Incubators make more sense than Tax Free Zones

by Marvin Pirila

While Tax Free Zones site idle everywhere, the less touted business incubator is the more logical and successful way to jobs.  The concept of incubators started in 1959 with the opening of the first in Batavia, N.Y.

Business incubators nurture the development of entrepreneurial companies, helping them survive and grow during the start-up period, when they are most vulnerable.  These programs provide their client companies with business support services and resources tailored to young firms.  The most common goals of incubation programs are creating jobs in a community, enhancing a community’s entrepreneurial climate, retaining businesses in a community, building or accelerating growth in a local industry, and diversifying local economies.

The National Business Incubation Association (NBIA) member incubators have historically reported that 87% of all firms that have graduated from their incubators are still in business.  The NBIA estimates incubator client and graduate companies have created about half a million jobs since 1980.

Every 50 jobs created by an incubator client generate approximately 25 more jobs in the same community.

NBIA estimates that in 2005 alone, North American incubators assisted more than 27,000 start-up companies that provided full-time employment for more than 100,000 workers and generated annual revenue of more than $17 billion.

NBIA also reports incubator companies grow an average of 400% during their stay.

Business incubators can reduce start-up costs by 40-50%.

The idea of providing business assistance services to early-stage companies in shared facilities did not catch on until at least the late 1970s. In 1980, about 12 business incubators were operating, all in the industrial Northeast, which had been hard-hit by plant closures in the previous decade.

The business incubation industry growth was swift in the 1980's as some realized the limitations of common economic development strategies that focused solely on industry attraction and large corporate expansions.  Others recognized the value of creating and expanding new businesses to sustain local economies, more communities developed business incubators to support these new ventures.

As of October 2012, there were over 1,250 incubators in the United States, up from only 12 in 1980. NBIA estimates that there are about 7,000 business incubators worldwide.

Statistically, about 93% of business incubators are nonprofit organizations focused on economic development, while the other estimated 7% are for-profit entities.  “Mixed use” entities, assisting various ranges of early-stage companies, account for 54%.  Technology businesses make up 37%, about 6% on service businesses (serve niche markets or assist other types of businesses), and 3% serve manufacturing firms.  About 47% of business incubators operate in urban areas, 28% in rural areas and about 25% in suburban areas.

Incubator sponsors are organizations or individuals who support an incubation program financially.  They may also serve as an incubator’s parent or host organization.  Academic institutions sponsor about 32%, economic development organizations 25%, government entities 16%, and other organizations 4%.  Four percent have more than one sponsor,  4% sponsored by for-profit entities, and 15%s have no sponsor or host organization.

To lay the groundwork for a successful incubation program, incubator developers must first invest time and money in a feasibility study. This study helps determine whether the proposed project has a solid market, a sound financial base and strong community support – all critical factors in an incubator’s success. Once established, model business incubation programs commit to industry best practices such as structuring for financial sustainability, recruiting and appropriately compensating management with company-growing skills, building an effective board of directors, and placing the greatest emphasis on client assistance.

Incubators help client companies secure capital by:  managing in-house and revolving loan and microloan funds; connecting companies with angel investors (high-net-worth individual investors); working with companies to perfect venture capital presentations and connecting them to venture capitalists; and assisting companies in applying for loans.

Incubator graduates create jobs, revitalize neighborhoods and commercialize new technologies, thus strengthening local, regional and even national economies.
NBIA estimates that in 2011 alone, North American incubators assisted about 49,000 start-up companies that provided full-time employment for nearly 200,000 workers and generated annual revenue of almost $15 billion.

Business incubators reduce the risk of small business failures. Historically, NBIA member incubators have reported that 87% of all firms that have graduated from their incubators are still in business.

Research has shown that for every $1 of estimated public operating subsidy provided the incubator, clients and graduates of NBIA member incubators generate approximately $30 in local tax revenue alone.  NBIA members have reported that 84% of incubator graduates stay in their communities.

Incubation programs graduate strong and self-supporting companies into their communities, where these companies build, purchase or rent space. Because incubated companies are more likely to succeed than nonincubated firms, landlords of incubator graduates face far less risk than they otherwise would. Also, while they’re in the start-up phase, incubator client companies can obtain flexible space and leases that are more appropriate to their stage of growth than they could on the commercial market.

There's no guarantee against failure, but an incubator increases the chances of success by providing space and consolidated resources.  It also helps by opening up financial support from such places as academic institutions, economic development organizations, and private sponsorship.