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Tenant Exit and Graduation

An important issue in the field of business incubation is the way in which incubators move tenants and clients through their programs. The term "graduation" is used to refer to tenants that leave the incubator with the promise of further growth and success, while "exit" is more encompassing and may include businesses that leave the incubator because they fail or close.

In the 2004 ARC incubator survey, respondents were asked if they have a policy regarding when a tenant must leave the incubator facility. Out of 73 responses to this question, about 70 percent indicated that they do have such a policy.

Respondents were then asked to describe their graduation or exit policy and were provided a list of options from the 2002 NBIA State of the Incubation Industry study. Table 7 shows the responses and compares them with the 2002 NBIA responses.

Table 7
Graduation or Exit Criteria
2004 ARC
2002 NBIA
Company has outgrown space available at the incubator
Client has spent the maximum time allowed in the incubator
Client company has achieved agreed-upon milestones
Client has failed to meet certain benchmarks or milestones
Business assistance needs of client are beyond what incubator can provide
Client company has an experienced independent management team
Client company has had a liquidity event or attracted additional financing
Sources: ARC; NBIA

In some categories, the responses from Appalachian incubators are very similar to national statistics. This is true in the first four categories shown in Table 7. However, Appalachian incubators less frequently used criteria from among the remaining three categories.

Respondents to the 2004 ARC survey also were asked whether they used a "graduated rent structure" as an incentive for tenants to exit the incubator. Such a structure typically calls for higher rental rates to be charged to tenants that have been in the incubator for several years, thus creating a financial incentive for an incubator tenant to seek space elsewhere. Slightly more than half (53 percent) of respondents to this question said they used such a rent structure.

Respondents also were asked if they offer placement assistance to graduating tenants. Once again, just more than half of the incubators responding to this question (54 percent) said that they provided such assistance.

The following conclusions are drawn from these data:

  • Appalachian incubators demonstrate a significant level of sophistication regarding tenant graduation or exit policies and have criteria for determining when a company should exit the incubator.
  • More than two-thirds of Appalachian incubators require tenants to leave the incubator after a specified time limit. The use of this criterion is consistent with national trends, however GCGI's experience has shown that it can be a concern if there is no flexibility. Incubator tenants vary dramatically in their growth and change and therefore in the length of time they could benefit from the use of the incubator's space, basic office services, and business assistance services.
  • Appalachian incubators are less likely to utilize the last three criteria listed in Table 7 for exiting tenants. This may be because they represent situations that these incubators are less likely to experience. For example, tenants in smaller, rural incubators in Appalachia are less likely to experience a "liquidity event" than would a tenant in an urban incubator in other parts of the country. This also may be an indication that Appalachian incubators tend to work more with earlier-stage businesses than does the incubator industry nationwide.
  • Many Appalachian incubators do not offer placement assistance for graduating tenants. One is inclined to believe that businesses could benefit more if a higher number of their host incubators offered such assistance. Incubators play an important role in helping create and grow small businesses; the logical next step is to ensure that these nurtured businesses stay in the community and are situated in a physical space that will support their continued growth and success.