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Conversations with June Lavelle (Part 2) – Business Incubator Sustainability

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This is the second part in a series on relating to Business Incubator sustainability (Click here for part one).  During this part the author June Lavelle explains what is meant by incubator sustainability as well as discusses  the Development phase and the Mature Incubation Phase in more detail.

b)   Development Phase

This period contains a number of different phases of development and can span many years. The early years, after launch, will continue to focus heavily on marketing and relationship building as it is primarily a time of building up critical mass, ‘deal flow’ (i.e. the flow of sustainable business entities through the Incubator), the networks and cash flow. As incubation environments mature, so they are able to spend more time building up the services and resources offered to clients, including specialist services/facilities.
Incubation management teams may also start to look outside the immediate incubation environment to identify ways in which the Incubator could influence wider economic development. They will also be concerned with issues such as availability of grow-on space for their graduating clients. However, this is also a period in which many incubation environments are faced with and should anticipate a decrease in and possibly the removal of any subsidies they might have had in the early years of development. Therefore there will be an emphasis on developing the business model to be sustainable.

c)   Mature Incubation Phase

The aim for most incubation management teams is to eventually run a high quality, flexible, ‘full service’ incubation environment that is sustainable in its own right, that has a quantifiable impact on the wider economy, that can be seen to be a catalyst for economic development, and that is creating successful, sustainable ventures. The mature incubation environment may become more specialized. Many develop a group of former clients as part of the business support networks for existing clients. Because it is still a relatively young industry, there are few incubation environments in the UK that can be regarded as ‘mature’, full-service environments. Although reaching a ‘mature’ phase of development is the aim of most incubation environments, their ability to reach this phase will be influenced heavily by the availability of funding and other resources.
Sustainability is the focus of a mature Incubator. When I refer to “sustainability” in the general sense, I rely on this definition:
“The ability of a Business Incubation Program to replace donor support with income that is generated from operating revenues (e.g., rents, training, consulting activities, fees-for-service, equity and royalty streams, etc.) and supplemented, when necessary, by long-term  financial commitments from local sources (e.g., rent free facilities, seconded staff, long-term agreements to cover operating deficits, etc.)”
When a business incubation program is able to replace all external subsidies with income generated solely from its operations, then it is said to be financially self-sustainable. 
Financial sustainability is only one part of the picture. We must also be concerned with the sustainability of the Incubator’s mission, i.e., the continued commitment to the impact model.
Enterprise and Supplier Development business incubator sustainability

Remaining committed to the Incubator mission

Sustainability of an Incubator’s mission requires sustaining the long-term motivation of local stakeholders and Incubator management to contribute to the Incubator’s operations. Strategies for increasing and ensuring local commitment will be discussed in detail below in the following sections while for now we will focus on strategies to improve the financial sustainability of business Incubators.
A business Incubator, regardless of its incubation model, has to have a financial sustainability strategy in order to survive. However, the strategy adopted will depend largely on the selected business model as well as likely sources of funding for the Incubator.  For example, if an Incubator is fully government supported, then much or all of its funding will come from the grantor, thereby influencing its incubation model. Such an Incubator may not need to raise additional funds and most, if not all, of its support services may be provided for free.
While fully subsidized incubation models have the good fortune ofEnterprise and Supplier Development business incubator sustainability having access to potentially unlimited sources of money, they are not without their fair share of challenges. Some of the challenges that a fully government may face include reliability and timeliness of the funds. This is an important issue for many reasons including the fact that companies in the Incubator will generally have budgets and timelines. Some will also have time-sensitive products. Extraordinary delays in funding can, therefore, sometimes result in ‘killing’ an otherwise viable business. Even more importantly, an Incubator can only show good and timely results if it can access funds on a timely basis.
Generally speaking, fully government or donor supported business Incubators have not performed as well as their private-sector counterparts for several reasons, including the following:
  • They have not gone out of their way to staff the Incubators with the appropriate personnel, i.e., with people with relevant educational backgrounds and/or who have actually started their own business initiatives and succeeded (or failed);
  • The Incubator managers are often stripped of decision-making responsibility and authority; rents and fees for service go directly to the government, giving little incentive to the managers to improve their performance;
  • The time taken to make important decisions generally takes long and is not responsive to the business environment in which the incubated companies operate;
  • Most have been run like government institutions with no cost-benefit focus;
  • They do not leave the entrepreneur with sufficient incentives to set and achieve the goals necessary to compete effectively in the real life of business, where there is often cut-throat competition. In other words they have the trappings of taking away the drive that is so essential to the success of an entrepreneurship initiative.
A variation of the government or donor supported model described above, is the partially government-subsidized model which is common not only in the EU, where the average Incubator receives 37% of its funding for start-up and operations from public subsidies, but also in the U.S. where Incubators cover about 40% of their operating budgets from public sources. The primary sustainability strategy for these Incubators is to generate as much revenue from operations as possible from rents, fees-for-service, sale of equity stakes in client firms, and royalty streams. In addition, Incubator managers learn to effectively write project proposals for additional funding and are adept at preparing and submitting timely budgets and reports.
[1] Business Incubation Framework Summary Report, UK Business Incubation, Birmingham (2004)

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