Business Planning for an Incubator

WHAT TO COVER

A Business Incubator needs to have a detailed business plan, which is updated regularly. This is particularly important during the early star-up phase of an Incubator.

A feasibility study will have identified the need for the Incubator, established the extent of the market for new businesses, and verified the size of the Incubator needed, assessed the financial and other resources.

It supposes to:

• Confirm the feasibility study results
• Identify and resolve any remaining problem areas
• Set performance benchmarks
• Communicate the strategy with others
• Provide a template for management

BIIA recommends that the Incubator business plan be developed by the Board and management team for the following reasons:

• Facilitate understanding of the feasibility study
• Ensure the plan is within the interest and capacity of those required to implement it
• Give a sense of ownership
• Enable easier updating

There are many examples of detailed business plans prepared by external consultants that were not followed by the organisation concerned because they did not understand or “own” it. (External consultants, on the other hand, generally best prepare Feasibility Studies).

The feasibility study, in consultation with local stakeholders, will have determined the type, size and management structure for the incubator appropriate to the particular economic and other circumstances of the area.

The business plan should guide the set up and detailed operation of the Incubator over a 3 to 5 year period. It needs to be reviewed regularly and adjusted to meet changing external factors new directions (flexible planning).

The Business Plan needs to address the following

1. A mission statement
2. objectives (short, medium and longer term)
3. Market Plan
   • Target businesses
   • Their specific needs
   • How to attract them
   • Pricing
   • Occupancy levels
4. Operating Plan
   • Facilities
   • Entry and exit policies
   • Types and level of services
   • Relations with other services
   • Staffing
   • Role of the Board
5. Relationship with Stakeholders
6. Financial Plans
   • Capital budget
   • Operational budget
   • Cash flow projections
   • Profit targets

OBJECTIVES AND TYPES OF INCUBATORS

Incubators differ and the business plan should begin by setting out its objectives clearly in relation to the type of Incubator.

Typical Incubator objectives are usually given as some or all of the following:

• Reduction of business failure
• Employment creation
• Local economic development
• Regional development and diversification
• Import replacement
• Commercialisation of research
• Technology transfer

 

In terms of the incubation process, these objectives are secondary.

The primary objective of a best practice Incubator is to grow new businesses more successfully and more quickly then would be the case if they did not receive Incubator support.

The higher the number and the better the quality of the businesses “hatched”, the better the secondary outcomes: i.e. the more people employed, the better regional economic outcomes, the more research commercialised etc.

Types of Incubator models currently operating or being developed in Australia are:

• The standard independent model of 1500 to 2000 square metres of usable space (more if accommodating industrial businesses and less for office based) with free building on one or more sites catering for a diverse range of tenants. Sometimes referred to as the licorice all-sorts model.) NB: American literature suggests an area of twice this size is needed in the USA; this is probably the result of the combined effect of higher salaries and lower rentals in that country.)
• The embedded (sometimes referred to as the “dependant” model), a much smaller facility that is owned and operated by an established organisation, which provides management or some other services. This includes special purpose Incubators (e.g. high tech) attached to a university or similar body, and a substantial number of smaller “licorice all-sorts” facilities usually located in smaller centres.
• The Incubator-Without-Walls (sometimes also referred to as a Virtual Incubator). This concept is being developed for remote parts of Australia but has not yet been tested in the field. The businesses are not co-located but are linked by electronic means, and receive the same level of support as they would if co-located. They could be either of the licorice all-sorts or specialist variety.
• The special purpose Incubator. This type of Incubator specialises in a particular industry area, for example, fresh food production, arts and craft manufacture, bio-technology, aquaculture, Hi Tech (usually attached to a Research/Tertiary Education Institution) and so on. They are sometimes more specialised in the future, but as yet, specialist Incubators are relatively scarce in Australia.
• Networked Incubators. This is a group of Incubators that operate in different locations but are linked in some formal way. For example, they may be owned/operated by the same organisation or share staff.

As the principal income streams from Incubators are rent, it is the area of flexible space that is critical, not the number of units. Ideally the units should be flexible so that the tenant businesses can grow or downsize easily. A small number of larger tenants could occupy the same spaces as a larger number of smaller tenants and still generate the same, say, employment outcomes and a very similar income for the Incubator.

NOTE: Real estate developments using the term “Incubator” which do not have a process for tenants to graduate, or do not focus on nurturing new business developments are not Incubators. Such developments have a number of benefits for local communities and operate on a commercial basis. Helping the best tenants to graduate is commercial nonsense.

BIIA has established best practice standards for Incubators in Australia.(Resources available through BIIA Administration)

THE MARKET

The feasibility study will have identified the market the Incubator is expected to meet. The business plan should put in place a strategy to tap that market. Such strategies might include:

• Informal marketing and advertising, especially word of mouth and referrals by other support organisations (i.e. not paid advertising. Local media, radio and TV stations are likely to sponsor some free advertising).
• Local newspaper features
• Good promotional material (located in Accountants’ offices, business training facilities and business support services, advisory services etc).

The business plan should be adjusted if market expectations are higher or lower.

FACILITIES

The feasibility study would have identified suitable buildings. The business plans will need to address such issues as refurbishment and maintenance costs.

Low cost, secure, but flexible partitioning is preferable to permanent partitions. If you have no choice, try for a range of sizes so that businesses can move to larger or smaller units as necessary.

Make sure the services area is central and is positioned so that the tenants can make frequent and easy contact.

POLICIES

Entry and Exit policies are often developed during the feasibility stage, but the business plan should address these. American best practices recognises four types of Businesses Incubators. (Rice and Matthews, 1995):

• “up-and-comers” – businesses that show significant promise that the incubation process “with intensive and persistent” assistance can grow successfully.
• “superstars” – successful, fast growing businesses that are getting ready to graduate but can still benefit from “selective and strategic” assistance.
• “long shots” – businesses that benefit from being in an Incubator but are not far enough in their development to “deserve must time and attention” and
• “anchor tenants” – established businesses, government agencies or community organisations that provide services to tenants and / or help with cash flow but require “little time or attention”.

In Australia there are also tenants who are at a “pre-business stage” developing and market testing their product / service. These must decide to go ahead and become full businesses to abandon their idea. In the latter case they are not classed as “business failures”.

SPONSORS

Incubators need external support to do well and this usually comes through sponsorship arrangements such as:

• Government supply of land / buildings for peppercorn rental
• Suppliers of office equipment (esp. computers, fax machines, photocopiers and furniture)
• Subsidised rents (if occupying commercially leased premises)
• Working bees for building maintenance / renovations

The business plan should include a strategy for attracting sponsorship. These are trade-offs however. Chasing sponsors at the expense of tenant services is counterproductive for staff. A carefully selected Board should help in attracting sponsorship.

LINKS WITH OTHER BUSINESS SUPPORT AGENCIES

Incubators work best when they are part of regional strategy to support enterprise development. Local professionals (accountants and lawyers), business advisory services, government business support programmes, education bodies should all be contacted. Some of these may have already been identified as stakeholders during the feasibility process.

SERVICES

The business plan will need to specify which services will be offered free, which will be on a pay as you use basis and which will be included in the rent and the charging. Issues such as whether to have a centralised telephone system (with calls being handled by an employed receptionist or anchor tenant) or no phone system can be critical to the financial viability of the incubator.

A central phone system is expensive to install, but provides opportunities for contact and support to the emerging businesses. If properly managed, the phone system can contribute to revenue stream of the incubator. Small Incubators may be able to share the phone system with the sponsoring service.

Good quality and reliable photocopying equipment, fax and computing facilities (if provided) should produce surplus / profit to contribute to the Incubator’s financial sustainability.

FINANCIAL PLANS

Sources of finance will have been identified during the feasibility study along with cash-flow projections, especially during the vulnerable “ramp-up” stage (where costs exceed income while the Incubator is in the process of reaching its optimum tenant level).

Much depends here on the way self-sustainability is defined. Some Incubators base their plans on having long-leases, rent free buildings and no other government assistance and see this as being self-sustainable.

Except for the initial capital grant, some Incubators see themselves as self-sustainable if they can meet all their future capital requirements.

Some interpret self-sustaining to mean “no additional sources of funding over that usually provided”.

Situations vary greatly, but best practice Incubators are those that operate as close to being businesses themselves. Thus the less long-term dependence on government funding the better.

However, it needs to be understood that in Australia, at least to date, no true Incubator can operate on fully commercial principles. (there are claims that it can be done using high risk venture capital, selecting businesses in such areas as, for example, bio-technology where the potential returns are enormous, the lead times are around the 10 year mark, the Incubator takes substantial equity in the project, and four out of five business failures are expected, but..)

SELECTING A CONSULTANT

Even though BIIA recommends consultants NOT be used for developing business plans, it is recognised that this is not always possible, especially if the proponents of the incubator plan to recruit expert board members and hire experienced staff once the funding has been secured. (A reliable feasiblity study and well developed business plan is prerequisites for funding.)

BIIA makes available a list of consultants experience in undertaking feasibility studies, incubator business plans and Incubator evaluations who have been registered with BIIA (and any available brochures etc. we have on these consultants). To be registered, BIIA satisfies itself that the consultant(s) has worked with Business Incubators in the past and has previously undertaken at least one satisfactory Incubator study.

BIIA is unable to recommend a specific consultant, and those wishing to engage a consultant to undertake a business plan or assess a proposal should check the following:

• knowledge and experience of incubators
• understanding of the incubation process
• access to data relating to the area where the Incubator is to be located
• personal skills to be able to draw in potential stakeholders, and
• other commitments, time scales and price
• written references from previous clients (followed up if necessary).

Interviewing prospective consultants would enable a judgement to be made about his / her personal capacities.

For new Incubators: If using external consultants to develop a business plan, Incubator proponents should ensure that a consultant is selected that has the capacity to produce a business plan that matches the scale of the Incubator project and the level of skill of those required to implement it.