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ESTABLISHING A BUSINESS INCUBATOR


Why Support Business Incubation?

Business incubation offers one of the most comprehensive strategies to foster entrepreneurship in the community, help create jobs by supporting new business ventures, stimulate growth by promoting a diversification of business opportunities, act as an agent to revitalize rural areas or depressed neighborhoods, and facilitate the transition to business ownership for students and workers seeking a new career path.

Business incubators may focus on commercial space at a low cost and a variety of business services to assist entrepreneurs in the earlier stages of business development (NBIA, 1991). Business incubators can also provide opportunities to integrate education and training with a focus on entrepreneurship, business, management, new competencies demanded in the workplace, and the training of employees from small firms operating in business incubation or in the community (Campbell, 1987). Further, business incubation serves as a vehicle to provide consulting services and stimulate business alliances in the community.

Although the benefits of this participation are many, the contribution of community technical colleges is actually rather modest. In 1991, out of 500 members in the National Business Incubation Association (NBIA), the total number of incubators primarily sponsored by these institutions was only 25. Thus, the question is how can community technical colleges get involved in business incubation? Seven strategies have been identified and presented here for that purpose.

Organization

Several organizational formats can be found in business incubation. The reason for an incubator's existence varies from case to case. A number of economic factors (e.g., plant closings, companies moving to other countries, global competition, high unemployment rates, and inflation) motivate local private and public agencies to offer opportunities to develop new jobs through the creation of small business enterprises. With this in mind, partnerships among local governments, social agencies, economic development groups, and other groups and individuals come together to alleviate these problems affecting communities by creating small business incubators, also known as "change agents" (Campbell, 1987).

[*] Usually, the justification and leadership to create a business incubator come from key leaders in the college or community who lobby and champion the idea. This leadership--especially within the college--is essential to support and set in motion the necessary steps to start a business incubator. A first natural step, once the leadership has been identified and used to promote further action, is to set up a task force to study in greater detail the opportunities and implications for setting up a business incubator. Task force members should include college administrators at various levels, bankers, faculty representatives, and other key stakeholders from the college and the community. Derived from the work of the task force, a committee can be formed to then take action on the organizational set up of the business incubator.

[*] One of the first steps of the organizational committee is to hire a manager for the incubator. It is advisable to hire this person at an early stage to have him or her fully participating in the conceptual organization of the incubator. This way, the manager grows with the incubator in tune with the resources and circumstances appropriate to the community and the college. At this point, the work of the committee may be terminated and delegated to the manager with the help of an ad hoc steering committee or a board of directors. However, in some instances, other informal arrangements without steering committees may work.

[*] One way to gather organizational ideas is to tour business incubators established in the area or in other states--if possible--to assess the differences in organization and operation. Every community is different, however, even though physical and social descriptors may be similar. The objective is to develop the best organizational set up possible, based on the resources and commitment available.

[*] In large cities, the best organizational arrangement appears to be a comprehensive approach to business incubation, including commercial space at low rates; clerical and office support; consulting services directly related to business management; and services needed for expansion, growth, product development and innovation, and even getting into international trade. In small communities, a more basic approach is usually found. The focus is to provide commercial space complemented by office and clerical support and management consulting services. The provision of educational and training activities is found in both comprehensive and basic approaches to business incubation under various formats. For instance, the Institute for Economic Development, which is located in a large metropolitan city in the South, offers an array of services which are available to both the clients at their business incubator and the general public or private corporations. The director of the institute explained that,

Among the various services that our college district has housed under the roof of the Business Institute, we have the Small Business Administration funded Small Business Development Center which provides help to anybody who wants to start a business [all the way from] getting the business name to helping him or her set up a partnership. We also have the Center for Government Contracting, the International Business Center, the Job Training Center, the Business and Professional Institute, and the Business and Technology Center, all of which are designed to support economic development in our district, from assisting small business development to providing support services to corporations around here.
At another site, the manager of a small business incubator located in a large Native American reservation in the Northwest added his experience on the organization of services:
The first phase of this program was to offer business training in what we call the 14-week Greenhouse Class. And it's really a small business management course . . . where we basically discuss all the issues that somebody wanting to start and operate a small business would face--everything from how to keep your books, tax compliance, budgeting, money management, you know, everything right. We bring various instructors, but typically we try to find someone who knows something about Indian culture or someone who has worked in some capacity with the tribe.
[*] In terms of staffing, it is clear that the best organizational arrangement is to have the managers fulfill coordinating responsibilities to provide quality services to incubator firms. In many instances, due to limited resources or commitment, the managers are forced to spend most of their time in building maintenance rather than in developing an entrepreneurial environment for incubator clients. The best arrangement may be to have a lean staff organization to provide for permanent and ongoing basic services (e.g., clerical support; troubleshooting, including building maintenance) and rely on external consulting services (e.g., professional, volunteer sources) to provide specialized consulting services and education and training opportunities.

No matter what organization and structure is developed, it should focus on what fits the situation. An incubator that proposes to reach out to a minority community will vary greatly from one with an emphasis geared toward technology, as described in the examples discussed previously.

Funding

[*] The availability of funds also varies from incubator to incubator. Only in rare instances is there a 100% commitment from one source. For example, a Small Business Development Center (SBDC) in the Northwest is financed by tribal funds, and the financing for an expansion project will follow the same pattern. In some cases, local funds are committed by the local government in conjunction with community colleges, universities, local economic development agencies, and other ad hoc partnerships. On occasion, these partnerships obtain funds through economic development and capital fundraisers, and in the case of for-profit incubators, from rent revenues or consulting services to firms in business incubation. Incubators thus funded must make an effort to increase revenues to continue in operation. The drawback is that managers are distracted from consulting services as they pay more attention to fundraising and public relations activities. The following cases illustrate various funding arrangements:

With incubator centers facing the challenges of raising adequate funding, it is appropriate to address some of the issues outlined by Lavelle and Bearse (1992). First, Lavelle and Bearse warned about the problem of undercapitalization; sometimes the decision to proceed with plans to start business incubation activities is forced by political pressure or by overestimating the commitment of sources for capital. This is particularly problematic for projects relying on grant monies or government subsidies. Thus, assuring both the commitment and availability of funds before starting up a business incubator is a must to ensure the chances for the success of the entire project.

Another issue identified by Lavelle and Bearse is the excessive financial burden that may arise due to high acquisition and renovation costs. This problem may be further complicated by a high overhead or high salaries, resulting in an undercapacity to reach a break-even point. These problems can originate from poor management and accounting practices--for example, if staff and administrative costs are allocated over different programs, creating a financial burden on the few funding sources. Obviously, maintaining healthy management of finances is as important as assuring adequate funding to preserve the chances for the continuing funding and credit worthiness of the incubator.

Operational Rules

The requirements to become a client in an incubator vary according to the type of incubator, entrepreneurial climate, sponsoring agency regulations, and other factors which depend on specific circumstances. Usually, the operational rules include enrollment, duration of stay, and exit policies.

Entrepreneurs renting or leasing space in incubators with stringent rules may find these conditions not conducive to their businesses' advantage, but this may be the only opportunity they are given to start or continue their business ventures. This situation may be true in incubators where space is at a premium or when clients with successfully proven businesses are recruited to provide steady rental revenues.

Business Financing

[*] The adequate financing of a small business is fundamental to its success. However, adequate financing is difficult to obtain, especially for new entrepreneurs. Further, it appears that during the earlier stages of business development, entrepreneurs do not have a realistic view of their capitalization and/or the operational needs for their business. Here is where incubators are key in assisting their clients in making an adequate assessment of their financial needs. Needless to say, the completion of a realistic business plan becomes the first step in obtaining adequate financial support, and funding schemes implemented by some incubators are instrumental in assisting small businesses.

[*] Some business incubators have established in-house business loan and grant programs to complement available bank and/or government-guaranteed bank loans. For instance, in the case of an incubator in the Northwest, the incubator manager, with the help of the tribal council, set up an in-house program to facilitate capital to new entrepreneurs in the form of loans and grants. The innovation of this program is based on the fact that it was designed and set up with the same requirements and paperwork as the SBA.

A different approach was utilized by an incubator in the South where the local branch of the SBA trained bankers on the SBA requirements and related paperwork at their facilities. The bankers welcomed this approach, since SBA traditionally requires extensive paperwork from banks and customers. Another business incubator, located in a rural area of the Midwest, created a loan program to assist entrepreneurs with start-up costs once they qualified for the incubation process. This program is called SELF--Self-Employment Loan Program--and provides up to $5,000. Even though this is a small amount, the center manager explained that it is a "program to help them get started, and we try to work with them as much as we can in terms of giving them some space at the center for meetings."

Business Consulting Services

[*] Consulting services to firms in business incubation are provided as a complement to commercial space and office and clerical support. These services may be delivered by incubator staff, volunteers, and/or outside consulting firms. The prevailing limitations of incubator management arrangements, such as staff involvement in fundraising activities to support the incubator, seem to detour the incubator's mission to provide entrepreneurship opportunities. This situation reduces, in many instances, the provision of adequate consulting and training activities to incubator clients. Thus, other alternatives have to be considered, including the utilization of volunteer services from nonprofit organizations, staff from government agencies (e.g., SBA, IRS), bank representatives, successful entrepreneurs, and private consultants.

[*] Experts in the field of business and entrepreneurial development in business incubators are sometimes contracted to provide managerial support services to both incubator staff and clients. For incubator clients, these contracted services are usually provided as part of the lease agreement or for a fee. In other cases--such as with an incubator in a large metropolitan city in the Southwest--incubators have a pool of experts who are willing to serve as presenters in their seminars, workshops, and other training activities for free. This participation of external consultants appears to attract more people into the center for help in how to start a successful small business in their community.

[*] Volunteer services from nonprofit organizations are also used to provide consulting services. Consulting services from the Service Corps of Retired Executives (SCORE) is one of the most popular because it provides free access to experienced consultants on a wide range of topics related to entrepreneurship and business management. Just keep in mind that these services may not be available at times (e.g., when consultants vacation), but this may be worked out with some creative scheduling with the local SCORE office.

This strategy of using the services of retired executives to provide free business advice to small business was begun by a member of the DuPont family in 1950. SCORE officially began operations as part of the SBA agency thirty years ago. This cadre of well-intentioned executives has mushroomed to a group of 13,000 executives who provide services in 300 U.S. chapters. In 1993, SCORE assisted 300,000 small business firms. It offers workshops, seminars, and one-on-one business consultations free of charge. Advice given may vary from bookkeeping and how to write business plans, to marketing new products in the global economy.

[*] Other volunteer consulting services may be accessible through working partnerships with local banks, government offices (e.g., IRS, SBA), chambers of commerce, industry, and entrepreneurs in the community. Staff and individuals from these sources provide valuable expertise on timely and relevant topics in business development at little or no cost. Sometimes paying travel expenses is sufficient to keep these connections in place.

[*] Using private consultants to deliver consulting services--and in some instances manage the incubator operation--is another alternative. When college staffing is not possible, or when the available expertise is limited, this option appears to work well, especially if private consultants are in the business of incubation themselves. The following examples illustrate this case:

[*] In general, basic consulting services must cover all aspects of managing a business from keeping accounting books to the management of financial resources. Assistance in expansion and/or growth is an area that deserves special consideration given the fact that entrepreneurs may overlook this stage of the operation. Incubator staff should be aware of this situation to help entrepreneurs meet their needs and solve problems. For instance, two incubator managers shared their experiences:
Let's say that you're Company X, and you need legal advice. We'll give you the first hour free of charge, sort of a taster . . . the rest is provided by lawyers who have been with the [management] firm for ten years. the charge then is below market rates. And we'll give you efficient legal advice in terms of your small business needs.

In terms of growth, one of the areas the clients need the most help is in hiring personnel. I have right now four start-ups . . . they're all just business owners, but for the last two months, they are at the growth level where they've had ten contracts, and they're ready to go out and hire additional employees, but they don't know what to do. So that's where we have stepped in and provided the technical assistance . . . We have set them up with our personnel director and the college district so they can learn the thousands of tax questions on their business.
[*] A complementary alternative to individualized consulting services may be the provision of low-cost training alternatives such as self-paced instructional programs or materials, computer interactive programs, and free or low-cost college- or university-sponsored business training seminars and/or workshops.

Networking Opportunities

[*] Exposure to opportunities for entrepreneurial development is one form of integrating the work of preparing entrepreneurs for the setting up of a successful business. This experience can be facilitated by establishing either formal or informal connections with key players and institutions in the community. This process requires a more proactive participation in strategic planning, the development of broad-based community partnerships, and supporting networking activities. Participation in networking activities is a natural role for business incubators because it connects entrepreneurs in and out of business incubation with key stakeholders in the community. Networking is an activity that must be developed and not necessarily assumed to take place within an incubator setting. Every entrepreneur has extensive and demanding activities to attend to each day in the operation of his or her enterprise; therefore, the leadership of the incubator must spend time fostering and promoting the development of networking activities within the incubator. Once a networking structure has been developed, it will more than likely take on a life of its own; that is, members will refine it and come to the conclusion that networking is probably one of the most important services provided by the incubator.

[*] A successful practice in promoting networking is to set up regular meetings where entrepreneurs in business incubation have the opportunity to discuss formally and informally the topics of common interest. Through these meetings, networking relations develop, and profitable interactions are established. In a way, entrepreneurs serve as consultants to one another about problems they have previously experienced. Further, business alliances can be created, and information is exchanged for immediate applications. Concurrently, the benefits of these in-house networking activities are informally extended to the daily interactions entrepreneurs have in the common areas of the incubator.

[*] Networking opportunities with external parties are commonly established by incubators through periodic meetings with representatives of the local business and industry and agencies supporting economic development. Breakfast and/or lunch meetings are promoted and scheduled to discuss current, relevant topics of interest for entrepreneurs and, in general, serve as a forum where the voice of those interested in economic development is heard.

[*] Formal and informal partnerships as a means to connect one or more players with an incubator facility offer an opportunity to access the consulting services and networking opportunities previously discussed. Developing partnerships with educational institutions is an example of these connecting activities. Integration of entrepreneurship in secondary school curriculum, for instance, may facilitate these educational connecting activities needed to expose youth to the concept of business development and business opportunities. This can be accomplished while integrating academic curriculum within a vocational context.

[*] As emphasized above, it is important for managers to develop key partnerships in fostering and promoting the development of networks. In 1993, Lipnack and Stamps offered a set of suggestions for successful teamwork, partnerships, and networks. First, they suggested that without a constantly visited, clear purpose, teams, partnerships, and networks can collapse. A sense of mission unifies the group. Second, no group can function well without individual members who demonstrate the voluntary commitment and capacity to work interdependently. Above all, they must want to do it. Third, frequent and timely communication between members is critical. If face-to-face meetings are too few, or communications systems (voice-mail, e-mail, FedEx) are inadequate, the synergy will not materialize. Ongoing, voluntary interaction between members sustains the partnership. Fourth, networks are deliberate acknowledgments that no one person can (or needs to) do it all. Teams succeed when they rely on more than one person to play a leadership role. Leadership development must be nurtured in successful enterprises. Leadership is a function, not a job title, and may be demonstrated by individuals who assume specific roles in the group or assume them when the situation requires it. Finally, it is essential to manage the flow of information. When teams do not keep their constituents informed, they run the risk of losing touch with the organization as a whole. The multiple connections to different people and levels within the participating organizations must be sustained.

[*] In fostering and developing networking/connecting activities, Lichtenstein (1992) suggested several variables that can be used by an incubator manager. These variables include the types of businesses, the personal characteristics of entrepreneurs, the stage of their firms' development, space or social distance, the existence and design of forums, the presence of a critical mass of firms, norms and attitudes, the actions of key individuals within a network (in this case, the incubator manager), and time.


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