Friday, February 13, 2009

The Business of Incubators

Allow me to do a bit of navel gazing...

There have been a couple articles the last few weeks about business incubators having difficulties. Here is a link to a Business incubator program suspended (the Adirondack Regional Business Incubator in New York). These articles usually contain some statistics about the return value of incubator programs, how many businesses were created, and other reasons why they should not shut down the programs.

While I have no specific information about that particular incubator, the article notes that they did not have enough sustainable financing to continue. What I find interesting is that for entities that are created to help businesses become successful, we in the incubation industry seem to have a hard time doing the same for ourselves.

It seems to be relatively straightforward to get grants and other sources to open a facility, get the mayor with the big scissors to cut a ribbon,..., but once open how do theyexpect to keep going? If it costs $400,000/year to run an incubator, but revenue from a full facility will bring in $100,000/year - where will the rest come from? Usually the rest comes from local funding agencies (Chamber, Economic Development Agencies, Grants) - but when there is a down turn in the economy, or change in a funding agency, the money disappears and the facility shuts down.

The problem is caused by something I occasionally see in a client business: the person paying for the product is not the end user. The incubator's operational expenses are largely covered by some other agency. The success of the programs are in local businesses - but they don't pay the incubator beyond the rent.

When we give reports to the agency, we say '50 jobs were created with incubator businesses, bringing in $x to the local community.' But those $x don't pay the salary or expenses of the incubator - the funding agency does.

At least in those incubators that take equity in their clients there is a clearer connection between the success of the program and success of our clients.

If a local community wants to setup an incubator, they had better be clear about where their dollars are going. Does the local community realize that they will be carrying a facility and staff indefinately on their budget? That is not in and of itself a bad thing - local communities fund police, fire, and other departments. But if there is some implied "well, the facility will become self-sustaining" I think that sets the community up for heartbreak.

That is why I was heartened to read Benton Harbor area not ready to sustain incubator - a community that realizes it is not ready for one yet (and maybe not ever). Instead they already offer a good set of services, and with some iintegration they can gain most of the benefits of an incubator.

Local businesses and entrepreneurs need and can take advantage of the services we offer. But we need to be fair to our stakeholders.

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