 3? It states that incubation programs should "structure for financial sustainability by developing and implementing a realistic business plan." Yet in the 1997 Impact of Incubator Investments study, 32 percent could give their clients no service without subsidy, and no technology or empowerment incubator existed without some (and often substantial) outside support for operating expenses.

Do these stats point to poor performance of incubation programs or a misdirected best practice? Neither, really.

When the industry signed off on the self-sustainable best practice, everyone knew it was a challenging goal, but that knowledge made it no less critical. "In the early '90s state program funding and other sources of support for incubation were running into trouble. If incubation programs had all been dependent for survival on outside funds, the industry would have disappeared," says NBIA Executive Director Dinah Adkins. The industry was also concerned about setting an example for the businesses it nurtures.

It's just not that simple, though. "Business incubators may be helping businesses get started but that doesn't mean you can simply apply a standard business model to them. It's more complicated than that," Adkins says. "These are institutions with public purpose." Furthermore, to say that accepting funding support flies in the face of a business model is not quite accurate. New companies may take years and various infusions of debt or equity funding before they get into the black and remain there. The same is true of many business incubation programs that are very successfully meeting their missions.

Others argue that you shouldn't confuse self-sustainability with complete self- funding, a.k.a. self-sufficiency. "Should an incubator strive to generate income? Yes. Will those revenues provide 100 percent of what it needs? It depends," says former board chairman Candace Campbell, who is now principal of CDC Associates, a consulting firm in Minneapolis.

"You have to consider the incubator's purpose and the conditions under which it is operating," she says. For instance, a 501(c) (3) incubator in a neighborhood suffering from second or third generation poverty may need support for years to come. "To say that a charity should be self supporting is foolish. We don't expect that of other charities," says Campbell, who goes one step further on that point. "Self-sufficiency itself is irrelevant to an incubator. The most important thing is what's coming out the other end. Is the value sufficient to offset the investment?"

So what do the stats indicate? It takes longer-term observation of the industry to realize the numbers actually convey more hope than concern, Adkins contends. For one thing incubators that have sponsorship are reporting that it comes from a much more diverse base. Secondly, more incubators are developing self-sustainability plans that match their missions and circumstances; they may not be supporting themselves entirely today, but they've mapped a point in the future when they will be. Thirdly, incubation in general is regarded more highly each year, which means stakeholders local and national are becoming more steadfast partners.

But the incubation industry must be realistic. Public purpose or not, average citizens do not regard us as indispensable like libraries or schools. The idea of business incubation is quite young in public policy years, which means considerable mass education still lies ahead before it is a nonnegotiable community asset. If an incubation program depends on outside funds, it's well advised not to depend on one source and to make sure the stakeholders it does have are either reliable or replaceable. And it should do whatever it can to keep those stakeholders satisfied: provide them with performance benchmarks, recognize them, include them in substantial ways and communicate, communicate, communicate.

The reality remains that benefactors can be fickle when you least expect it, and managing sponsor relationships takes time away from other incubator must-do's. The self-sustainability concept may look different, be tied to different missions and require different time frames in various circumstances but it is still a cornerstone of business incubation survival. Striving to reach adequate size and generate ample revenues to cover the basics of an incubation program should be on every incubator executive's to-do list. The No. 3 best practice self-sustainability should still be a No. 1 priority.

For the complete list of principles and best practices, see the NBIA Web site at www.nbia.org.

Keywords: self-sustainability, sponsor

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