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Summary

Adhering to certain industry best practices contributes more to incubator success than a program’s age, size or regional economic conditions, according to a new study funded by the U.S. Economic Development Administration. This article highlights some of the most important research findings for incubation practitioners.

Study reveals key characteristics of successful incubators

by Linda Knopp

December 2011

Business incubation programs that adhere to industry best practices outperform those that do not – no matter where they're located or what type of environment they operate in. That's the key finding from a new research study funded by the U.S. Department of Commerce Economic Development Administration and conducted by the University of Michigan's Institute for Research on Labor, Employment and the Economy; the University at Albany, SUNY; NBIA; and Cybergroup. After a three-year research effort, the EDA released Incubating Success: Incubation Best Practices That Lead to Successful New Ventures in October.

This finding comes as good news for the incubation community – especially those developing or operating incubation programs in regions experiencing tough economic conditions, as the results demonstrate that incubator managers can maximize client success by implementing certain key best practices.

Through the Incubating Success study, the research team set out to identify the factors that contribute most to incubator and client success. Although other industry studies have examined business incubation best practices and trends, this work is one of the first to use a rigorous definition of what constitutes a business incubator. To be included in this study, incubators had to:

  • Have correct and verified contact information
  • Have been in operation at least five years
  • Target their services to start-up firms
  • Offer at least five commonly provided incubator services, such as help with business basics, networking activities among incubation program clients, help with accounting or financial management, access to capital, or linkages to higher education resources and/or strategic partners

"This study builds on prior work and is unique in its scale of depth of practice," says David Lewis, assistant professor in the Department of Geography and Planning at the University at Albany, SUNY and the lead author of Incubating Success. "It provides an empirical understanding of the key practices that matter most in business incubation, what works and what doesn't."

So what does work?

One of the key findings of the study is that business incubation practices matter more than facility size, program age or regional economic conditions when it comes to incubator success. Certain characteristics and practices matter more than others, but the study found there's no one magic bullet that will lead to success. Instead, it's the interaction between multiple practices, policies and services that produces optimal outcomes.

However, top-performing incubation programs identified in the Incubating Success study shared several common management practices, as described below.

Data collection. Successful incubation programs have learned that having current impact data from incubator clients and graduates goes a long way toward proving their program's contribution to their local economy and helping to secure stakeholder buy-in. In today's tight economy when many programs are competing for limited public dollars, being able to show your sponsors that your efforts are making a difference in the region's entrepreneurial environment could be the key to securing continued support.

According to Incubating Success, most top-performing incubation programs collect outcome data from client companies, both while the firms are still in the incubator and for a certain period of time afterwards. Collected data should include client and graduate firm revenues and employment, firm graduation and survival rates, and information on the success of specific incubator activities and services. (For more information about the importance of collecting impact data, see Measuring Your Business Incubator's Economic Impact: A Toolkit at www.nbia.org/impact. Created in cooperation with Southern California Edison, this toolkit also contains downloadable spreadsheets for data collection.)

Many incubator managers have found it's easier to collect this data if they gain commitment from clients to provide this information up front, either through an informal agreement or through the incubator's formal application process. As each new company enters the incubator, you should have a conversation about your expectations and requirements for sharing impact data – both while the firms are in the incubator and after they graduate. In fact, if you give clients a list of the data points you'll be requesting, they'll be better prepared to provide you with the information you need when you need it.

Written policies. By formalizing incubator policies in writing, you can help make sure the program's stakeholders and staff are on the same page when it comes to how the incubator operates. Key policies to have in writing are the incubator's mission statement, marketing plan, sustainability plan, goals and objectives, and mechanisms for collecting rent and fees.

  • Mission statement: A mission statement that describes the organization's fundamental purpose clearly and succinctly gives the staff and board a framework through which to consider new program ideas or goals. By having the statement in writing, it's easier to keep the mission at the forefront of any discussion about new program directions or services.
  • Marketing plan: A written marketing plan can play an important role in an incubator's success by providing a framework of ideas for ensuring that stakeholders, potential clients, prospective service providers and others are aware of your program, its services and its successes.
  • Sustainability plan: Having a financially sustainable incubation program helps ensure that you have sufficient revenue to continue offering quality programs and services to clients. Incubators need to review their sustainability plans periodically to make sure that funding sources are stable and secure, even if part of that funding comes through operating subsidies from outside sources.
  • Goals and objectives: Written goals and objectives help ensure that your program is on a clear path for achieving its mission. An incubation program that tries to pursue too many or conflicting goals can get off track and fail to accomplish what it's intended to do.
  • Robust payment plan: Having formal methods for collecting rents, service fees and other sources of income in a timely manner is important for meeting your budget projections. Letting clients fall behind on rent or fees can jeopardize your program's financial health and sets a bad example for entrepreneurs, who need to learn the importance of paying their bills on time and managing their accounts receivable.

Incubator advisory boards. Incubator advisory boards can help staff think strategically about its operations and establish policies and programs that will help the program reach its goals and objectives. Board members can host visitors, network with stakeholders and make presentations – demands that can divert the manager's time away from assisting clients. Sometimes, advisory board members even play a direct role in helping clients by offering legal or financial expertise, serving as mentors or making investments in clients.

According to Incubating Success, incubator advisory boards tend to be most effective when they have between eight and 20 members. However, even more important than the number of people on the board are the types of experience and expertise represented on it. For example, having an incubator graduate and a technology transfer specialist on an incubator's advisory board correlates with many measures of client success. Also, having accounting, intellectual property and general legal expertise on the board often results in better-performing incubation programs.

Additionally, the study found that including government and economic development representatives on an incubator's advisory board plays a role in client firm performance, as their participation helps ensure the incubator is embedded in the community and that these critical stakeholders are aware of the program and its successes.

Service providers. Providing start-up clients with the resources and assistance they need to grow their firms is what differentiates an incubation program from a real estate operation. Although ensuring that the incubator has a competent staff with sufficient resources – including time – to work directly with client companies is paramount, most incubator executives have other responsibilities in managing their programs beyond assisting clients. In many cases, part of the assistance they provide to clients is developing and administering an effective service provider network.

Service provider networks give clients access to high-level (and often reduced-rate) legal, accounting, financing and other types of business assistance that might not be available from the incubator staff. These experts should be readily available and able to resolve most problems faced by client companies. By negotiating free or reduced rates with service providers, incubator managers also help their clients conserve much-needed capital.

Incubating Success found that most top-performing incubation programs use between 10 and 60 outside professionals at least quarterly to provide additional services to their clients.

Entry/exit criteria. Not all entrepreneurs are cut out to be incubator clients, so incubators should take steps to ensure that the companies they are admitting are a good fit for the program. In particular, Incubating Success found that incubators that evaluate clients on their potential for success and select companies based on cultural fit generally perform better. Another important step is assessing client needs when the firms enter the program.

Having an effective client selection process helps ensure that your program has the right mix of companies, weeds out entrepreneurial wannabes from those who are committed and able to grow successful companies, and makes sure there's a good fit between the incubator's resources and the start-up's needs. In assessing potential clients, look for entrepreneurs who are willing to take advice, who will contribute to your program's overall success and who need the types of assistance your program can provide. Because incubator managers usually have limited time and resources, it's important to focus on the businesses that will benefit most from your help and have the greatest chances of success.

Equally important as implementing a formal client selection process is having criteria in place to determine when firms should graduate from the incubator. No one graduation policy works for all clients, so incubation programs often develop a complex set of exit criteria based on milestones, such as meeting certain predetermined goals, outgrowing available space and/or spending a set amount of time in the program.

By establishing exit criteria, incubators give clients concrete goals to work toward and make sure there's room for new companies to enter the program and receive incubation services. Although some programs set arbitrary time limits on how long a company can remain in the incubator, this approach assumes that all clients will mature at the same rate, which is not necessarily the case. Whatever the incubator's graduation policy, it should be flexible enough to allow companies to speed up or delay graduation as needed.

Managerial practices. Incubating Success found that certain incubator management practices often result in better client company outcomes, including regularly reviewing the incubator's budget against actual revenues and expenses, evaluating the quality and relevancy of service providers and incubator services, conducting regular meetings with clients to discuss their progress and showcasing client successes to the community.

  • Budget reviews: Most top-performing incubation programs compare their budgets to their financials at least annually – and usually much more often. By doing so, you can see early on how closely your daily financial situation is to your budget projections, which can help you recognize problems early on and identify possible solutions.
  • Evaluation of incubator services and service providers: By regularly assessing the relevancy of incubator services and the effectiveness of outside mentor relationships, incubation programs can ensure that their clients are getting the types and quality of assistance they need to grow successful new firms. Using surveys, focus groups or informal conversations, incubator managers can gather input from clients and make adjustments in the program's offerings or service provider network to reflect changing client needs.
  • Regular client meetings: Having regular time set aside to meet with clients to establish mutually agreed upon milestones and to assess progress toward achieving those goals is conducive to client success. If an incubator doesn't track client progress formally, both the incubator staff and the start-up might fail to recognize problems until it's too late.
  • Showcasing clients: Many incubators regularly highlight clients through their Web site, events, press releases or other means. These efforts can help highlight your program's success stories, raise awareness of your program and help clients generate publicity.

Community awareness. Top-performing incubation programs know the importance of having board members, stakeholders, sponsors and staff members who both understand and support the incubator's mission. When all key players are working toward the same goal, you have a better chance of achieving that goal. If everyone has a different idea of what the program's mission is, the incubator will never be able to satisfy everyone, and you'll likely waste time and effort pursuing activities that aren't productive.

As communities around the world look for ways to stimulate economic growth and create jobs, more organizations are looking to business incubation to lead the way, making this examination of the factors that contribute to successful incubation very timely. "During this financial crisis, policymakers and other sponsors are looking for better ways to invest public dollars," Lewis says. "Although incubators don't have the photo-op impact that business attraction can give, business incubation is the most cost-effective economic development strategy when the programs are well-operated."

To download a copy of the research report or a brochure highlighting the study's findings or to access an online tool for incubation practitioners based on the study's results, visit www.edaincubatortool.org.

Overview of incubators in Incubating Success study

Incubating Success examined a subset of the U.S. incubation community. The study included programs that had verified contact information, had been operating five years or more, targeted services to start-ups and offered at least five commonly provided incubator services. Here are some key findings about this population.

  • In 2008, these programs averaged 17 resident clients, 32 affiliate clients and 55 graduates. Average full-time resident client employment was 76.8.
  • Incubator firms from these programs generated approximately
    $18.7 billion in total revenues in 2008.
  • The average five-year survival rate for incubator graduates among this group was 75 percent.

Best-practice resources for incubation practitioners

NBIA research has consistently shown that incubation programs that adhere to the principles and best practices of successful business incubation generally outperform those that do not. Now, Incubating Success confirms that best practices matter.

In an effort to provide incubation practitioners with access to current information about industry best practices, NBIA has contributed to several resources. To learn more, check out the following tools.

  • In 1996, NBIA and its board developed the Principles and Best Practices of Successful Incubation.
  • In cooperation with the Appalachian Regional Commission and Tennessee Valley Authority, NBIA developed an online benchmarking tool that allows managers to compare their incubator's practices with those of their peers and with NBIA best practices.
  • As part of the Incubating Success research study, NBIA Partner Cybergroup developed an online tool to help incubation practitioners measure their program's performance compared with the practices deemed most important to client success in the study.

Keywords: Advocacy, Best practices, client services, Economic development, Economic impact of Incubation, Policy, Research-incubation

Contact NBIA

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Fax: (740) 593-1996
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info@nbia.org