Economic Development Incubator Helps Start-Ups

Last Updated: September 21, 2022

Why not set up a community economic development incubator or accelerator to help your business start-ups by providing a shared facility, shared technical assistance, and in-person and virtual support system?

Research supports the notion that many entrepreneurs lack adequate essential knowledge about business building and especially financing. Give them an edge.   (See the entrepreneurship definition page in this section if you don't know what we're talking about.) 

An economic development organization or local government can start a business incubator or accelerator to increase the likelihood that start-ups keep expenses under control and find the business expertise, contacts with skilled professionals, and emotional support they need.

With careful planning and just the right situation, a for-profit social enterprise incubator also could work.

The role of the economic development incubator is to be a place where a baby business can be nurtured and looked after until it is ready to survive on its own. The incubator typically employs a trained manager who has business knowledge and experience that can be shared with the new business owners. In addition, this person needs to be a superb networker and accumulate an outstanding roster of professional experts who may be willing and able to help new businesses.

Supporting entrepreneurs should be close to the number one task of every economic development agency. Make sure your governmental, quasi-governmental or private organization has a sound understanding of building and sustaining a local economy through growing your own local businesses. We think that an incubator facility, at best, and if that is not possible at least an incubator-type support system, is the most important form of support for day-to-day decision making that an economic development organization could offer.

Typical Incubator Services

Admittedly, the coronavirus pandemic has made in-person interaction a challenge in many places and times, but we still think that face-to-face conversations are what matters most. At this point we're going to keep our original writing below, just as if you folks are actually able to be "at the office" right now where you are.

The economic development incubator typically provides a shared reception area and service, shared business machines such as a copier, a shared telephone and broadband system, and perhaps a library or collection of other materials that will assist in setting up the business correctly.

Expenses are kept low. Tenants are charged rent, but often not to the full extent of the government or economic development organization's expenses.

Optional services also may be provided, including accounting and legal advice. These costs may be recovered on an hourly basis or a lump sum monthly basis to keep expenses more predictable.

It's possible, by the way, that some services, such as accounting or administrative assistance, may be separate entrepreneurial enterprises also getting their start in the incubator. 

The financial arrangements depend solely on how much subsidy is available for operation of the economic development incubator. Note that the concept is so attractive that some entrepreneurs have set up for-profit incubators, so in that case, even allowing for a profit is necessary.

Integrate the Business Incubator with the Community

A business incubator should be closely aligned with community economic development goals. The economic development incubator is best regarded as a total-community effort to create jobs in the long term, and therefore rally the entire community behind it.

If need be, explain that small business is where most job creation lies, and you're not waiting around for some big corporation to rescue you by handing you jobs. Use the grand opening of the facility to drive home your rationale.

Educate future tenants on your community economic development realities and plans, and then take your own plans and determinations of what's feasible and what's highly unlikely into account when you select tenants.

About half of all economic development incubator operators now say that they support virtual tenants and businesses that choose not to occupy space with the remainder of the group.

The disadvantage is that this practice requires devoting resources to those who are not receiving one of the major advantages of this particular type of entrepreneurship support program, which is being eyeball to eyeball with professional management and peers on a daily basis.

However, if you can arrange a full cost recovery through fees charged to non-resident participants, there is potential for community benefit.

Our e-mail shows that some of you are having trouble attracting tenants for your incubator right now, and if this is true, your outreach through unconventional methods and compromises such as sharing virtual assistants and allowing virtual tenancy at a reduced rate may be necessary. Pandemic-era upgrades in telecommunications certainly have made the virtual option more attractive, but we still prefer in-person relationships develop to the extent possible.

Advantages of an Economic Development Incubator

Even if there is no subsidy as such, the incubator is worthwhile for the start-up entrepreneur because:

• The screening process for admittance to the economic development incubator may prevent the bad business idea from losing money.

• Camaraderie in the building keeps the entrepreneur out of his or her house and focused on business. Subtle competition and oversight prevents procrastination.

• A ready source of information and support when things go wrong often keeps the start-up on track.

• Networking opportunities abound, of course, when you begin with an instant network within the building.

• Sharing administrative and receptionist services always is an economy.

• The availability of a conference room and other amenities not necessarily accessible to entrepreneurs in a separate space both facilitates business getting done and impressing the right person.

• Sharing of business knowledge, subject matter expertise, and contacts is invaluable, especially for first-time entrepreneurs.

Some economic development incubator programs, or business accelerators as some variations are now being called, want an ownership stake in the business as it grows. (We think that strictly speaking, an accelerator takes on businesses that are not necessarily fresh start-ups, but businesses that have stayed small and now are ready for rapid growth. But the actual language out in the field gets fuzzy.) 

If you're the entrepreneur, make sure that any share of your future business that you are giving away is truly proportionate to what has been given to you.

It seems appropriate that your original investors other than friends and family receive a cut of the business, but much less necessary to give the incubator or accelerator an ownership position.

Some newer tech accelerators are built mostly on the notion that they are investors in your business instead of providers of start-up services.  In that case, it's perfectly appropriate that you share some future assets and profits with private sector owners of an accelerator.

Just distinguish these investor entrepreneurs from the government-owned or nonprofit incubator that is a business development tool for the earliest stage businesses.

Advice for Owners and Managers of a Business Incubator

Having direct inside knowledge of several different economic development incubators, below is our advice for those who set them up.

• Provide the best possible resource person/manager you can find. Don't skimp on management to save a few bucks, unless you're doing this as a private enterprise. You want a person who is a good manager of your facility and finances, but also someone who has been an entrepreneur himself or herself for the sake of good empathy with your tenants.

But the critical point is that you need someone who can serve as a real resource person to the tenants. Keep in mind that being a resource sometimes means emotional support, though, so don't go so overboard on a finding a keen business mind that you find someone who can't be empathetic when the going gets tough.

• By definition, the manager should know other businesspeople in the community, including the accountants, lawyers, and marketing personnel your tenants may need immediately.

She or he also should be sophisticated in understanding technology transfer, the basics of patents, some practical accounting systems for very small business, and the rules of the road for state and local licenses, taxes, fictitious name registration, and such.

• Preferably you should require an entrepreneur to have a viable-sounding business plan, however ill formatted and presented, before entry into the economic development incubator.

I see no point in giving space to people who proceed to write for eight weeks and then turn out something that the manager thinks is trash. If the thinking and the numbers are there, let the tenant move in, but not before. Then the manager and administrative personnel can assist in making the business plan presentable.

• Invest a few bucks in making the incubator as attractive as possible, even homey. Business books and magazines, plants, and color should be everywhere.

You need a walking-around place, which most layouts will provide automatically, but see to it. It takes a lot of pacing to grow a business. A ping pong or pool table might provide a welcome diversion too.

• Yet the economic development incubator needs to exude professionalism. It's welcoming, comforting, stimulating, and upbeat, but it's really really serious about business. Make sure the waiting area for visitors is meticulous, because anyone coming to see the tenant is important to the future of that business.

Keep appropriately high profile business magazines and newspapers in the reception area, neatly maintained of course. A lender or regulator could be coming to check out your tenant.

• Demand frequent reports from the tenants, and offer the most intensive referral and counseling you can afford when any problems arise.

The only times a client should be allowed to fail are when a tenant has a self-realization that he or she is not an entrepreneur, or when the original business plan shows itself to have been based on false premises.

• You can definitely use a downtown redevelopment space or actually any abandoned building that needs to be filled for the economic development incubator.

In other words, you can have more than one public purpose in mind as you set up the incubator. Just make sure your exterior environs aren't so seedy that they completely obliterate your businesslike intentions inside.

While your economic development incubator may need to move at some point to meet these multiple community objectives, keep in mind that you're forming a business incubator for the long haul. The incubator's own business plan should be sustainable, and don't set it up to be a wandering nomad.

•We are not big fans of placing the incubator at the edge of some really tacky neighborhood that you hope someday to repopulate with new businesses. Entrepreneurs aren't idiots, so when they graduate from your facility (most facilities kick them out after two or three years), they simply will locate their first permanent facility in a better neighborhood. Those who are socially motivated will find their own way to a downtrodden neighborhood.

• The incubator needs a board of directors, some of whom may well be part of the Chamber of Commerce or city government. Make sure successful businesspersons are represented also.

Also plan on an advisory board that has no governing responsibilities and doesn't include any political people who may be replaced in an election cycle. Both groups can help and challenge the manager do a better job, and offer referrals and suggestions that can be priceless.

The advisory board also can be a means of community involvement in the success of the entrepreneurs. Place a news media executive on the advisory board, to fill the dual role of business advice and hopefully some extra publicity for successes.

• Your incubator can be of any size, in terms of number of clients, but if you have more than about eight clients, you need to hire a second manager, who might be called a client services manager or coach.

Tenant service, coaching, teaching, and referring needs to be the number one job of the manager, and beyond six to eight small businesses, the management of the business incubator itself will suffer.

• Consider and court teen-age and young adult entrepreneurs as tenants, using local high schools or universities to recommend and screen. Having youthful energy in the building is good karma, and the most talented young people might grow an Internet-based business, for instance, that others of us wouldn't think of.

By the time our young Bill Gates goes to college, the business might be able to employ someone else who could maintain and/or expand the business.

• Since the baby business won't provide employment for your community if the tenant remains a sole proprietor, provide some modest training in supervision through insisting on as many college or high school interns as you can work into the incubator program and the individual businesses. Practice in supervision may be part of the entrepreneurship training for some.

• Keep data on results. When you graduate a tenant to another location, make it a major celebration and inspiration to your boards, the community, and your other tenants.

But keep tabs on what the graduate accomplishes in the community. In fact, build this reporting requirement into your original contract with the tenant, and you won't meet resistance when the time comes.

• Although it's really painful, feel free to admit it if you made a mistake. Kick your mistakes out of the program as tactfully, quietly, and firmly as possible, but do establish up front a method for ending a tenant relationship.

• Commit to continuous improvement.

Pages Also Related to Homegrown Business

Definition of Entrepreneurship

Economic Base

Regional Competitiveness

Maker Space

1. Community Development
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2. Economic Development
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3. Economic Development Incubators

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