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The Higher ED Blog: Incubators generate results but still might not be worth the investment

Catherine Oosterbaan / January 19, 2015

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The Higher ED Blog: Incubators generate results but still might not be worth the investment

How do you attract and retain the startup or early stage business that is poised for rapid growth, innovation, and job creation? This is a key question on the minds of economic developers across the country. One potential solution that appears to be emerging as a popular tool is the development of business incubators and accelerators.

Business incubators and accelerators typically provide a central location where startups can access  a suite of services designed to support the commercialization of products, processes or services, and facilitate fundraising. In 2006, the National Association for Business Incubation surveyed its members (report available for purchase online) and shared a number of very attractive statistics around business incubators in the United States:

  • Current and graduate incubator tenants have created over 500,000 jobs since 1980;
  • For every 50 jobs created within the incubator, another 25 are created in the broader community;
  • In 2001 alone, incubator tenants and graduates created over 82,000 jobs and generated over $7 billion in revenue; and
  • 87% of business incubator graduates survive beyond 5 years.

After hearing those stats, who wouldn’t want one of these employment and economic drivers in their community?

As a young economic developer, enthralled with the excitement and opportunity innovation brings into a community and the global economy at large, I was sold on the idea. However, before I set out to build a business incubator and/or accelerator in the community I worked in, I wanted to understand what piece of the pie–as described by those fantastic stats listed above–would be retained in my community.  I also wanted to know who truly benefits from investment in a business incubator, and where the incubator could turn if/when financial assistance is needed.

These are questions that plagued my mind as I started my masters in Local Economic Development, and I seized the opportunity to answer them with the program’s major research paper component.  I was particularly interested in finding out the impact of social capital on graduate retention. Please note that due to a low response rate, the applicability of these results may be limited. The results incorporate just nine survey responses.

I’ll start with a look at what social capital is. Social capital is essentially an umbrella term for resources that are derived from relationships between individuals. The stronger your relationships are with people in your network, the more access you will get to support and resources. In the context of business incubators, the support and resources can be used to develop one’s business.

Strong external networks enable businesses to have a broader impact through their supply chains and industry connections, which can help them grow, innovate, and commercialize new products and services. Internal networks help businesses build local industry partners, customers, and clientele. Examples of opportunities to build social capital included in this study are internal and/or external networking opportunities, local event participation, connections with local resource networks, integration into local supplier and producer networks, and mentorship. The irony of this social capital building strategy is as a business becomes more integrated in global networks, it may become easier for that business to operate in other marketplaces, which presents a retention concern for economic developers. That said, my findings show that incubator retention is high despite the increased potential to leave.

The results indicated that on average, 74% of business incubator/accelerator graduates stayed within the municipality where they received business incubation services. There was one outlier in this subset of data, where only 5% of that incubator’s graduates were retained in the municipality; however, in that same case, 100% of incubator graduates were retained in the region, so they didn’t go far. From a regional perspective, on average 96% of business incubator/accelerator graduates were retained, with the median and mode both at 100%.

When I dug deeper and isolated social capital programs, I discovered that some are more effective than others at keeping graduates in the municipality (Figure 1). The highest retention rates at the municipal level resulted from participation in local events. It is possible that the public nature of event participation truly increases a business’ social capital in the local community By participating in local events, it may also serve to create awareness around the tenants and what they offer, which may lead directly to local customers, resulting in a need to remain in that local municipality upon graduation.

Figure 1. Incubator Graduates Retained By Social Capital Development Opportunities

Oosterbaan figure 1

Typically, business associations can lead to a broader network of associates, with a range of experience and connections, and potentially, this could eventually result in the tenant looking outwards for new opportunities to invest.Conversely, opportunities to build social capital through business associations, mentorship, and local economic development support ultimately led to the lowest regional graduate retention rates This likely has more to do with the nature of the social capital these networks build:

  • Mentorship through business incubation and acceleration also has the potential to create some high profile, outward facing linkages into new social capital networks. Assuming the incubator will bring on successful mentors, their expertise and network likely consists of global linkages.
  • Connections into local economic development support may also increase an incubator/accelerator tenant’s ability to expand their network beyond the region. This is both surprising, in the sense that the directive of an economic development office is to attract and retain business, yet unsurprising, as that same office also attempts to assist that business in growing into as large an economic contributor as possible. This attempt ultimately exposes the tenant to an enlarged network, often with connections into trade missions and export development opportunities. Opportunities like this may actually play a role in encouraging a business to expand its external social capital, making it easier for them to relocate out of the region, given the presentation of an opportunity.

Ultimately, when reviewing the research question of who gains the most from business incubators, the answer is certainly the municipalities and regions in which the incubators are located. This study provides preliminary evidence that the presence of a business incubator increases a municipality/region’s success in retaining high-value, high growth potential companies, assuming that the incubators are screening for these types of tenants. However, lower-tier governments should not be solely responsible for keeping these business incubators operational and sustainable. Rather, they should be part of an ecosystem of stakeholders, which should also include the private sector and the tenants themselves. The private sector has much to gain from the presence of new entrepreneurial ventures, including an expanding talent pool, and the potential to expand supplier/consumer networks of their own.

A final consideration is whether business incubators actually generate returns on investment. Given that business incubators screen their candidates for characteristics of a successful entrepreneur, are their high economic return statistics skewed? Would those businesses be successful with or without the help of an incubator? The answer is unclear.

So what is an economic developer to do? Take time to consider if there are ways you could recreate some aspects of the business incubator in your own community–such as social capital building opportunities and start up knowledge exchanges and resources–without actually creating an incubator to potentially get a bigger bang for your buck.  This may enable you to support a broader range of businesses that may require additional support, but are not at a stage where they would pass an incubator entrance screening.  Obviously you know what will work best given your community’s economy. Certainly, any combination of business development and business incubation services will help you attract and retain strong entrepreneurs to support your municipal and regional economy.

About the Author

Catherine Oosterbaan recently joined the OMAFRA team as an Agriculture and Rural Economic Development Advisor, after almost 3 years with the County of Simcoe as an Economic Development Officer. She is particularly interested in supporting entrepreneurship, innovation, value chain development, and intersections between the three. While always a fan of reviewing and applying best practices, she is an innovative, out-of-the-box thinker, who is eager to design meaningful, unique, and geography-specific initiatives that do not always follow the status quo – after all, how can a community stand out in a crowded marketplace if we’re all doing the same thing!

About the series

Higher ED: Insights for the Next Economy is a platform for students, guest speakers, staff and faculty of the University of Waterloo’s professional and graduate economic development programs to share knowledge with the field at large. The series takes works destined for an academic audience and reworks them into a fresh, easy-to-digest blog article.

Established in 1988, the Local Economic Development program is the only master’s program in Canada devoted solely to local economic development. It offers a balance between theory and practice by combining coursework, a major research paper, an internship, and weekly seminars featuring guest speakers. Students are prepared for careers in local, community, or regional economic development.

The Economic Development Program is a nationally-accredited provider of professional training. It delivers certification programs and seminars that offer a deep understanding of the Canadian context in a convenient block format. Peer learning is combined with informative lectures and practical case studies to provide dynamic instruction that is beneficial for junior and senior-level practitioners.

4 responses to “The Higher ED Blog: Incubators generate results but still might not be worth the investment”

  1. […] Development program. Indeed, several recent posts here on Higher ED have explored questions like ‘Do incubators benefit their host communities?’ and ‘What are the trends in food-related incubators?’. Adding to this discussion, a major […]

  2. Bill Price says:

    What would be the long term cost befit of Start-ups incubated in Hometown compared with buying in Gorillas?
    Core industry tends to be Homegrown.
    Given the regulatory barriers to start-ups, “good advice” available thru incubators may be critical to survival.

  3. Kathryn Dodge says:

    So a question I have, is what screening criteria were they using to evaluate an applicants entrepreneurial skills or characteristics?

  4. Catherine Oosterbaan says:

    It can differ across incubators. The screening criteria was not measured not this particular study, but from my experience I would say the number one characteristic incubators look for is if a potential tenant is mentor-able – ultimately will they be receptive to the suite of support and training the incubator can provide. Other factors may be the strength of the business plan, or the potential for the company and/or product idea to grow, amongst many other potential criteria.

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