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How To Conduct A Business Incubator Feasibility Study
 

How To Conduct A Business Incubator Feasibility Study

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The presentation I gave at ASBDC 2011 on how to conduct an incubator feasibility assessment.

The presentation I gave at ASBDC 2011 on how to conduct an incubator feasibility assessment.

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  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Most incubators fail because they do not adhere to the best practices identified by the industry.
  • 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.
  • 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.
  • 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?
  • 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.)
  • 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.
  • -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?
  • 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
  • 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
  • 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?
  • 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.
  • 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
  • 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)
  • IDEALLY, GET 25% OF SPACE LEASED BEFORE DOORS OPEN.
  • 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
  • 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.

How To Conduct A Business Incubator Feasibility Study How To Conduct A Business Incubator Feasibility Study Presentation Transcript

  • “ Build It And They Will Come” is Not a Strategy: How to Conduct a Business Incubator Feasibility Study
    • Association of Small Business Development Centers
    • Annual Conference
    • San Diego, CA
    • September 8, 2011
    • Presented by Sandra Cochrane, Technology Business Consultant
    • MI Small Business & Technology Development Center
    • Kalamazoo, MI
  • Goals
    • Help participants understand what a business incubator is and what a business incubator is not
    • Give participants the tools for conducting a feasibility study
      • Overview
      • Track One: Fact Finding & Orientation
      • Track Two: Preliminary Plan
      • Track Three: Facilities & Services
      • Track Four: Funding & Implementation
    • Incubator failure and success factors
  • What is Business Incubation?
    • A business incubator is….
      • a program designed to accelerate the successful development of entrepreneurial companies
      • through an array of business support resources and services,
      • developed or orchestrated by incubator management,
      • and offered both in the incubator and through its network of contacts.
    • A business incubator is NOT ….
      • cheap rent
      • a way to use an old building
  • Incubation Industry Timeline
    • 1959—First U.S. incubator founded in Batavia, N.Y. by Joseph Mancuso
    • 1985—National Business Incubation Association founded; 40 members
    • Today—7,000+ incubators worldwide; 1,900 NBIA members; 60 countries
    • Industrial Technology Research Institute Incubator Center, Hsinchu, Tawain
    • 2006 Randall M. Whaley
    • Incubator of the Year
  • The Incubation Difference
      • Help with business basics
      • Networking activities
      • Marketing assistance
      • Help with financial management
      • Access to capital
      • Links to university/corporate partners
      • Business training programs
  • But What’s the Difference?
    • Small Business Development Center:
    • By law, works with any small company that asks
    • Works with small businesses at any stage
    • Research/technology park:
    • Focuses on large or established companies
    • Offers few or no business assistance services
    • Permits companies to stay as long as they like
    • Business incubation program:
    • Works with select, viable start-up and early-stage companies
    • Offers targeted, specific business assistance services
    • Requires companies to graduate
  • Successful Incubators
    • Integration into larger community
      • Part of overall community economic development plan
      • Community/sponsor support for mission and operations
    • An effective team
      • Professional management with adequate pay
      • Network of business advisors, mentors and consultants
    • Professionalism
      • Emphasizes client assistance
      • Models good business practices
      • Strives for financial sustainability
      • Measures effectiveness and impact regularly
    Source: NBIA Principles and Best Practices of Business Incubation
  • Types of Incubation Programs
  • Incubation Program Sponsors
  • The Bad News….
    • Seven out of ten new employer firms last at least two years, and about half survive five years. More specifically, according to new Census data, 69 percent of new employer establishments born to new firms in 2000 survived at least two years, and 51 percent survived five or more years.
    • (Source: U.S Dept. of Commerce, Bureau of the Census, Business Dynamics Statistics )
  • The Good News….Incubation Works
    • Return on investment:
      • $1 public investment in incubator = $30 in local tax revenue
    • Business retention:
      • 84% of graduates stay in community
    • Increased likelihood of business success:
      • 87% of incubator graduates stay in business
    • (Data provided by NBIA)
  • Why Incubators Fail
        • Expecting too much too quickly
        • Selecting the wrong manager
        • Overestimating the incubator’s role
        • Overspending
        • Failure to leverage resources
  • Goals
    • Help participants understand what a business incubator is and what a business incubator is not
    • Give participants the tools for conducting a feasibility study
      • Overview
      • Track One: Fact Finding & Orientation
      • Track Two: Preliminary Plan
      • Track Three: Facilities & Services
      • Track Four: Funding & Implementation
    • Incubator failure and success factors
  • 1. Overview of Feasibility Studies
    • Why conduct a feasibility study?
    • The process can galvanize support from numerous potential stakeholders
    • Creative ways to overcome obstacles can be explored and identified
    • A comprehensive plan includes a facilities plan and a service program business plan, important tools for operation of the project
    • Most funders will require such a study
  • 1. Overview of Feasibility Studies (cont.)
    • Four major areas (develop concurrently)
    • Fact-finding and orientation
    • Preparing the preliminary plan
    • Facilitates and services
    • Finances and preparation for implementation
  • Track One: Fact Finding & Orientation
    • Step 1. Determine funding needed to complete feasibility stage (usually $25k for a consultant)
    • Step 2. Create an RFP (or study guide) that states what you want the feasibility to accomplish
    • Step 3. Test community reaction
    • Step 4. Explore potential project funding sources
  • Track One: Fact Finding & Orientation
    • Step 5. Explore possible facilities/building sites
    • Step 6. Create outline of plan
    • Step 7. Present outline of plan’s concepts to small groups of interested parties
    • Step 8. Forge consensus and identify community resources
  • Track One: Fact Finding & Orientation
    • 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.
      • Demographic data can be found in many places
      • Not all demographic data is equally important
  • Track One: Fact Finding & Orientation
      • Demographic statistics can help:
        • Identify any and all clusters of companies/industries
        • Identify clusters of companies that can serve as a source of customers for incubator companies as well as a source of spin-off technologies to grow the cluster.
        • Establish a foundation upon which you can prepare a “needs” section of a grant proposal to support the project.
        • Locate potential incubator candidate facilities
        • Identify a source of prospective clients via databases that collect business registrations
        • Identify features of the community that can be organized to support new company development
  • Problems to watch out for….
    • Feasibility study that does not provide adequate detail on critical topics.
    • 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.”
  • Feasibility Questions
    • Organization & Management
    • What does the sponsor or any other potential stakeholder expect by way of outcomes from the incubator’s activities? How will success be defined?
    • Which legal entity and organization structure will achieve the expected outcomes? Are those expectations aligned with the financial commitments being made?
    • Who will become the key champion(s) of the project?
    • How will the management team be assembled, evaluated, and rewarded?
    • What significant organizational or political barriers need to be surmounted?
    • What organizations or groups which are not now involved could be valuable contributors to a successful effort?
  • Feasibility Tips
      • Purposes of the Core Planning Team
    • Shape the vision of the project
    • Commit the resources of the sponsor(s)
    • Decide if there should be any co-sponsors, besides the original sponsor
    • Make key planning decisions which will help in the further definition and refinement of the project.
    • Brainstorm tactical development alternatives
    • Provide the development team or consultant with introductions to key individuals and organizations in targeted industries
    • Recommend potential funding strategies
    • Exploit media opportunities creatively
    • Critique interim reports or documents and approve final business plan recommendations
  • Feasibility Tips
      • Board Structure Tips
    • Limit the number of members
    • Be clear about expectations of Board members’ roles
    • Seek clarity from Board about staff priorities
    • Let each Board Member participate in an area where they are most skilled
    • Set up procedures in the bylaws to eliminate problems (i.e., lack of attendance)
    • Consider two different Boards, each for a different purpose (Fiduciary Board and Advisory Board)
    • Allow any person who will work with the Board have a role in formulating its composition
    • Keep the Board well informed
    • Don’t allow Board meetings to become a forum for the sponsors to beat up on each other (i.e., play out other agendas)
  • Track Two: Preliminary Plan
    • Step 1. Construct a corporate identity
      • Private non-profit
      • Public authority
      • Separate corporation
      • Non-profit/for-profit hybrid
    • Step 2. Formulate the mission statement
    • Step 3. First private draft of feasibility report. Very brief (6-8 pages)
    • Step 4. Present the First Cut Plan to the Public (20-30 pages)
  • Track Three: Facilities & Services
    • Step 1. Develop a marketing plan as part of the business plan
      • Are there prospective customers for the incubator in the community?
      • Do not rely on demographic analysis—perform first person interviews
      • Benchmark: minimum of 25,000 jobs. If community has less, perform additional research
      • Analyze clusters
      • Evaluate new entrepreneurial activity in the community
  • Track Three: Facilities & Services
    • Step 2. Target the Facility
        • 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?”
  • Track Three: Facilities & Services
    • Step 3. Establish the Service Program
      • Services can aid in recruitment. Start services up to a year before facility opening.
      • Focus on quality, not quantity
      • Office practice services
      • Management services
      • Determine which services to include in the rent and which are fee-based
  • Track Three: Facilities & Services
    • Step 4. Line up Funding Sources
      • Establishing a nonprofit entity will offer widest range of funding options
      • 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
      • Weigh grant funds with a critical eye…compliance can be difficult
      • Do not under-capitalize
  • Feasibility Questions
    • Key Questions (marketing plan)
      • What are the highest priority, target markets for the incubator? What is known about the stage of development, technology intensity, or business support needs of these targeted firms?
      • From which sources (e.g., college faculty, corporate spin-outs, industry associations, the entrepreneurial community, etc.) will the bulk of incubator candidates be drawn?
      • How will we continue to court the existing database of prospects? By what timetable will incubator space and services be available?
      • What mix of on-going marketing activities and promotion will attract clients and tenants?
      • What realistic absorption rates can be projected for the incubator? Are the projected rental rates achievable?
  • Feasibility Questions
    • Key Questions (facility)
      • What is the demand for and supply of physical space in the vicinity of the proposed site? Under what terms and conditions are early-stage companies currently leasing space?
      • Is there a cost effective strategy in which the project can be developed in construction phases or at different related sites?
      • Are there any local facilities now providing “shared space” and common services for early-stage companies?
      • How easily can the facility be reconfigured to maximize the creation of appropriate, flexible space and at what cost?
      • Has the build new vs. renovate old decision been made yet?
      • Are there any special build-out strategies that might be employed with the facilities tailored to these particular target markets? i.e., what kinds of space do you bring on-line first?
      • Who might be available to help design and construct/rehab the incubator facility?
  • Feasibility Questions
    • Key Questions (service program)
      • How can the sponsor work collaboratively with other businesses and technical service providers in the area?
      • Which existing services of the sponsor can be offered to the incubator’s clients and tenants and which new services and resources will need to be developed?
      • What specialized services and resources of the sponsor would distinguish the incubator from other “similar” projects in the area?
      • What are the projected costs to develop, manage, and deliver these business and technical support services?
      • What business and technical support services will entrepreneurs pay for and how much will they pay?
      • How can the services, resources, and facility be integrated into a comprehensive support program to achieve the expected business growth outcomes of the incubator firms?
  • 10 First Cut Criteria
      • Ability to lease sufficient space (usually around 30,000 s.f.) in order to reach minimum critical rental role.
      • Ratio of at least 75/100 net rentable to gross s.f.
      • Ability to meet all facility mortgage, tax, insurance, and operational costs at no more than 75% leased.
      • Ability to offer lease rates at 80% - 95% of the market rate.
      • Existing interior fire wall rated partitions accommodating multi-tenant occupancy.
      • One parking spot per 300 s.f. of leasable space.
      • Detailed as-built drawings and complete history of building use available for review.
      • Building has value appreciation potential.
      • Acquisition/renovation compares favorably to flex-type re-engineered new construction.
      • Environmental issues are known and resolved.
      • Develop a relationship with local commercial real estate agents
      • Formulate a clear set of standards by which all properties will be judged
      • Identify sources of funding for bricks and mortar projects
      • Understand the importance of LOCATION to the potential clients
      • Research patterns of industrial development in the area
      • Justify your decision to build new vs. renovate based on solid criteria and a reality-based understanding of available properties
    Build or Renovate?
  • Track Four: Funding & Implementation
    • 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
      • Environmental conditions
      • Costs of tenant improvements
  • Track Four: Funding & Implementation
    • Step 2. Go/no go decision
      • Over 90% of feasibility studies recommend the project proceed. Hind-sight complaints are usually one of four reasons.
      • 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.
      • Examine your financial assumptions.
  • Feasibility Questions
    • Key Questions
      • What is the magnitude of the funding sought?
      • What are the possible and likely sources of funding for program development, facility acquisition, and/or capital improvements?
      • What are the projected cash flows in the context of organization, market, real estate, and program?
      • What are the possible and likely sources of funding for operations support? For example, you’ll need to cover the short-term and medium-term shortfalls typical of projects until they reach break-even.
      • Given the above, what are the projected returns-on-investment (ROI) the stakeholders can expect? What tradeoffs between financial outcomes and other non-financial outcomes are acceptable and what ones are unacceptable?
      • How and when will a fundraising campaign be orchestrated?
  • Self-sufficient or self-sustaining?
    • Self-Sufficiency: The Holy Grail?
      • How do the stakeholders define self-sufficiency?
      • Are there grants or loans available?
      • What’s included in “project expense?”
    • Pros: More autonomy
    • Run incubator like a business
    • Flexibility for new endeavors
    •  
    • Cons: May not be financially possible given the business dynamics
    • Doesn’t take into account other benefits
    • May force an unwanted “bottom line” focus
    •  
    • Self-Sufficiency vs. Self-Sustaining
    • Every incubator needs a self-sustainability plan.
  • Key steps in financing your project
    • Determine the scope and scale of the project
    • Decide on financial goals
    • Sell the financial model to the stakeholders
    • Monitor and tweak the financial model
    • Wear the fundraiser’s hat (always!)
    • Remember Murphy’s Law
  • Goals
    • Help participants understand what a business incubator is and what a business incubator is not
    • Explain best practices of incubation
      • Mission driven & market responsive
      • Sustainable
      • Management & leadership
      • Client selection
      • Client graduation
      • Measurable outcomes
    • Give participants the tools for conducting a feasibility study
      • Overview
      • Track One: Fact Finding & Orientation
      • Track Two: Preliminary Plan
      • Track Three: Facilities & Services
      • Track Four: Funding & Implementation
    • Incubator failure and success factors
  • Why Do Business Incubators Fail?
    • Organization
    • No clear definition of stakeholders’ roles, responsibilities, and aspirations for the project
    • Unclear understanding of personnel responsibilities
    • Lack of a “champion” or core development team
    • Underestimation of the complexity of developing and running an incubator project
    • No integration of the project into regional economic development plan
    • Cumbersome and/or overlapping board structures
    • Lack of knowledge of similar projects on a national level
    • Reluctance to use outside advisors—NIH (not invented here)
  • Why Do Business Incubators Fail?
    • Market
    • Inadequate budget to support ongoing, systematic marketing campaign
    • Focus on “cheap rent” instead of quality business and technical support services
    • Confusing the concept of advertising with that of marketing
    • Failure to understand tenant companies’ needs
    • Insufficient analysis of local market conditions
    • Managers unfamiliar with real estate sales
    • Ineffective use of “referral agents” (accountants, bankers, lawyers)
    • Failure to engage the local real estate agents/developers
  • Why Do Business Incubators Fail?
    • Program
    • Inadequate budget for support programs and lack of delivery on promised services
    • Hiring of business support personnel with no entrepreneurial or start-up business experience
    • Undue reliance on pro-bono services by professionals
    • Unkept promises of financial support for individual companies
    • No subcontracting of support services to private companies
  • Why Do Business Incubators Fail?
    • Real Estate
    • Substandard property in a bad location
    • Underestimation of fixed costs to run building
    • Site has severe environmental remediation problems
    • Building size is insufficient to reach critical mass of tenants
    • Architectural design not geared to start-up companies
    • Inappropriate mix of uses by tenant type
    • Unworkable traffic flows of interior spaces
    • Net leasable space too small a percentage of total space
    • Property subject to historical/landmark restrictions
  • Why Do Business Incubators Fail?
    • Finance
    • Lack of diversified and ongoing approach to raising capital
    • No reality-based financial projections
    • Unsuccessful monitoring of cash flow
    • Lack of foresight regarding financial contingencies
    • Disagreement around projects need for break even
    • No provision for working capital funds for start-up tenants
  • When is a Business Incubator Feasible?
    • Commitment
    • The stakeholders have developed a mission statement and established measures by which the project will be evaluated.
    • The stakeholders understand the kinds of investments (land, money, time, other resources) they will be required to make over time and the respective magnitudes.
    • A single project champion or group of advocates has been identified to marshal resources in the early stages of the project.
  • When is a Business Incubator Feasible?
    • Resources
    • Adequate cash flow analyses have been performed and threshold levels of financing have been secured.
    • A building can be secured which lends itself to the needs of early-stage companies (easily modularized, flexible, core infrastructure, multi-use).
    • Specialized equipment and/or office furniture is available at minimal cost.
  • When is a Business Incubator Feasible?
    • Expertise
    • The project manager understands the role of the incubator within the context of other local and regional economic development projects.
    • A team experienced with incubation will lead or coach the formulation of the business plan.
    • People with experience in construction/rehab will be part of the business plan development effort.
  • When is a Business Incubator Feasible?
    • Market
    • The incubator offers specialized business and technical assistance services in order to meet the needs of targeted entrepreneurs.
    • The people testing the feasibility complete a market assessment that identifies a significant quantity of potential client candidates (2X more than the # expected).
    • The feasibility study team can identify a sufficient number of quality candidates to enter the incubator.
  • Wrap-Up
    • Were goals met?
    • Help participants understand what a business incubator is and what a business incubator is not
    • Explain best practices of incubation
    • Give participants the tools for conducting a feasibility study
    • Please complete evaluation form.
  • Thank you! Questions? Email: sandra_cochrane@gvsu.edu Cell Phone: 269-267-5489 @scochrane sandra.cochrane Sandra Cochrane