BUSINESS INCUBATOR

TOOLS TO SUPPORT BUSINESS DEVELOPMENT AND A GOOD BUSINESS ENVIRONMENT BUSINESS INCUBATOR THE CHALLENGE On average only 50% of new businesses survive over the first year and just 5% reach the sixth one.

WHAT IS A BUSINESS INCUBATOR
WHAT ARE THE BENEFITS OF CREATING A BUSINESS INCUBATOR
HOW TO CREATE A BUSINESS INCUBATOR
EXPERIENCE OF BUSINESS INCUBATORS IN UKRAINIAN CITIES
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WHAT IS A BUSINESS INCUBATOR

The main reasons of new business failure are poor business planning, high overhead rates, and expensive venture capital and consulting services. Overhead costs include rent and utilities, transportation and communication, and general administrative and financial expenses. Costs of business administration, rent and utilities are fixed expenses entrepreneurs have to pay regardless company profitability. High overheads redirect company resources from business development to administration. The main reasons of the expensive start-up capital are high risk of the business failure and absence of, or poor, credit history. A naturally low level of the sale revenues of new-born companies makes them operate on borrowed expensive capital for an extensive period, which might constitute a fatal combination for a new company.

A business incubator addresses these problems. Business incubators are institutions that help new companies to survive over the start-up period, by easing such typical entrepreneurial challenges as limited access to capital, limited production resources, incomplete market exposure, high overheads and limited business networking. More specifically, incubators offer cheap rental space, affordable in-house business consulting, administrative and secretarial support, and information on allocating financial resources. The best incubators offer entrepreneurs the opportunity to concentrate on their business development while they receive affordable and high quality consulting, accounting and administrative services, share security and maintenance expenses with other tenants and save on rent and utilities.

As the goal of incubators is to provide lower than market rates for rent and services, most (over 90% in US) are non-profits focused on new job creation or specific sectors of local economy development. Of course, because an incubator needs to be a self-financing entity, it is particularly important to make sure an incubator has a good, practical management plan that includes firm standards for choosing high-potential business candidates for the incubator, and precise services that feasibly match the needs of selected business firms.

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WHAT ARE THE BENEFITS OF CREATING A BUSINESS INCUBATOR

Business incubators serve businesses in their early development stages. The best incubators provide a full range of services, like affordable space, in-house accounting and administrative services, business development consulting, transportation and communication services. New businesses save on overheads, significantly reduce staff and can direct all resources to business development. The best incubators provide services in marketing research, human resources management, communications, conference organization, intellectual property registration, field-of-interest consulting and information, office and lab space. The price for services should be lower than the going market price, and be affordable for incubator tenants. However, because it is important to prepare businesses for an independent, post-incubator life in the real world, it is necessary for companies to project revenue growth and to plan sufficiently to meet market-based expenses in the future.

As a general principle of incubator management,  incubator tenants have far higher chances to graduate if an incubator provides full and high quality level of support services at affordable prices.

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HOW TO CREATE A BUSINESS INCUBATOR

Table 1. Business Incubator Success and Failure Factors. 

Failure factors	Success factors
1. General business environment: cultural and government:
Financial, cultural and bureaucratic constraints.	Favorable government support, established entrepreneurship culture.
2. Type and scope of services provided by business incubators:
Limited support and services provided to incubator tenants, or high prices for services and rent.	Complex services provided like work-space, counseling, information, training, access to finance and professional services in one affordable package.
3. Availability and quality of research resources:
Weak research potential, absence of experts in a field, undeveloped information/library system.	Strong scientific and research basis. Easy accessible and developed information share system.
4. Professional services infrastructure:
Weak infrastructure and absence of (or remoteness from) professional services. One of the ways to create an incubator is to establish a “cyber” incubator providing counseling and training services from remote locations by well-developed internet services.	Strong infrastructure and high level of professional services development. Strong infrastructure and favorable conditions give entrepreneurs the possibility of starting a business.
5. Availability of high-volume, robust venture capital:
Weakly developed or expensive venture capital.	Critical mass of the venture capital and affordable, or lower than market, cost of the capital. Established linkage between incubator activities and venture capital.

All factors are interrelated and crucial for successful development of an incubator. In order to develop a high-tech incubator, an organization needs not only to find sufficient investment capital and equipped premises for their future company-members, but it should create conditions for easy and full exchange of information to support the nascent business ideas. This can be accomplished by providing expert consulting in a particular field, research libraries or more advanced media like electronic exchange systems.

Further, research findings show significant correlation between the availability of research and scientific bases and successful development of incubators’ tenants. This suggests that some type of services provided by incubators affiliated with research institutions or universities, raise the likelihood of successful business start-ups and their sustainability. Such services may of course be varied, but all are related to research capabilities. For instance, a number of incubators created on the basis of research institutions provide for their tenants’ access to accumulated knowledge within specific fields as well as a pool of experts. If a city has a university or research institute that does practical, commercializable scientific research, it is likely to be a good place for the establishment of an incubator.

Cheap or free consulting services are critical at earlier stages of incubator development. In some cases, in order to minimize the cost of consulting services for incubator tenants and to provide real-life practices for their students, universities assign graduate students as research assistants at incubator companies.

Additional obstacles for high-tech business incubators are uneven levels of development within specific technology fields across countries as well as language barriers. For instance, some topics might be under-researched or not researched in certain countries and information from outside might be less approachable for such reasons as language, distance, information-share regulations. Most information in the high-tech world today is in English, even in non-English speaking countries like Japan or Taiwan. The same is true with market and product information and sometimes products themselves. For example, successful software products should be in English.

Ability to speak and work in English makes incubators in English-speaking countries more competitive in the global environment. The best examples are software companies from India, where language and high level of skills became critical factors for the success of software incubators. Today, about one third of the Fortune 500 companies outsource their software production to India, and country’s software exports exceed $6 billion or 15% of total export volume. A lot of Indian IT companies grew from incubators created on the basis of research institutions. The most famous examples are the Entrepreneurship Development Institute in Ahmedabad and the network of the Council for Scientific and Industrial Research laboratories.

Young companies that prepare to graduate from incubators into the real world depend a lot on whether their governments are, in general, supportive of new business growth or, in contrast, create additional bureaucratic constraints. Government can be supportive in a number of forms. For instance, it may provide new businesses with low annual percent rate (APR) loans or simplified conditions for loans, or can guarantee loans made by banks to new business. Government can also sponsor additional informational resources, as well as networking entrepreneurs into business clubs, where young companies may meet new partners. However, the most important factor of governmental attitude towards new businesses and business incubators is whether its rules and regulations are client-friendly. One-stop-shops and one-day-registration centers, simplified accounting system for small companies, and electronic permit and information services are some good examples of government support of new business growth. In contrast, complicated and labor- and time-consuming reports or long procedures for registration or obtaining permits and/or licenses, create significant difficulties for new companies that do not have resources to pay qualified accountants or lawyers. In such circumstances business incubators have to carry additional expenses in order to provide adequate assistance to their member companies.

Another factor that is critical for successful graduation and sustainability of new businesses is infrastructure. When they are in an incubator, companies operate in a type of artificial environment; however, once they graduate they have to operate (e.g.,manufacture, transport, distribute, and sell their products or services) under the conditions of real markets. In regions with weak infrastructure not many new companies are likely to successfully graduate from incubators. This is because good transportation routes, state-of-the-art communication media, high quality professional services (like accounting and consulting),developed and modern office, industrial or retail real estate, accommodating financial institutions and reliable electricity, water  and sewer systems are all critically important for establishment of a new business.

Many incubators in India and China failed exactly because of too weak infrastructure; most skilled and educated entrepreneurs cannot develop business without financial and professional services, developed markets for their products or services, and skilled labor. At the same time, there are many successful examples of high-tech companies founded in Silicon Valley by entrepreneurs from India or China who previously could not realize their ideas in home countries due to poor infrastructure.

Last but not least, high-tech industries typically consume large financial resources and are very risky but also highly profitable. A critical mass of venture capital ready for risky, but potentially highly profitable, investments is important for successful start-ups. Venture capitalists should be experienced players in high-tech markets in order to evaluate a new company’s potential for success. In some regions, there might be no company ready and able to invest in a new, business idea that is for them unusual and unknown. Incubators therefore, should be encouraging companies that have some connection to the already-existing financial and business base in a region.

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EXPERIENCE OF BUSINESS INCUBATORS IN UKRAINIAN CITIES

The history of business incubators in Ukraine started in the late 1990’s when several donor organizations financed several pilot projects. They include those that turned out to be viable and that operate to this date - in Simferopol, Chernigiv, Slavutich, and Bila Tserkva. These business incubators were predominantly registered as NGOs since that status enabled them to get support by various funds, which is crucial during establishment of business incubators.

In addition, if the local government is interested in such form of support to business, business incubators can be established as municipal enterprises. Lack of support by local authorities adversely influences the viability of business incubators. According to our information, only the business incubator in Slavutich enjoys significant support of the Mayor and the City Council.

Bila Tserkva

In 8 years of operation of the Bila Tserkva Business Incubator, it hosted about 300 firms. While about 60 percent of registered firms in Ukraine do not continue their operation, those that were emerging supported by business incubators survive and are successful in 85 % of cases. All the enterprises that were located in the Business Incubator created approximately 2,000 jobs in total, not including those created after they became fully independent. According to the Ministry of Labor and Social Policy, the cost of creation of one job is on average USD 5 thousand. If applied, this estimation means that enterprises of the Bila Tserkva business incubator enterprises invested about USD 10 mil in elimination of unemployment, not including taxes paid by enterprises in these tears.

• To reduce the percentage of enterprises that collapse during first years after establishment;
• To reduce unemployment;
• To help local government to adhere to the economic policy oriented at the priority development of enterprises of a certain area.

In order to achieve its objectives, the Bila Tserkva business incubator has a long-term lease of a seven storied building of the total area of over 2,000 sq. m. The newly established enterprises that wish to obtain business space in the business incubator submit properly executed applications. The commission of experts considers 50-60 applications each year for 10-12 available premises. The main criteria of selection include the following:

1. Promising firms that have been working less than one year after their registration as businesses;
2. Firms that develop manufacture of new goods or provision of new services to the population;
3. Firms that have significant potential in creation of new jobs;
4. Enterprises created by unemployed or other categories of vulnerable citizens;
5. Enterprises oriented to introduction of new technologies.

The average period of enterprises staying in the Business Incubator constitutes 3 years. There are several patterns of gradual increase of the rent depending on the type of enterprises and the period of their operation. But in general, in the first half year, an enterprise pays 50 % of the rent, the second half year - 75 %, and beginning from the second year of stay - 100 %. In some cases the amount of rent can be increased up to 125 and even up to 150 %, which allows the Incubator to cover losses and encourages well established independent enterprises to leave. The Bila Tserkva Business Incubator also has enterprises that have stay there more than 5 years. These are enterprises that provide services to other clients of the Business Incubator.

Apart from leasing its premises, the Bila Tserkva Business Incubator provides a wide range of additional services, and in particular the following:

lease of a conference room and other premises, furniture, means of communication and office equipment;

• services of a phone switch;
• protection of premises and parking;
• provision of business information, the Internet, a library, translation services
• selection and training of personnel;
• secretary services;
• conferencing services;
• consulting services;
• marketing services;
• assistance in search of financing and credit resources (including provision of loans through its own credit union); and
• technical and computer services.

Payment for services is equal to the cost of the services. Reduction of prices occurs because of joint use of services.

According to the president of the Bila Tserkva Business Incubator M. Paal, the following is crucial for success of a Business Incubator:

• Availability of large premises. Business-incubators that have less than 800 sq. m. have small chances of steady development. This is an area where local government can play a decisive role if it provides a business incubator with a sufficient area from communal property.
• Public awareness. Local mass media could play a decisive role explaining principles of business incubators, and of the benefits the community can yield from its operation and services.
• Properly prepared personnel of an incubator that will render services to clients. Personnel of the Bila Tserkva Business Incubator were thoroughly trained, including training abroad.
• Availability of infrastructure financing in the beginning of operation. Maintenance and equipment of the premises are quite costly. In case of the Bila Tserkva Business Incubator, the money was provided by foreign donors. Under other conditions, a city council can allocate the resources. But in any case a Business Incubator needs to have initial resources to start its operation.

Slavutich

A separate entity "Business incubator" of the municipal enterprise “Business Development Agency in Slavutich” was created in October 1999 upon initiative of the local authorities.

Founders of the Business Incubator included the city community in the name of the executive committee of the City Council, and the municipal enterprise “Business Development Agency in Slavutich”. Establishment of the Business Incubator also involved the following participants:

• international organizations (a ТАСІS project «Mitigation of social consequences of closing the Chernobyl nuclear power plant», a USAID project “Establishment of Business Incubator of small businesses”);
• the City Council of Slavutich;
• Slavutich Development Public Council.

The mission of the organization is to promote social and economic progress of the city of Slavutich, development of civilized business, and opportunities for self-realization of its citizens, as well as building competitiveness of enterprises and companies, their survival in the market during their initial stage of activity, promotion of small and medium businesses in the sphere of manufacture of goods and provision of services, and creation of new jobs.

The maximum period of a client firm’s staying in the Business Incubator is 3 years. Since the beginning of operation, 66 client firms graduated from the Business Incubator, and 50 of them are still successfully running their businesses. During the period of its existence, the client companies created 365 new jobs, as well as retention of 42 jobs.

During 5 years of the Business Incubator operation, its client companies paid to the state and local budgets taxes in the amount of UAH 1,132 thousand.

In 5 years, the Business Incubator spent UAH 106,350 for maintenance of its buildings from the proceeds for leased premises, and paid to the local budget UAH 25 thousand for development and maintenance of infrastructures of the city of Slavutich.

The Business Incubator administers two buildings of the total area 1,372 sq. m.: “The International Business Development Center “Slavutich in the ХХІst century" and "The Small Business Incubator”.

The list of services provided by the Business Incubator include:

• leasing premises for a certain period;
• consulting services;
• trainings for businessmen;
• administrative and office services;
• accounting services;
• providing access to financial resources;
• marketing services;
• quality management services;
• administrative support;
• communication services (phone, fax, e-mail, Internet);
• maintenance of premises of clients of the Business Incubator (water supply, sewer, fire alarm system, supply of electricity, heat supply, garbage collection, planting, cleaning of the territory, etc.);
• meeting requirements of fire and sanitary safety for all clients of the Business Incubator;
• leasing office equipment and furniture;
• arranging meetings with potential partners, customers, investors;
• search of office space and production sites;
• development of business-plans and investment projects, feasibility studies, programs of organizational and personnel reorganization;
• selection, testing, and training of personnel for the client companies;
• technical inspection and technical supervision of houses, constructions, and engineering infrastructures, industrial objects;
• development of projects on construction and reconstruction and development of estimates for construction works;
• expert appraisal of businesses, property, property rights, non-material assets, equipment;
• organization of exhibitions, presentations, business meetings, seminars, conferences, training courses;
• development and participation in realization of projects and programs.

The key to success is flexibility. Incubators should be considered not simply as a structure that offers office space and production sites to new businesses, but as a set of services to businesspeople with the purpose to enhance their chances of success.

Thus, an incubator should possess full information on the local conditions, and its own business-plan should be oriented at the optimal use of local resources in interests of development of local economy.

Unfortunately, the available capacity of the Slavutich Business Incubator, with two two buildings, is insufficient to provide assistance to businesspeople in the area of production. The Business Incubator has no possibility to provide the full range of services for manufacturers, as its resources are limited. There are seven applications from businesses waiting for their turn for premises.

A current project for adding production areas to the Business Incubator will, it is hoped, enable it to provide more premises to emerging production businesses.

In addition to production areas, the Business Incubator can offer a new service for manufacturers – the leasing of necessary equipment. Provision of equipment is expected to occur through establishment of a leasing fund to purchase equipment. The new project of the Business Incubator development includes creation of “a production hangar” and a leasing fund.

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