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Executive Summary

The Appalachian Regional Commission (ARC) views entrepreneurship as a critical element in the establishment of self-sustaining communities that create jobs, build local wealth, and contribute broadly to economic and community development. Support for business incubators has been a key component of ARC's multifaceted approach to help the people of Appalachia to build a better future. This survey, initiated in the summer of 2004 by Greenwood Consulting Group, Inc., complements and updates the 2001 ARC survey Business Incubation at Work.

Results from the 2004 survey provide evidence of job creation by companies that have "graduated" from incubators, thus providing strong evidence of the importance of business incubation to an Appalachian community's economic development strategy. Appalachian incubators are, in many respects, equaling or exceeding national norms. However, it appears a significant number of incubators are on unsound financial footing, and steps should be taken to address issues of long-term operation stability.

Survey data reveal that Appalachian incubators have graduated almost 1,300 businesses to date, most of them into their host communities, and have helped to create almost 38,000 jobs. Of these 38,000 jobs, 24,500 are directly attributable to current incubator tenants and graduates, and the remaining 13,500 jobs are indirectly attributable to these same firms.(Based on an industry multiplier developed for Business Incubation Works, NBIA, 1997.) Discussion of this takes place in the section titled Businesses Graduated and Jobs Created.) These are remarkable results and suggest that incubators are important and effective economic development tools for Appalachia.

Appalachian incubators house an average of 16 tenant companies at one time, including client companies that are incubating as well as service providers, anchor tenants, and others. When nontenant companies (affiliates) served by the incubators are considered, the average Appalachian incubator serves about 30 companies at any given time. Once again, these numbers are reasonable (given national averages) and demonstrate maturity in Appalachian incubators in following modern incubator practices.

The size of an average Appalachian incubator is about 41,000 square feet, while the net leasable area is about 31,500 square feet, or 77 percent of the incubator area. Both the overall size and net leasable area averages track well with national averages. However, 30 percent of Appalachian incubators are very small, consisting of 15,000 square feet of space or less. This small size makes it difficult to achieve financial stability and to serve enough tenants and clients to maintain the desired synergy and services within the incubator.

Appalachian incubators are predominantly nonprofit (94 percent), which is consistent with industry norms. Roughly half of Appalachian incubators are tied to a university or technical/community college. The most common type of incubator in the Region is "mixed-use," meaning it caters to clients in a wide variety of industries, with technology-related incubators being the second most common.

Consistent with the definition of business incubators, Appalachian incubators provide a number of services to tenants and clients. The most common "basic office services" provided by Appalachian incubators are conference rooms, photocopiers/fax machines, and Internet access, and these services are highest in demand by their tenants and clients. Among "business assistance services," the areas of networking, accessing loans, and marketing are the most commonly provided, and they receive the heaviest use by Appalachian incubator tenants. Surprisingly, only about two-thirds of Appalachian incubators provide entrepreneurial training (although these data may be understated due to a misinterpretation of the survey question).

Appalachian incubators tend to have policies regarding when a tenant must graduate, or exit, from the incubator program. The criteria used to determine when graduation should occur are generally consistent with national guidelines. We note that a number of Appalachian incubators require a tenant to exit or graduate based on a predetermined time limit. (About 67 percent of respondents employ this criterion.) Also worthy of mention are the significant number of incubators in the region that do not offer placement or relocation assistance to graduating tenants (54 percent).

The average Appalachian incubator responding to the survey has an annual operating budget of $219,000.(A group of five incubators with unusually large budgets was excluded from this sample. When these outliers are included, the average incubator budget is $289,000.) In comparison, a 2002 State of the Incubation Industry study by the National Business Incubation Association found the national average annual operating budget to be $363,000. The apparently small budgets of Appalachian incubators are a concern, both as an indicator of financial challenges facing these incubators and as a limitation on how well incubators can finance programs, services, and staff.

About 28 percent of the respondents indicated that their incubators are financially self-sufficient, meaning their operating expenses are covered by revenues generated from incubator operations. Another 20 percent of the Appalachian incubators are self-sustaining, meaning they can cover their operating expenses through a combination of incubator-derived revenues and "reliable" external funding sources such as service contracts. The balance of the incubators surveyed, almost one-half, must depend on unreliable subsidies. Therefore, a large number of Appalachian incubators appear to be in jeopardy because they require an operating subsidy that represents more than half of their operating budget.

Most Appalachian incubators have between one and two full-time equivalent positions (FTEs). Appalachian incubator managers are well educated, with roughly half possessing advanced degrees, a figure that tracks well with national averages for incubation managers. However, as a group they are not well compensated; they are twice as likely as the national average to have a low salary and half as likely as the national average to have a high salary. (High and low salaries are defined in a later section on Staffing to be $70,000 and $40,000, respectively.)

Despite the documented success business incubators have had generating jobs and growing businesses in rural communities throughout Appalachia, many continue to face significant financial and operational challenges. The largest areas of concern for the continued success and growth of business incubators, and hence the growth of entrepreneurial businesses in Appalachia, include the following:

  • More than 50 percent of Appalachian incubators require operating subsidies, with the average subsidy equaling 53 percent of an incubator's budget, suggesting questionable financial viability for a substantial number of incubators.
  • Thirty percent of Appalachian incubators are too small to achieve financial sustainability or provide the desired level of support to incubator tenants and clients.
  • Fifty-seven percent of Appalachian incubators charge below-market rental rates, making it difficult to achieve financial self-sufficiency.
  • Many Appalachian incubators (67 percent) rely on predetermined time limits, requiring tenants to graduate or exit their programs, while the remainder offer more flexible arrangements.
  • Appalachian incubator managers earn relatively low salaries, despite high educational attainment, when compared with national averages for incubator managers.
  • Fifty-four percent of Appalachian incubators offer no placement or relocation assistance to their graduating tenants.

Incubators have demonstrated that they are effective long-term business- and job-creation engines, but not if they run out of gas and are forced to close because they failed to achieve a sustainable financial position. ARC believes that many of these issues can be addressed by helping at-risk incubators identify and resolve their financial and operational challenges so they can continue to generate jobs and support entrepreneurial businesses in the Region.