by Meredith Erlewine
Most small businesses don’t make it to their fifth anniversary. In fact, according to the U.S. Small Business Administration, only 44 percent make it past four years.
Business incubators help companies beat the odds by offering specialized services and mentoring. Does it work? Historically, NBIA member incubators have reported that 87 percent of all graduate firms are still in business. Pretty impressive, isn’t it?
But here’s the hitch: The data on incubator graduates is more than 10 years old. Funders, government officials, the media and others want up-to-date proof of incubation’s impact.
The public doesn’t know a lot about economic development, let alone what incubation is or whether it’s effective. To many, economic development is the opening of a new chain restaurant. As an engine of economic growth, business incubators are not heard. We have an impressive story to tell, but without a unified voice, the silence is deafening.
Unfortunately, NBIA has had difficulty gathering current information on incubator impacts because many incubation programs don’t track the success of their clients and graduates. Without hard data from incubators, NBIA can’t spread the word about the industry’s effectiveness.
Why would incubators not track this important information, especially if they have such a powerful story to tell? Because without guidance on what to track and how to measure success, it can be hard work.
That’s why NBIA, in cooperation with Southern California Edison, has created Measuring Your Business Incubator’s Economic Impact: A Toolkit. The toolkit, free to all NBIA members, provides incubator managers with the rationale and the tools they need to get started down this critical road of tracking success. We hope this toolkit will be the first step in a major data collection effort that will ultimately allow the industry not just to break the silence, but to break it with a triumphant message of success.
“Since NBIA was founded, we have attempted to collect information on the impacts of incubator investments. But this has become more difficult as our members collect all sorts of different data that are not comparable, and some don’t collect any outcome information,” says Dinah Adkins, NBIA president & CEO. “If we are successful in showing – without doubt and with hard data – that incubation makes a significant contribution to our local and national economies, our programs will gain prestige and will be able to access valuable resources. This is the single most important contribution we can make to our industry.”
Do you know the magnitude of the impact your incubation program has on the local economy? Not just in terms of clients served, but the real meat of the matter: jobs created, salaries paid, revenues earned and other economic gains?
If you don’t have these figures handy, you might be missing opportunities to convince champions, potential funders and the public of your program’s importance. Additionally, if you aren’t tracking this information, you might be unwittingly contributing to feelings of doubt about the industry’s effectiveness.
“A real challenge with incubation is that programs have to continuously prove themselves because they are constantly asking for operating subsidies,” says David Lewis, assistant professor in the Department of Geography and Planning at the University at Albany in Albany, N.Y., and a published researcher on economic development and business incubation.
Other economic development strategies – such as tax abatements to bring a company to town or a one-time grant to a manufacturing company to expand its facility – normally require one large chunk of money up front or, in the case of tax abatements, an up-front decision that will affect future taxes. Once the decision is made locally to grant the money or abatement, the public doesn’t often pay a whole lot of attention to what ends up happening.
Incubators, on the other hand, often require operating subsidies across many years – and the public and elected officials take note, due to requirements to obtain annual approvals. “It feels like incubators are being held to a higher level of accountability, because they are going back to the well so often,” Lewis says.
Having hard data about your program’s impact can help you prove your program’s contribution to the local economy. Additionally, tracking outcomes helps incubators:
NBIA’s 2006 State of the Business Incubation Industry report shows that 21 percent of responding incubators had city, county or state government as their main sponsors. Another 20 percent were sponsored by academic institutions – many of which are public institutions. What does this have to do with tracking impact? The public wants to know whether it is getting value for its money.
“While utilities would love to be philanthropic about investing in incubation, they can’t,” says Skip Farrar, manager of business development at Southern California Edison, a public utility in California. “The California Public Utilities Commission requires [SCE] to demonstrate that our investments in economic and business development activities ultimately result in a benefit to our rate payers.”
That means that SCE must invest its economic and business development funds (approximately $2.5 million annually in Southern California) only in projects that result in either more customers or increased electricity usage. Those projects then spread the utility’s fixed cost of doing business across a wider base of sales or customers, thus placing downward pressure on rates.
“The only way I can demonstrate the benefit of incubation is to show that I’m ultimately creating spin-off companies and jobs,” Farrar says. “Until we can quantitatively demonstrate cost effectiveness, we just can’t spend the money on incubation because we’re prohibited by regulation from doing so.”
Farrar says that qualitatively, business incubation sounds like a great investment. “But without data demonstrating results, it’s hard to let loose of the purse strings when there are other economic initiatives that have compelling data competing for the same money.”
Incubator managers should evaluate outcomes to know if their programs are effective. There is no more powerful tool available to prove your program’s successes and to identify where program improvements are needed. Evaluation results can be used to attract sponsors, strategic partners and high-quality clients.
Linda Clark, director of the Ohio University Innovation Center in Athens, Ohio, released an economic impact study of the incubator for the first time in 2005. “I needed a way to objectively evaluate that we were headed in the right direction,” she says. She was pleased with what she found out. For example, in 2006 alone, incubator clients and graduates employed 217 people in Athens County. (For more information about Clark’s economic impact study, see “Telling a Story With Numbers.”)
Similarly, Sam Funchess, president & CEO of The Nussbaum Center for Entrepreneurship in Greensboro, N.C., conducted a formal economic impact study of the program for the first time in 2006 (the incubator began serving clients in 1988). The impetus for the study, Funchess says, was twofold: The program was preparing to seek grant funding, and also wanted to demonstrate to the community at large that it was a significant player in improving the local economy. “While we are respected in our community, we are not looked at as an economic development engine for this area,” Funchess says. “The report details otherwise.”
For example, Funchess found that the Nussbaum Center’s clients and graduates directly employed 655 individuals in Guilford County in 2005 alone. Those jobs created another 562 jobs through indirect and induced impacts; in total, the 1,217 jobs were estimated to have generated a total of $46.4 million in labor income. Additionally, the jobs paid an average salary of $38,169 – much higher than the median county income of $26,000.
Armed with data that proved the center’s effectiveness, Funchess issued more than 20 press releases in the first 37 days after the release of the study in January 2007. “We will be a force known in our community for job creation at higher-than-average salaries,” he says.
While individual incubation program impacts are impressive, imagine the story we could tell about our industry if NBIA could gather impact data about individual programs, aggregate it and report out on it. Would that not increase the industry’s clout and political visibility?
“If there were a standardized reporting method and NBIA could tabulate the data – just as we do with our clients – it would be good for the industry, good for the association and ultimately good for individual incubators,” says Joel Wiggins, CEO & president of the Enterprise Center of Johnson County in Lenexa, Kan., and chairman of NBIA’s Board of Directors. “So many more individuals and organizations could be more supportive of the industry as a whole.”
When NBIA attempts to ask impact questions on industry surveys, however, most are left unanswered, presumably because respondents aren’t tracking that information. If the majority of incubators tracked just a few key metrics (in addition to the data they need locally), NBIA could begin to demonstrate industry-wide impact. To make that happen, incubator managers and sponsors must buy into the process of tracking impact and commit to participating, and the majority of incubation programs must track a core set of common metrics and measures. Measuring Your Business Incubator’s Economic Impact: A Toolkit is a first step toward realizing this vision.
Measuring Your Business Incubator’s Economic Impact: A Toolkit is now available. In NBIA’s first-ever guide to collecting and disseminating economic impact information, you’ll find the rationale behind data collection, the 10 data points you should track, tips for ensuring cooperation from clients and graduates, advice on how to crunch the numbers, and suggestions for ways to get the news out to stakeholders and the public. Also included are the following electronic documents: separate surveys for clients and graduates, and a spreadsheet for data collection.
All of this information is available in HTML format, free to NBIA members, at www.nbia.org/impact. A visually appealing, hard-copy version also is available in the NBIA Bookstore at www.nbia.org/store.
Some incubator managers don’t track graduate data because they believe they can’t take credit for accomplishments (or mistakes) of firms after they’re out on their own. How is an incubator manager to know if a series of decisions that led to a company’s ultimate success or failure is due to its former association with the incubator? How can an incubator say it had a hand in creating jobs that come into existence after a company leaves the program?
The role the incubator plays in getting a business off the ground is extremely important, says Skip Farrar, manager of business development at Southern California Edison, a public utility in California. “It’s a but/for argument: But for the incubator, this business might never have existed, and the persistency wouldn’t be there,” he says. “Therefore, the incubator gets to claim results over time.”
One reason tracking economic impact can be a significant boon to your program is that you can use those numbers to demonstrate results. Consider the impact of the Ohio University Innovation Center in Athens, Ohio. In 2006 alone, the incubator’s six clients had the following impact on Athens County:
Those figures are particularly impressive when you consider the context. The Innovation Center is located in a rural Appalachian county where nearly 30 percent of the population lives below the poverty line.
Taking those numbers one step further paints an even more impressive picture. Linda Clark, Innovation Center director, contracted with OU’s Institute for Local Government Administration and Rural Development to conduct an economic impact analysis of the program. ILGARD used the Impact Analysis for Planning (IMPLAN) economic modeling software program to analyze the incubator’s impact.
After taking into account indirect and induced jobs created as a result of incubator clients, the total impact of all six incubator clients on Athens County in 2006 is estimated to be:
Keywords: advocacy, economic impact, evaluation -- incubator performance, funding sources/fundraising -- incubator, economic impact of incubation, marketing and promotion, research -- incubation, stakeholder relationship management
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