Partners (Winter 2000)

Alabama’s Small Business Incubators
By Michael Milner

Small businesses have been one of the leading contributors to this country’s economic success. According to the Small Business Administration, small businesses with fewer than 500 employees created 76% of new jobs between 1990 and 1995. Recognizing the value of small businesses, some communities have discovered that Small Business Incubators are becoming a more practical and fundamental approach to creating jobs and stimulating economic development.

Incubators take small young businesses and help them grow during their start-up period, the times when they are most likely to fail. They offer shared office space, access to equipment, flexible leases, technical assistance, and a number of business services under one roof. The goal is to stay in this environment 3 to 5 years and graduate to its own facility. Graduation is also achieved when the business is sold for a reasonable return.

According to the National Business Incubator Association (NBIA) the concept of the small business incubator has been around since 1959 when Charles Mancuso & Son Inc. of Batavia, New York, purchased an 850,000 square foot multi-story building for its real estate investment holdings. After failing to find a tenant that would agree to lease the entire building, he decided to lease small pieces, hoping to find enough tenants to get an acceptable return. Allowing tenants to share the expense of various office services is now a fundamental incubator concept.

The number of incubators has increased significantly since the early 1980s, when communities, colleges, and local governments throughout the country started taking an interest in them. The NBIA estimates that there were only 12 incubators in the country in 1980 compared to 800 today.

According to trade consultant, Frederick Burger, of the many kinds of incubators, mixed-use incubators are the most popular and are primarily created by local governments to spur economic growth and create jobs. Technology incubators focus on enhancing research and development in high-tech, rapid-growth industries that have a good chance of attracting capital and can have a long-term impact on spurring economic growth and creating jobs.

A third type, targeted incubators, focus on assisting start-up companies in a specific industry, such as food production, arts, fashion, biomedical, etc. Empowerment or micro-enterprise incubators target low- and moderate-income communities as a means of assisting in revitalizing efforts. And finally, manufacturing and service incubators house similar types of businesses in order to benefit from cost savings through shared equipment, services, and a tailored facility design.

*Source: NBIA
Small business incubators typically don’t become involved in retail, construction contracting, or with businesses involving commissioned sales. Nor are they involved in professional counselor fields such as accountants, attorneys, and financial planners.

Although most small business incubators come with much the same design and structure elements, such as low-cost office space and shared expenses, an incubator’s success is measured by its own goals and objectives. For example, a mixed-use incubator that is established for job creation should not be compared to one established for technology or empowerment.

In recent years, Alabama has had an incubator boom: 14 incubators have created over 346 new companies and 4,232 jobs, according to Wilson Harrison, chairman of the Alabama Business Incubator Network, the state association for small business incubators.

Birmingham’s Technology Incubator

Harrison is also the director of the Office for the Advancement for Developing Industries (OADI), a technology incubator sponsored by the University of Alabama in Birmingham. OADI, founded in 1986, has graduated 37 companies employing 1,400 people. Twelve firms have either been sold or merged with other firms, and only two firms have gone out of business.

"We have a 70-to-80% success rate rather than a 70-to-80% failure rate,” according to Susan Matlock, president of the Entrepreneurial Center, a small business incubator located in downtown Birmingham, Alabama. Matlock describes the businesses in the center as a mixture of service, light manufacturing and software. “We want businesses that can bring new growth into the area, and new employment.”

The Entrepreneurial Center has been awarded the 2000 National Business Incubator of the Year by the NBIA. The incubator operates in a 48,000 square-foot facility, housing 30 small businesses, and generating revenue to support about 80% of its own expenses. Matlock’s fundraising efforts from the community provide the other 20%.

Montgomery Area Incubator

The Montgomery Alabama Small Business Incubator is unique because it has four major anchor tenants that are a resource for many of the small business tenants. The anchor tenants are the Auburn University Montgomery Center for Business & Economic Development, Alabama State University Disadvantaged Business Enterprises; Alabama State University Business and Technology Center; and Troy State University at Montgomery. Because of the strong partnership with these four organizations, the incubator is able to provide the most up-to-date information and advice to small businesses at all stages of development. The incubator currently holds 17 businesses and is completely self- sufficient, relying on no outside funding. In addition, there is an open-book monitoring program where the records of the businesses are reviewed on a regular basis.

Lessons Learned

Of course, not all incubators are successful. In the 1980s, many local governments and nonprofit organizations created small business incubators in hopes of stimulating jobs and economic development in their communities, identifying with the phase from the movie Field of Dreams, “If you build it, they will come.” Many incubators were built and many business start-ups came, but many failed. Because local and state governments had funded many of those failures, public funding sources had become scarce. However, attitudes changed as community benefits proved to outweigh risks that can now be better mitigated.

Sources from NBIA say that there are no national statistics on how many incubators have failed, but many believe that most of the failures come from poor management and failure to match the type of incubator with the available resources and needs of the community. The academic community and the U.S. Department of Commerce are calling for more research to study the success rates and to analyze the failures.

Ms. Sonya Buckner, vice president of the Montgomery Area Incubator, noted that incubators are more than just four walls — it takes an experienced staff with an understanding of the specific needs of the community and the start-up businesses in order to succeed. Today, unlike the 1980s, there are hundreds of successful templates of small business incubators. The following list highlight common features of many successful small business incubators.
The type of incubator must meet the needs and match the resources of its community.
The incubator’s management should be experienced.
The facility should require minimal overhead costs.
The incubator should begin with at least one strong anchor tenant.
The incubator’s business plan should target self-sufficiency in order to limit dependency on external funding.
Businesses should have an approved comprehensive business plan prior to moving in.
Businesses should maintain sound financial recordkeeping that is accessible to regular managerial inspection.
The incubator should have an emergency contingency plan, such as access to a revolving loan fund, to assist businesses with small emergency cash flow needs.
The program should promote networking opportunities between the tenant businesses.
The program should include strong internal small business education.

Soundly structured small business incubators have proven to play a meaningful role in economic development. Not only are many viable businesses generated, some go on to realize astounding growth and profitability. And in turn, incubators themselves can be profitable. According to the NBIA, 25% of all incubators are now for-profit. “Venture Capital Small Business Incubators,” for example, give entrepreneurs a monetary return in exchange for an ownership interest in the business, and the incubator monitors operations until the company is large enough to go public or be sold to another company.

From all indication, it appears that the small business incubator concept is here to stay. As more published data becomes available on the success of these incubators, it is certain that more state and local governments and communities will take a closer look at small business incubation being a viable option to economic development.

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