by Brian Walker
In the beginning, there was funding … at least that's what every prospective incubator manager would hope for. One of the greatest obstacles to starting an incubation program is securing the hundreds of thousands of dollars that it takes just to open for business. Incubator managers have a large number of funding sources to pursue, but an equally large number of expenses to cover.
To learn about the levels and sources of funding necessary to launch a nonprofit incubator, NBIA conducted an informal survey of 26 nonprofit incubators in the United States that have opened their doors since Jan. 1, 1999. We found that incubator developers may fight an uphill battle to get the funding they need, but the money and support are certainly available. So pull out your calculators and ledgers as NBIA addresses some of the most frequently asked questions about launching a nonprofit incubation program.
This is the big question, isn't it? A big question and, in most cases, a big answer. The total cost to get an incubation program off the ground and through its first year of operations for our survey respondents averaged $2.3 million. Total expenses ranged from $80,000 for the 9,100-square-foot Entrepreneur Center in Ashland, Ky., to $11.5 million for the 41,000-square-foot Nidus Center for Scientific Enterprise in St. Louis. The median cost was $1.2 million, more than $1 million less than the average.
Expenses included in this figure are fees for feasibility studies, land/site acquisition, architectural and engineering projects, new construction, site renovation, professional services, capital equipment purchases, and the first 12 months of operation. (See Figure 1.) Of course, not every incubator spent money in every category, and they represent a variety of program types and geographic locations. So although these averages are helpful for preliminary planning, readers should remember that every incubation program is unique and costs will vary.
The biggest factors dictating cost were those directly related to building specifics, such as square footage; the price of land, construction and/or office space in the area; and whether respondents constructed, renovated or leased facilities. Generally, those with larger, newly constructed facilities in urban areas experienced greater costs, but that wasn't always the case. "For us, [the costs] all came down to renovating an existing building," says Larry Haines, executive director of Advantech in Richmond, Va. "Renovating was simply more expensive than new construction."
Richmond has limited space for new construction and an abundance of outmoded buildings, making renovation the only viable option. Haines' 53,000-square-foot, eight-story building was built in 1916 and required new sprinkler systems and electrical wiring throughout. The entire renovation cost $1 million, 45 percent more than the average renovation cost paid by respondents to this survey and the second highest amount paid overall.
A surprising (and discouraging) 44 percent of respondents have less than 30,000 square feet of gross space. More than half of those programs, 26 percent of all respondents, have less than 10,000 square feet of gross space. Incubation industry experts have long recommended that, in order to generate adequate rental revenue, incubator facilities must be at least 30,000 square feet, with about 75 percent of that (23,000 square feet) being leasable space. Robert Meeder, president of Pittsburgh Gateways Corp., has been in the business incubation industry for more than 17 years and believes those figures are on target. "Today, more so than ever, I think you need that magical 30,000 square feet to be self-sustaining, even in rural areas, because rental income is the most significant source of ongoing revenue for most nonprofit incubators." There are other ways of working toward self-sustainability, but Meeder points out that most include having a parent organization (university, corporation or otherwise) fielding many of the costs. "The winds can change in politics and you could be left high and dry without your previous funding source, so you really want to have enough physical room from the onset to house the clients you need to sustain services and the expenses that you will incur," Meeder says.
Even though many of the incubators surveyed have less than 30,000 square feet of gross space, more than half meet Meeder's recommendation. The average gross square footage was 27,484 and the median was 31,081. And, in a few years, the numbers might look even better. After an average of two years, half of all respondents plan to add more space, which would give 60 percent of the incubators more than 30,000 square feet of space. (See Figure 2.)
In terms of cost, respondents paid an average of $65.44 per square foot of gross space (the median was $51.43) for new construction and renovations combined. The costs ranged from $248.78 per square foot of gross space for the 41,000-square-foot Nidus Center for Scientific Enterprise in St. Louis to $1.06 per square foot of gross space for the 9,100-square-foot Entrepreneur Center in Ashland, Ky. In our sample, those who renovated paid less per square foot of gross space than those who constructed new buildings. (See Figure 3.) Other factors causing such a variance in numbers are instances where the incubator required high-tech (and consequently high-cost) facilities, such as the biotechnology-focused Nidus Center, or where the incubator was provided with free or low-cost space as part of a partnership deal, such as the Entrepreneur Center's arrangement with Ashland Community College.
If you are anything like the majority of this survey's respondents, it is likely. Seventy-three percent expect to require ongoing subsidies to survive. (See Figure 4.) The 27 percent that do not expect to require subsidies estimate that it will take an average of 33 months to gain revenues that will equal or exceed their expenses. Preliminary results from NBIA's recent State of the Business Incubation Industry survey support these numbers, showing that 71 percent of responding North American incubation programs require ongoing subsidies of some kind.
It is interesting to note that, in this survey, respondents with larger facilities were less likely to expect ongoing subsidies than those with smaller facilities. All of the respondents with less than 30,000 square feet of square feet expect to require ongoing subsidies except one – Tucson Technology Incubator in Tucson, Ariz. Currently at 8,000 gross square feet of space, it will not be free of subsidies until it undergoes a planned 25,000-square-foot expansion. It appears that Meeder's theory holds up in practice, at least among this survey sample.
Respondent Empowerment Inc. in Chapel Hill, N.C., is squeaking by with 6,000 square feet of space. The program is self-sufficient – if it is staffed with only one full-time employee, which is not enough staff to provide clients high-level business-assistance services. "The way it was initially thought up was that the building can meet all of its own needs," explains Jeff Caiola, Empowerment's business manager. "But the crux of any incubation program is providing services, and I think that is where we're running into problems." Even with the industry-average 2.4 staff members, incubator managers often struggle to find enough time to spend directly serving clients. Developers facing circumstances similar to Caiola's may wish to explore a without-walls approach to serving clients.
Readers should not interpret these figures to mean that the 73 percent of respondents who expect to require ongoing subsidies do so solely because of incubator size, nor that they will require these subsidies forever. There are many ways to work toward self-sustainability, and the important thing to focus on is putting in place predictable, reliable sources of funding.
Of those surveyed, the average cost for the first 12 months of operation was $252,013. The highest annual cost was $1 million, the lowest was $24,000, and the median was $230,000. Included in these costs are such things as staff salaries, client services, building maintenance and security, utilities, and supplies.
Budgeting an accurate estimate for first-year operating costs is a major challenge for developers and managers of new programs. "We started out just like a new business client, writing a business plan including financial projections," says Sonya Buckner, director of the Montgomery Area Small Business Incubator in Alabama. "Since that time we have had to watch our cash flow, conserve our cash and be very diligent in our plan to maintain our occupancy. It is tough, but we practice what we preach." Buckner, like many other incubator managers, spent a lot of time researching costs specific to her building and program, from utility cost estimates to janitorial service quotes. She tried to get contractual agreements whenever possible as a means to gain solid, dependable numbers in her budget.
No matter how absolute your expenses look on paper, there are always numerous surprises that occur when operating an incubator. Developers and managers should try their best to account for surprises when estimating operating costs. "I would love to say that I was brilliant enough to have anticipated all of the roadblocks we encountered along the way," Buckner says, commenting on a last-minute scramble for landscaping expenses, "but I am not, and therefore would never have expected to raise money for crape myrtles or maple trees." (For more of Buckner's honest and entertaining thoughts on launching an incubator, see "Could've, would've, should've.")
Most incubator managers will agree that all the budgeting in the world won't account for the truly unexpected. Once Advantech was up and running, the air conditioner was the least of Haines' worries – at least until it caused more than $500,000 in damage. The air conditioner blew out the entire circuit breaker, which in turn caught fire and kept the incubator without electricity for a week. "The insurance company ended up paying for all of it," Haines explains, "but needless to say, they weren't quite as happy about that fact as we were." Even though this expense was covered, many accidents such as broken windows and burst water pipes might fall beneath the range of insurance deductibles. It's for instances like these that incubator managers should accrue a rainy day fund. "We have also been fortunate to reserve funds for major maintenance projects and currently have monies in certificates of deposit," Buckner says.
This is perhaps the trickiest question to answer. The average amount of time that elapsed from the point at which the developers of the 26 incubators surveyed began promoting their projects and the time their incubators opened their doors was 25 months, just a little more than two years. However, those periods of time ranged from four months for TechRanch in Bozeman, Mont., to 10 years for the San Juan College (SJC) Enterprise Center in Farmington, N.M.
More often than not, the time it takes to launch a program is directly related to funding. In the extreme case of the SJC Enterprise Center, developers made two separate attempts at launching an incubator. First, city officials began project planning and fund raising, but they came up short of the necessary funds. After seeking more funding and exploring other opportunities, the city decided to partner with San Juan College to create the incubator, signing over the funds that it had already raised. The college then had to repeat the whole fundraising process before finally launching the incubator.
Even if your development process is going smoothly, be prepared for some bumps in the road. The Indian River Community College in Stuart, Fla., had incubator facilities ready to go, but the lease agreement fell through unexpectedly. It turned out that the owner did not want the offices "subleased," as he saw it, to other businesses. "Clearly, he did not understand the concerns of business incubation," says Bruce Trembly, incubator director. Eventually the college found a second suitable building in the area, but this incident cost developers precious time.
So don't count on the average of 25 months reported in this survey. The time it takes to get an incubator up and running will depend on how quickly your community gets behind the project, the lead time of your funding sources, the amount of work it takes to prepare your building, and any number of surprises that pop up along the way.
Yes. It's a simple, easy and to-the-point answer, but one that NBIA has felt the need to promote for years. We're pleased to report that in this informal survey, 81 percent of respondents had developed a business plan, 81 percent had conducted a feasibility study, and 65 percent had used both a business plan and feasibility study. Only 4 percent (one respondent) had done neither. (See Figure 5.)
An incubator's business plan will address the program's potential for financial health and, among other things, help developers and potential funders know whether the endeavor is worth time and energy. Most incubator managers require business plans of their clients, so it is only natural to think that an incubator developer should have one in hand when stumping for funds. "Every place we went for funding required a business plan," Haines says. "For no other reason that that, it was worth having one." But even beyond funding purposes, a business plan gets the developing process out of a person's head and into reality. "You don't know what you really need until this kind of formal assessment is done," Buckner says. "I would have lost my mind if I didn't have a road map to get me to the end."
Incubator feasibility studies go beyond the business plan to look at factors including the community's entrepreneurial climate, the presence or lack of existing business support services, and the potential for community support for an incubation project. Ultimately, a good feasibility study will determine if it is possible to garner sufficient support for the ongoing operations of a business incubator in a given community.
Recent research on business incubation in rural communities indicates that incubator success is closely tied to whether a program performs a feasibility study. "The vast majority of programs that performed poorly were not based on a competent feasibility study," says Dinah Adkins, NBIA president and CEO. "And if there was a study, it failed to do such simple things as indicate the market and type of clientele that the incubator would assist." Consequently, these poor-performing incubators suffered from not having the adequate deal flow or sponsors that a proper feasibility study provides.
The Entrepreneur Center was the only respondent to NBIA's informal funding survey that did not complete either a feasibility study or a business plan. "I definitely wish that a feasibility study had been completed," says Ed Shytle, the center's director. "As things were, we simply based our projections on the number of clients and interest we had had so far." Ashland Community College developed the incubator with almost all of the initial funding coming from Kentucky's Cabinet for Workforce Development, an initiative designed to provide opportunities for Kentuckians to improve themselves financially, professionally and personally. A feasibility study likely would have identified more diverse funding sources for the incubator, making it less dependent upon Ashland Community College for its sustainability.
Finally, the process of completing feasibility studies and business plans often answers many questions that we have not answered in this story. These include "Who should I partner with?" and "What services should I provide?" The business plan process should uncover all potential competitors (other business assistance providers), who might be just the partners you need to launch a successful program. And because the feasibility study process involves extensive interviews with representatives of all these service providers as well as other potential partners, supporters and clients, it's a great way to learn about possible sources of support you weren't aware of and the types of services clients need.
Even if a person is happy with a job well done, there are almost always certain aspects that he or she would change if given the chance. Sonya Buckner, director of the Montgomery (Alabama) Area Small Business Incubator, provides the following list of missed opportunities and saving graces of incubator funding.
I wish I had …
I am thankful for …
When NBIA conducted a similar informal survey in 1994, the U.S. Department of Commerce's Economic Development Administration (EDA) was the biggest federal financial supporter of business incubation. (See Figure 6.) Today, the EDA is still, by far, the most important source of federal funding for incubators. Nineteen percent of survey respondents' funding came from the EDA, with contribution sizes averaging $1.2 million. The next closest federal source for funding in terms of contribution size and frequency was the U.S. Department of Agriculture, which supplied 3 percent of contributions, averaging $375,038. Most incubator projects apply for EDA funding through the Public Works Program or the Economic Adjustment Program.
Along with EDA's consistent support for business incubation as a means of economic development comes a long wait for funding due to the sheer number of applicants. "The demand far exceeds our available funding," says David McIlwain, director of EDA's Public Works division. Consequently, most business incubators cite a one- to two-year wait for the EDA to process their applications. McIlwain explains that it's not decision making that's holding things up, but the federal government's allocation of funds to EDA. "When we get new federal allocations, we don't post an open petition for new applications. Instead, we look at the hundreds we already have. So you're not waiting for us to process the application, rather for us to apply the limited funds that we have to the most distressed areas and those with the most competitive programs." Once EDA selects a project to potentially fund, the approval process generally takes about 70 days. —BW
Keywords: budget -- incubator, facility selection/construction/renovation, feasibility study, financial management -- incubator, funding sources/fundraising – incubator, subsidy
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