by Carol James
Developers of an Australian incubator that opened in the late 1980s had dreams of jump-starting their region's declining steel-industry economy with new manufacturing businesses. With that goal in mind, they renovated a former factory into an incubator with bays.
Indeed, potential clients came knocking. But the entrepreneurs were looking for office space in which they could start service businesses. "This then cost hundreds of thousands [of dollars to convert] the factory to offices," says Julian Webb, CEO of Australia's Capital Region Enterprise and Employment Development Association (CREEDA), a nonprofit agency that focuses on creating jobs through small business development. "After about 10 years, the incubator closed. It was never in the right location for office businesses."
Why were project developers so off the mark? Their development process apparently failed to accurately identify a target market or ideal location. A well-researched feasibility study likely would have demonstrated a need for office – not manufacturing – space. It also likely would have suggested a location in a city commercial district, not an outlying industrial area.
Providing detailed answers to critical questions, a feasibility study helps incubator developers decide whether an incubator will prove effective in a particular setting by determining if the proposed project has a solid market, sound financial base, strong community support and true champions. Beyond that, a feasibility study identifies obstacles that incubator organizers might have to overcome and offers options for surmounting them. It also may look at whether a proposed incubator will further a community's broader economic development goals.
Armed with this information, community leaders, project stakeholders and other interested parties can begin to bring an incubation project to life. Or, the feasibility study may help those individuals conclude that the climate is not right for a business incubation program. That decision can be a difficult one, especially for project leaders who have invested lots of time and emotion in the venture. Ultimately, however, a well-informed decision not to move forward with a project saves money and time that could have been sunk into a bad idea.
Readers take note: Some issues discussed in this story will impact only incubation programs aimed at community or economic development. Other factors, however, will impact the feasibility of any incubation program – including those that are private, for-profit businesses (see For-profit programs need feasibility studies, too).
Anyone conceptualizing or developing an incubator project – a government entity, community development corporation, university, economic development organization, entrepreneur, venture capitalist, corporation or other entity – should consider having a qualified professional or another objective third party conduct a feasibility study. Without one, an incubator developer cannot answer the plethora of questions that will come – and they will come – from community members, potential funders and others about the project's potential for achieving success.
"You wouldn't make [a personal] investment without doing due diligence," says Jeff Milanette, president of consulting firm Innovative Partners of Westfield, N.J. "You have to look at a number of factors you can evaluate without emotion, as objectively as possible."
To get that objective, third-party point of view, incubator developers commonly hire outside consultants to conduct feasibility studies (see Looking for a Consultant?). Every feasibility consultant has his or her own approach, tailored to the group conducting the study. Feasibility consultants generally examine the following core elements:
Webb speaks from experience when he says it's best to perform a feasibility study when there is already a degree of local interest in business incubation as an economic development strategy. CREEDA operates four nonprofit incubators, provides incubator consulting services and has conducted more than 30 feasibility studies. Webb suggests that developers should have some notion of what it will take to gain community support and where their incubator project might fit into the local economic picture. Setting up a committee to pitch the idea to community officials and potential stakeholders may help. Organizers also should develop a request for proposals for, and identify possible sources to fund, a feasibility study. Whether the process is formal or informal, some preliminary legwork must precede the study.
"Studies [initiated before local interest is established] may be somewhat abstract and have difficulty when it comes to local champions and stakeholders," Webb says. "Studies happening [too] late in the development process may be compromised because proponents have already gone a long way down the track," perhaps selecting an inappropriate building or governance structure.
A thorough market analysis is worth its weight in gold, says Chuck Wolfe of Claggett Wolfe Associates, a consulting firm in Auburn, Calif. The market analysis addresses probable target clients, the potential for deal flow, the services clients will need and whether an incubator can obtain them. The market will drive the composition of staff, incubator size, location and configuration, costs, advisory board or board of directors, makeup of the service provider network and other incubator specifics.
"The market analysis determines how you should position the incubator and whether you have the parts you need to put it together," says Wolfe, who has conducted 20 feasibility studies. "You're not selling cheap rent, you're selling value-added services. Can you gain access to capital, professional services, mentoring and strategic alliances? Do you have the core components to support particular sectors?"
No matter what part of the world you're in, the basic tenets of feasibility remain the same. The need for an entrepreneurial pool may be the most important. Identifying area entrepreneurs that the incubator could serve provides the foundation for the market analysis. "Even though there may be great need in terms of unemployment and economic restructuring, if people are not starting businesses that an incubator can help, then the market demand will be low," Webb says. "The market demand should be described and quantified in terms of the size, … geographic dispersion, characteristics, projection of [annual client numbers] and market share for a prospective incubator."
Interviews with and surveys of area entrepreneurs – those at the idea stage as well as seasoned business operators – will provide information about the types of start-ups in the community, their industries, location preferences and the kinds of services and space they need. Entrepreneur interviews also will reveal whether they would consider giving up equity in exchange for incubator space and services and whether they respect or use existing sources of business assistance.
Although there may be keen interest in the incubator project, not every community has an adequate pool of entrepreneurs to support an incubator. "They can fill it one time, but they don't have a turnover of 15 to 20 businesses every three years," Wolfe says. "The market isn't sustainable."
The information gleaned from entrepreneurs provides far more than an assessment of their potential activity. It also will help with another part of the market analysis – a competitive examination of other incubators and entrepreneur support programs. "Are there unmet business assistance needs in the area, and are existing sources [of assistance] willing to cooperate with the incubator and not consider it to be competition?" asks Jim Greenwood, president of Sanibel, Fla.-based Greenwood Consulting Group.
A closer look at those existing sources should include interviews with representatives of the organizations to learn about their attitudes toward business incubation and whether they would be appropriate and willing to assist incubator clients.
Finally, the market analysis should look at all market opportunities, Wolfe says, describing a range of scenarios for the incubator project and their attendant levels of risk. In a rural setting, for example, with fewer entrepreneurs to select from, a single-focus incubator might not be appropriate. It may be necessary to serve a mixture of clients and perhaps even open satellite locations to achieve economies of scale. An understanding of these specific market needs can help developers integrate an incubator into its community and use it as a business attraction tool. For instance, an incubator could house a day care center or attract an anchor tenant to provide needed services and contribute to community economic development and the incubator's bottom line.
The market analysis may show that an incubator project is feasible from a purely market perspective, but community support is another vital chapter in the incubator development story. This is especially true for incubation programs focused on community or economic development. Every incubator project needs champions – individuals or entities willing to marshal the project through its early operations. "If there's no champion, there's no incubator," Milanette says. The champions who carry the project to fruition aren't necessarily the people who first propose a business incubator for their community. Champions are the individuals who have the necessary levels of networking skills, political savvy and passion to make the organizers' idea a reality.
Through face-to-face interviews, the feasibility study identifies potential champions and their strengths and weaknesses. "Nobody's going to tell you your baby's ugly in a public setting like a focus group," Wolfe says. "They're not going to tell you [publicly] their opinions of the organization trying to develop an incubator."
To gauge the potential for community support, feasibility consultants conduct interviews with anyone who might have an interest in supporting (or undermining) an incubator project. That includes business professionals and representatives of any academic institution that might ally itself with the program, funders (public and private) and other entrepreneur support programs in the community.
"We want to interview political, business and civic leaders," says Greenwood, who has conducted about 25 feasibility studies. "You get a feel for who's really for it and who just agrees for whatever reason." At CREEDA, studies involve at least 30 and as many as 80 face-to-face interviews, according to Webb.
Buy-in shouldn't stop at the city limits – successful incubators have a broad base of supporters from all economic development organizations in the region. Gaining that level of support requires lots of networking, so often the core group of organizers begins making contacts before starting the feasibility study process.
An essential task for that core group during the feasibility process and beyond is managing stakeholder expectations. "Everyone wants incubators to perform in years one and two, and that's not going to happen," Wolfe says. Managing expectations includes setting reasonable goals and milestones for the project from its inception through its opening and first few years of operation, Wolfe says.
Fortunately, the interviews conducted during a feasibility study provide an excellent opportunity to offer information that will educate, win champions and help manage expectations. In many communities, few people understand business incubation at the outset of a project, according to Larry Albertson, president of consulting firm LPA Associates in Gainesville, Fla. "A lot of what you do while interviewing and surveying, talking to community groups and anybody else who will listen" is educate people about the business incubation concept and financial aspects of the particular incubator project.
Yet another piece of the feasibility puzzle is money – an incubator is the ultimate test of creative funding capabilities. Organizers first must find a way to pay for their feasibility studies, priced from $20,000 to $40,000 or more, then must secure the millions of dollars necessary to get the program off the ground.
Incubator developers have secured feasibility study funding from a number of sources (see Get Feasible with Agency Support). "One of the most common sources we're seeing now is local entities joining together," Greenwood says, each contributing $5,000 to $7,000 of the total study cost. That process breaks down the total into something each organization can afford and provides the community groups an opportunity to see how they work together.
The biggest money matter, however, is paying for the incubator, from start-up through long-term survival. Incubation programs cannot base their operations on significant ongoing subsidies. Albertson, who has a half dozen feasibility study contracts under his belt, says incubator self-sufficiency often does not get enough attention in the planning stages. "The requirement, in my opinion, is designing the program from day one so that you have a chance of reaching the break-even point in a reasonable period of time," such as two to three years, he says.
Although opinions on the self-sufficiency time frame vary, consultants aren't the only experts who agree it must be addressed. Tom Shea of the Department of Defense's Office of Economic Adjustment says feasibility studies his agency funds have to show the potential for incubator self-sufficiency – requiring no outside financial support – in 18 to 24 months, with few exceptions.
In an attempt to best make those projections, the financial part of the feasibility study assesses the funding and resources required to carry out the project, including the ability of the incubator to support itself. "Will the building support enough companies who can pay enough rent for the incubator organization to meet its mortgage or rent payments?" Milanette asks. A feasibility study should estimate the cost of developing the incubator and identify reasonable funding sources, including financing options and capital formation opportunities for client companies.
Milanette's firm, which has been principal consultant or team member for 20 feasibility studies, bases financial feasibility projections on estimates of expected income from rents, services, grants and other sources, and the likely growth rates of those sources, then projects expenses and develops an income statement. Incubator organizers can refine the plan to reflect revisions in specific real estate, construction, personnel and other costs. Information from the market analysis provides the basis for financial projections.
"You always have to keep in mind that an incubator is just another business," Milanette says. "Part of the reason for doing the study is to prove that you as a business management team have taken time to do a plan. ... If the assumptions are right, then where do we stand in terms of accomplishing our goal?"
When you're launching an incubation program, it's not enough just to have a building. That building has to make sense in terms of location, size, configuration (everything from floor plan to amenities such as freight elevators) and affordability. An incubator located far from the business district may drive entrepreneurs elsewhere for space, and a building that is too small or too large might not generate enough revenue to support its programs or pay for building maintenance. Although a donated building may seem like a windfall, it might bankrupt a program because of costly renovations or upkeep required due to age or other factors.
Potential community bias about the program's eventual physical location is another factor, Greenwood says. Is there a predetermined location for the incubator, and if so, will it jeopardize the project?
"The wrong building is a problem we see quite often," Greenwood says. Feasibility consultants can tell horror stories of bad building choices, including a jail refurbished as an incubator that offers minimal internal build-out flexibility and poor amenities for clients.
Developers also must look at the potential impact of real estate on the incubator's financial evolution, Wolfe says. For example, the Technology Innovation Center in Evanston, Ill., is undergoing financial restructuring in part because of a real estate issue. Last summer one of the incubator's two buildings changed hands and the new landlord raised the rent substantially. A simultaneous loss of some operating funds forced the incubator to lease less space and let some clients go. Had the incubator not been in a position to be pushed around by a landlord, the situation might not have been so dire.
"You need to figure out a way to get your hands on the building free and clear or at least minimize debt service or lease payments that might be required," Albertson says. "Size the program and work the budget in great detail so you can see that if you have reasonable levels of occupancy, there'll be enough revenues for building maintenance, staff and programs."
The market analysis will have provided a clear idea about ideal facility size, location and configuration. Finding and evaluating potential facilities varies from project to project - some communities have buildings or sites identified and want the consultant to evaluate them, while others want a feasibility consultant to suggest what's appropriate.
Less-than-optimal proposed facilities often are the reason behind feasibility studies that advise not to move forward with a project. According to Ben Grinnell, director of business incubator development for the North Carolina Technological Development Authority (NCTDA), 20 percent to 30 percent of the feasibility studies NCTDA pays for get no-go recommendations, usually because the proposed building does not make the project worthwhile.
Building successful companies takes time; so does building a successful incubator. Feasibility studies typically take two to five months. "Ideas need to percolate through the community, and sometimes potential stakeholders and partners don't step forward until they are convinced it's a good project," says Milanette, who specializes in technology incubators.
Rushing a feasibility study will weaken its results. Interviewing people, organizing meetings and gathering data are not overnight processes. "If you try to push [the time frame], you won't get the nuances," Wolfe says. "People need to digest what you've been talking to them about, and you need time to investigate new thoughts."
If the feasibility market and financial assessments show an incubator is doable, then "it's a patience game," Wolfe says. "It takes time to get all the pieces in place," he says, citing an incubator that just opened in October 2000, five years after its 1995 feasibility study.
Accounting for much of the start-up time frame is getting funding sources in order. In seeking government funds, applicants have to consider budget cycles, which may require 12 to 18 months. Albertson completed a study more than a year ago in Jacksonville, Fla., and "they are just now [early April] putting the finishing touches on funding."
Although getting resources and funding lined up may take years, "it tests the doggedness and commitment of proponents, which can be a good thing," Webb says.
The feasibility study provides the keys that can open or close the doors on a proposed incubator project. Once your consultant has completed your feasibility study and has explained what it reveals, it's time to work through the results of the feasibility analysis with the community and stakeholders to make final decisions. Those decisions can range from giving up the project to deciding that a proposed high-tech incubator must house other types of businesses as well in order to generate necessary cash flow.
Even if the study recommends shelving the project, Webb says, "It may lead to an incubator down the track, or some other relevant initiative. We have found that some of these outcomes may be alliances in the community, [or] other business support services. … If nothing else, a feasibility study should help educate local stakeholders."
Consultants have their own methods of helping incubator developers see the big picture and make informed decisions. Greenwood assigns a score for the community on each of the six main criteria his team evaluates. Each is weighted in the overall feasibility conclusion, which helps the community clearly see critical criteria and provides the opportunity to improve a situation before going ahead with an incubator project.
Sometimes incubator proponents have a difficult time dealing with a feasibility study's findings.
"They may already have made up their minds on some issue of feasibility," Greenwood says, and "we may have to tread gingerly. We need to help them rethink, and give them more ammunition with which to make the decision."
And that's what a feasibility study is all about – gathering focused, relevant information and providing unbiased recommendations that can tell you how to adapt your project before proceeding, or to scrap it before you invest potentially millions of dollars in a program that has little or no chance for success.
We've provided a list of helpful resources for people interested in incubator feasibility studies.
Choosing a consultant to conduct your feasibility study can be a project unto itself. Here are some suggestions for getting started, compiled from consultants and other NBIA members we interviewed for Let's Get Feasible:
Underscoring the importance of feasibility studies, many incubator funders require that applicants conduct them. To help developers meet those requirements, some private agencies, federal agencies and state governments have developed initiatives to help pay for feasibility studies.
In North Carolina, incubator developers may apply for feasibility studies through the North Carolina Technological Development Authority (NCTDA), a private, nonprofit corporation. NCDTA operates a seed stage venture capital fund, is involved in technology commercialization with the state's research universities, and soon will be managing its third incubator.
"Unless there's a feasibility study done, we generally don't look at a project" for the low-interest loan funding NCTDA offers incubators, says Ben Grinnell, NCTDA's director of business incubator development. "To me it's a screening mechanism. It weeds out weak projects and weak communities, where there isn't support or understanding [of incubation]."
NCTDA contracts for feasibility studies through the North Carolina Small Business and Technology Development Center (SBTDC), a small business support agency operated by the University of North Carolina and U.S. Small Business Administration. "We thought it was best to bring in an objective third party who doesn't have an interest one way or another" in whether an incubator project is developed, Grinnell says. NCTDA pays for the cost of the study. Four operational incubators have resulted from 12 feasibility studies completed since 1995, and none have failed, Grinnell says. Four other incubators are under development.
At the federal level, the Department of Defense's Office of Economic Adjustment (OEA) has long helped communities plan how they will adjust to economic dislocation caused by military base closures. Often those plans have included business incubation, says Tom Shea, an OEA project manager.
The OEA has supported 17 incubator feasibility studies since 1994 through matching grants. Although none resulted in a no-go recommendation, only five so far have led to operational incubators, Shea says. Nonetheless, an incubator feasibility study can be a valuable document, he says. For example, in Ogden, Utah, an OEA-funded incubator feasibility study drew together local education and government entities and focused planners' attention on cooperative regional development. "They went down a new path that they wouldn't have done without the incubator feasibility study," Shea says.
As part of the OEA-funded feasibility study process, the office provides guidelines for requests for proposals that local redevelopment organizations must follow in seeking consultants to conduct OEA-supported feasibility studies and business plans. Local authorities choose who will perform the work.
In Maryland, the Technology Development Corp.'s (TEDCO) incubator feasibility study grant program helps ensure that incubator projects are well researched. The program provides matching funds (up to $25,000) and assistance for local authorities to conduct feasibility studies. While awardees decide who conducts the study, the application requires that an independent entity do the work. "An independent, expert consultant is best prepared to answer [feasibility questions]" and to bring an objective view of the need for and capability to carry out an incubator project, according to Jim Sanders, TEDCO's director of business incubation programs. The feasibility grant program is part of TEDCO's broader incubator initiative to foster new technology companies through the support of existing and new incubators.
Although Maryland doesn't mandate a feasibility study in order to receive any state assistance for an incubator, "we want to create a disciplined way in which people can get fundamental assistance," Sanders says. "This is a way to focus on all the issues. We're asking for studies to have advisory boards, to build commitment and understanding in the community about what this [incubator] program would be."—CJ
If you're hungry for more information that will help you through the feasibility stage and beyond, check out these publications, all available through NBIA.*
Gerl, Ellen, Bricks & Mortar: Renovating or Building a Business Incubation Facility. Athens, Ohio: NBIA Publications, 2000.
Hayhow, Sally, ed. A Comprehensive Guide to Business Incubation. Athens, Ohio: National Business Incubation Association, 1996.
Meeder, Robert A. Forging the Incubator: How to Design and Implement a Feasibility Study for Business Incubation Programs. Athens, Ohio: National Business Incubation Association, 1993.
Agoston, Jennifer. "Eight Things Incubator Managers Can Do to Avoid Failure: A little hindsight from those who have been there," NBIA Review 12, no. 5 (1996): 6-8.
Gerl, Ellen and Sally Hayhow. "An Incubator in Our Community? Perspectives on Conducting a Feasibility Study that Works," NBIA Review 13, no. 6 (1997): 1, 3-5, 19-20.
Hayhow, Sally. "Fishing for Future Clients," NBIA Review 14, no. 5 (1998): 1, 3-5.
Kalis, Nanette. "Can Incubators Be Truly Self-Sufficient? Yes, even those that were designed to be anything but," NBIA Review 11, no. 6 (1995): 1-3, 8-9.
Keywords: consultant, entrepreneurial pool, facility selection/construction/renovation, feasibility study, market research -- incubator, stakeholder development
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