How To Conduct A Business Incubator Feasibility Study

Editor's Notes

1. Business incubators nurture the development of entrepreneurial companies, helping them to survive and grow during the vulnerable start-up period. Incubation goals include creating local jobs, enhancing a community’s business climate, retaining businesses in a region, commercializing technologies, accelerating growth in a particular industry, and diversifying local economies. Incubators offer their clients business support services and resources that are tailored to their needs.
2. Incubation is not a new concept. The first U.S. business incubator, the Batavia Industrial Center, opened in 1959. Incubation really took off in the late 1970s and throughout the 1980s, as communities recognized the value of building and expanding new businesses to sustain their local economies. The industry grew quickly as forward-thinking economic developers realized the limitations of traditional business-attraction strategies. Today, NBIA estimates that there are about 7,000 incubators worldwide. The National Business Incubation Association, headquartered in Athens, Ohio, has more than 1,900 members from 59 nations.
3. A business incubator is not about cheap office space or just shared administrative resources. The heart of a true business incubation program is the services it provides to its clients: networking with other entrepreneurs and with business leaders; help with business, strategic and marketing plans; access to capital; and development of the skills needed to make a business successful. Start-up companies can get office space from any commercial landlord. What they won’t get there is management guidance, technical assistance and consulting that’s tailored to young, growing companies. Incubators provide a myriad of services to their clients. Nearly all offer help with business basics – such as writing business plans – as well as one-on-one business counseling and mentoring, networking opportunities, marketing assistance and shared facilities, equipment, and services such as reception and high-speed Internet access. Most have some mechanism to help their clients fund their enterprises, from links to venture capitalists and angel investors to in-house loan funds. These are just a few of the most common incubator services.
4. Incubators are different from other business assistance and economic development efforts. The U.S. Small Business Administration’s Small Business Development Centers, for example, are required by law to work with any small-business owner who contacts them, regardless of the company’s viability or stage of development. Research/Technology parks are usually not interested in startups but in larger companies that can partner with the sponsoring institution. Incubation programs, on the other hand, focus on start-up and early-stage companies, screen prospective clients for their likelihood of success and provide continuing, not episodic, support. However, many incubation programs partner with SBDCs to avoid duplication of services in a region.
5. In 1996, NBIA’s board of directors developed a set of industry guidelines to help incubator managers better serve their clients. Since that time, 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. Model business incubation programs are distinguished by a commitment to incorporate industry best practices.
6. Most North American business incubators are nonprofit organizations devoted to economic development. More than half of all incubators are mixed-use, assisting a wide range of start-up companies. A third focus on technology businesses. Other incubators serve primarily manufacturing firms, service businesses, or niche markets such as arts and crafts or specialty foods. About 53 percent of North American incubators are located in urban areas and 28 percent are in rural areas.
7. The vast majority of business incubators are sponsored by some kind of organization or consortia that provides a physical space for the incubator and/or some amount of financial backing. Academic institutions, government agencies and economic development organizations are the most common incubator sponsors.
8. Some of the United States’ most successful companies got their start in a business incubator. PeaPod, a pioneer of Internet commerce, was founded in 1989 at the Technology Innovation Center in Evanston, Illinois. It hit the Inc. 500 list of fastest-growing private companies in 1996; two years later, it made its one millionth delivery. Today, the online grocery service has more than 155,000 customers and is a subsidiary of Royal Ahold, owner of Stop & Shop and Giant Stores. When MindSpring entered the Advanced Technology Development Center in Atlanta in 1994, the company had three employees and only 20 subscribers. It graduated a year later with 45 employees and more than 8,500 subscribers. By 2000, when it merged with EarthLink, MindSpring had become one of the country’s biggest Internet service providers, consistently topping customer satisfaction surveys. Martek Biosciences may not be a household name, but chances are, if you have children, you have benefited from Martek’s products. Martek develops and sells products derived from microalgae, including nutritional oils included in baby formula that aid in the development of newborns’ eyes and central nervous systems. Martek has license agreements with 13 infant formula manufacturers, representing more than two-thirds of the world formula market. Formula containing Martek oils is available in more than 60 countries worldwide. If you’ve ever swiped on some sunscreen using one of those prepackaged towelettes, you’ve used another incubated company’s products. OraSure began its life as Solar Care Technologies Corp., the brainchild of three former Procter & Gamble employees. They developed a sunscreen towlette that they then licensed to Schering-Plough, makers of Coppertone. In 2000, the company merged with another firm to form OraSure Technologies, a leader in the oral fluid diagnostics market, developing tests that use saliva to simplify and speed testing for HIV and other infectious diseases as well as drug and alcohol abuse. In 2000, Pabst Brewing Co. tapped Object 9, an advertising and design firm, to help market its venerable Pabst Blue Ribbon brew to a new generation of beer drinkers. The tactics Object 9 devised – including a Web site that allowed users to register for special promotions – helped Pabst Blue Ribbon sales increase by 10 percent in both 2002 and 2003. So Pabst naturally turned to Object 9 again in 2004 to update the Old Milwaukee logo. Object 9 has worked similar marketing magic for other national brands as well, including Sprint; Realtree hunting clothes and supplies; and Advantis Technologies, maker of pool- and spa-care products.
9. Business incubation is an important tool in economic development. Incubators create jobs in a community, but they also can help attract and retain outside companies, which will be attracted by a region’s strong entrepreneurial base. A 1997 study of incubator impacts found that for every public dollar invested in them, NBIA member incubators and their graduates return about $30 in local tax revenues. Historically, 84 percent of incubator graduates remain in their communities, continuing to grow to provide returns on public investment. Business incubators reduce the risk of small business failures. Because incubation programs pick and choose their clients and accept only those with viable products or services, their success rates cannot be fairly compared with overall business survival statistics. However, NBIA member incubators historically have reported that 87 percent of all firms that have graduated from their incubators are still in business. Incubator graduates create jobs, revitalize neighborhoods and commercialize new technologies, which strengthens local, regional and even national economies. In 2005 alone, North American incubators helped more than 27,000 start-up companies that provided full-time employment for more than 100,000 workers and generated annual revenues of more than $17 billion.
10. Most incubators fail because they do not adhere to the best practices identified by the industry.
11. NBIA has donated the publication “Forging the Incubator: How to Design and Implement a Feasibility Study for Business Incubation Programs” on CD. This is a great tool for beginning incubator programs and we are fortunate that NBIA has made it free to us.
12. The feasibility study is the precursor to a comprehensive business plan. During the feasibility study phase the go/no-go option should be considered. Managing expectations of the stakeholders throughout the development process is critical.
13. Step 1. Determine funding needed to complete feasibility stage (usually $25k for a consultant) If necessary, secure funding before proceeding further Step 2. Create an RFP (or study guide) that states what you want the feasibility to accomplish Hire consultant, if using one Step 3. Test community reaction Convene a small ad hoc feasibility committee/task force to prepare a list of persons to interview in Round 1. Provide a reason for each interview. Schedule and conduct the interviews Interview comments are tabulated. Additional referrals are noted. Schedule and conduct Round 2 interviews with referrals from Round 1 Final interview comments are tabulated and positive and negative patterns are noted. Meet with the feasibility committee/task force to discuss significant positive or negative outcomes. Step 4. Explore potential project funding sources  Federal Government EDA, USDA, HHS/OCS, NSF State Government State economic development agency, state department of commerce, line item budget allocation/earmark City or County Government Enterprise/Empowerment Zone funds, CDBG funds, other HUD allocations, LDFA money, local chamber of commerce Utility Companies Power, telephone, gas Corporations Sponsorships, private developers Foundations National, local Private Philanthropists Who has $ in your community?
14. Step 5. Explore possible facilities/building sites Purpose: understand local real estate market (availability & prices/rental rates) 2 hour walk-through evaluation Create “first cut” list of buildings/sites Step 6. Create outline of plan. At this stage you should be able to identify Organizations that might want a direct “stake” in the program Possible funding sources for the total project Some candidate facilities and/or sites Individuals and organizations that will provide services and assistance to entrepreneur prospects Key leaders and organizations that will devise obstacles to your program Step 7. Present outline of plan’s concepts to small groups of interested parties Why? Determine level of local support and attempt to involve all interested parties If lots of support is evident, this helps neutralize skeptics Allows you to test your recommendations without anyone “losing face” Allows larger community to begin “taking ownership” of project and accept the project as a valid initiative Generate feedback that can advance the project Identify adversaries (especially the b, c, & d folks) Direct opposition (hate the idea and will take steps to stop the project) Fakers (appear to support but really looking for a way to stop the project) Foot Draggers (support the project but have the ability to slow everything down so that the project self-destructs due to delays) Nervous Nellys (support the project until the first sign of a problem then want to jump ship) Have consultant or project leader meet with small groups of 25 key community members to present the outline of the plan (no public forums at this stage) Review activity to date State purpose of meeting (discussion only—still fact finding) Present recommendations and options based upon information already gathered Recommend which organization would lead the development and/or management of the proposed incubator Present list of candidate facilities/building sites List possible local, state, and federal funding sources for construction and operation of the proposed incubator State anticipated benefits of having an incubator in the community (new companies, new jobs, increased tax base). BE REALISTIC, THOUGH! Seek comments on any facet of the feasibility process that the group believes is being neglected/ignored Review next steps in the feasibility process. Emphasize future contact during next steps. Step 8. Forge consensus and identify community resources Determine which entities and people you want on the incubator development team. Specify why. Make follow-up phone calls to community leaders to define specifics for the formation of a development team. Organize an advisory committee. This group may someday be the incubator’s board of directors. Include members who can access local and state resources. Advisory committee develops a preliminary budget and contact funding sources to determine potential support if the feasibility study is positive. Funding sources should be able to indicate possible participation based on certain conditions which are important aspects of the feasibility study (timing of applications, eligibility issues, restrictions on use of funds, matching funds requirements, etc.)
15. Some notes on demographic statistics -Demographic statistics should play a secondary role in revealing some obstacles and/or resources that can indirectly affect the project. -Beware of the consultant who devotes a majority of time to collecting demographic statistics on your community as the key data upon which success or failure is predicted. Collect community demographic data yourself, even if using a consultant. Where to look for demographic data: Chambers of commerce SBDC offices Local economic development or community planning offices State departments of labor University business departments Commercial real estate agencies Database companies, including local business newspapers What demographic data to collect: Number of new business registrations per year and their classification Lists of existing corporations by category (include size and/or annual sales) Lists of economic development and business assistance organizations Commercial/industrial rental rates Size of work force Racial/gender population numbers Sudden and severe job loss data (important for federal grants) Not all demographic data is equally important DIFFICULT: New business registrations at earliest stages of formation (when they register company name, when they order a phone, when they incorporate). This is not easy information to find but the more of this you can get, the more accurate a picture of early stage company formation you’ll get. DON’T BOTHER: Stats on business failures and average incomes are of minimal importance.
16. -Feasibility study that does not provide adequate detail on critical topics such as where to begin, how to proceed, and who to approach and when. -Overly ambitious financing assumptions—“If all the stars align, the groundhog doesn’t see his shadow, and the Lions win the Super Bowl, we can make this work….” -Study team failed to be realistic about the entrepreneurial activity that would support the incubator. -“The horoscope study.” The format was a “cookie cutter” version of a study done in another city, offering general observations and recommendations that could apply anywhere and everywhere. Choosing a consultant to conduct your feasibility study can be a project unto itself. Here are some suggestions for getting started. Ask for the National Business Incubation Association’s (NBIA) list of consultants. The association maintains contact information for NBIA members who want to consult on incubator projects.   Prepare a professional Request for Proposal (RFP) that outlines the scope of work you expect the consultant to perform.   Distribute the RFP to people you believe are qualified to do the work and who have experience in the specific sector you expect to target.   Review proposals carefully. Evaluate qualifications, look at the price tag, check references, talk with candidates’ previous clients, and assess the candidates’ understanding of business incubation.   Select the best candidate. Manage expectations from the start, making sure you understand what the consultant is going to provide for the money you’re going to spend.   Questions to ask your consultant candidates: How many feasibility studies have you conducted?   How many of those studies recommended that the community build an incubator?   Of those incubators that were built, how many are still in business now?
17. The main functions of the Board should be : * To build community support * To set overall direction * To help get money Sources of Board Members Large companies Small business organizations or owners Educational institutions—vocational, university, community college Labor Local government Banks and other financing sources Economic development organizations Legal firms Accounting firms Neighborhood community groups
18. Private non-profit 501(c)3: charitable organizations. Exempt from taxes but limited in the kinds of political operations they can perform. Donations are tax deductible.  They're not allowed to lobby the government; they're supposed to spend their money helping people. 501(c)6: business organizations. Donations are NOT tax deductible, but they have more freedom to engage in political activities (though specifically lobbying for a particular candidate is forbidden). Step 2. Formulate the mission statement Specific mission statement and clear objectives Define and manage expectations (what an incubator can and cannot do in the community) Tenant eligibility, tenant time limits, incubator manager’s role, anticipated tenant services Avoid multiple and/or conflicting goals (like creating jobs AND focusing on university R&D) Educate community re: reasonable expectations for the incubation program Step 3. First private draft of feasibility report. Very brief (6-8 pages) Identify the organizations involved Recap the input received and the process by which it was received Identify the development team (responsibility & reporting) Identify the stakeholders Define the proposed corporate structure of the incubator, subject to revision Specify the mission statement and general management principles of the incubator List the specifications for candidate facilities Describe remaining steps needed to complete feasibility study (anticipated completion date) Circulate only to enough key representatives to ensure a broad-based review 7-15 community representatives Mail with a cover letter; emphasize this is preliminary report and evidences the start of the feasibility process Request reader’s feedback by a specific date Follow up with a phone call or personal visit within one week Step 4. Present the First Cut Plan to the Public (20-30 pages) Use feedback from preliminary reviews to create a first cut draft plan Identify conditions upon which the incubator would be feasible Sponsorships Management Facility Funding Supporting demographic data and incubation industry comparisons Recommended “candidates” to assume roles and responsibilities Financial analysis on one or two identified facilities Next steps in the feasibility process Request for feedback and assistance in moving forward Distribute to a wider range of community collaborators and stakeholders
19. Step 1. Develop a marketing plan as part of the business plan Are there prospective customers for the incubator in the community? “ Build it and they will come” never works Do not rely on demographic analysis—perform first person interviews Benchmark: minimum of 25,000 jobs. If community has less, perform additional research Number of companies filed with the state (DBAs) Number of companies that have filed for bankruptcy Types of businesses filing in past 5 years Racial and gender composition of those business filings Number of export licenses granted in past 5 years Directly survey new entrepreneurs asking if they need business assistance Analyze clusters Identify clusters of businesses in emerging markets Identify the supply chain of these business clusters Determine if the clusters are formalized (do business owners meet regularly?) Pinpoint topics of interest to prospective entrepreneurs that they’d meet to discuss an incubation program Evaluate new entrepreneurial activity in the community Meet with at least 5 key points of contact in the community that new entrepreneurs could call/visit to receive assistance to determine their level of support and assistance Hold one-on-one or focus group meetings with potential entrepreneurs. What services are needed?
20. Step 2. Target the Facility Steps for determining acquisition lease price for an existing facility Using existing floor plans, sketch out possible tenant spaces Measure the linear feet of each designated area Measure the net rentable square feet of the partitions Grade and label the leasable spaces as A, B, C, or D Seek input from 3 or 4 commercial realtors regarding market lease rates for similar property and establish market rate at the average. Calculate the potential revenue at full occupancy by listing A spaces at full market value, B spaces at 90%, C spaces at 80%, and D spaces at 70%. The total is the potential full occupancy revenue. Starting with this potential full occupancy figure, subtract 8% for vacancy and 6% for bad debt. Next, subtract $.90 but not more than $1.40 per square foot for contributions toward your service program and staff. Subtract fixed costs for taxes, insurance, etc. Calculate $.90 per square foot for maintenance, janitorial, and repairs and subtract it from your balance. Adjust this figure based upon condition of the building. This final figure is the amount you will spend on a lease or mortgage at “full occupancy,” regardless of when (if) this is achieved. Follow a conservative schedule of what you believe will be leased to tenants. For example: 10% pre-leased 40% lease-up by end of year 1 50% lease-up by end of year 2 80% lease-up by the end of year 3 This analysis will enable you to determine what you have available for lease or mortgage payments through the first three years. ANSWER THESE TWO QUESTIONS: Is there enough money to support the monthly payment with the anticipated subsidy for the first three years? Is there enough money to support an unsubsidized program at “full occupancy?” If the answer to either is YES, hire an engineer to corroborate partitioning plan and to construct an estimate of renovation costs If the answer to either in NO, re-negotiate acquisition cost/lease rate with the property owner Some industry “Rules of Thumb” Demonstrate that the facility can break-even at 70% Break-even cannot be achieved without a minimum of 30,000 net leasable s.f. (40,000 gross s.f.) Focus on income potential, not market value.
21. Office practice services Clerical, switchboard, telephony, photocopier, notary, AV equipment, conference rooms, canteen/coffee service Management services Capital formation, technical and commercial communications, bookkeeping/accounting services, legal referral, business plan preparation, marketing assistance, mentoring/coaching services
22. Step 4. Line up Funding Sources Establishing a nonprofit entity will offer access to the widest range of funding Expect one year of planning if targeting federal funds (like EDA) Raise enough initial money to cover 18-months of operations Do not plan on federal/state funding support beyond 3 years Get creative when looking for funding support but keep debt service on the facility as low as possible (long-term, unsecured, zero interest) Weigh grant funds with a critical eye…compliance can be difficult Employment requirements, job growth, Davis-Bacon wages, minimum 15-year program life Do not under-capitalize (everything costs twice as much and takes twice as long)
23. IDEALLY, GET 25% OF SPACE LEASED BEFORE DOORS OPEN.
24. Step 1. Identify Critical Assumptions Leasing schedule (monthly and quarterly) Break-even point Utility costs Bad debt (usually 6%-8%) Third-party income (i.e., political “pork” support) Tenant mix Know what clients you want and which you DON’T want Environmental conditions Always perform a baseline environmental assessment (BEA) Calculating the extent of hazardous conditions and the cost of remediation are complex tasks Costs of tenant improvements
25. Step 2. Go/no go decision Over 90% of feasibility studies recommend the project proceed. Hind-sight complaints are usually one of the following: The feasibility recommendation was to proceed but neglected to provide adequate details The feasibility study left gaps in funding, depending upon too many “long-shot” events and no sense of timing The feasibility study assumed acquisition of the property and commitment to a significant debt without valid evidence of customer demand The feasibility study looked like a “cookie cutter” version of a study that was done in another city. The conclusions were so general that they could apply anywhere. Be sure the target facility shows potential to provide enough rental income. Re-evaluate your program to see if it is really organized to feature services as your market niche and if those services are worth paying for. Check the timing of application deadlines and anticipated award/rejection dates for funding sources. Can your project survive rejections and/or delays? Examine your financial assumptions. Are your 3-5 year projections based on the probability that “soft money” will not sustain the program long-term? If each concern is addressed in the feasibility to the degree that concerns are alleviated, a “Go” decision may be recommended.