Incubator Characteristics

This section describes incubator facility size, number and type of tenants, type of incubator, and affiliation with a university or college. This section also includes the very important parameters of business and job creation, which can be used to measure the economic impact of incubators on Appalachia.

Incubator Size

Figure 2. Size of ARC Incubators

Besides the overall or gross size of the incubator facility, the 2004 ARC Survey also asked about the square footage of leasable space in the Appalachian incubators. The average amount of leasable space among all 76 responding incubators is slightly more than 42,000 square feet, or about 69 percent of the average gross incubator size of about 61,000 square feet. When we remove the five outliers from the sample, and exclude from consideration data from three other non-reporting incubators, we arrive at an average net leasable area of approximately 31,500 square feet, or about 77 percent of the average gross size of about 42,000 square feet for these 68 Appalachian incubators.

Several conclusions can be drawn from this analysis of the size of business incubators in Appalachia:

• Although the average gross size of incubator facilities in ARC's service area is considerably larger than national averages, this average is heavily influenced by a few very large Appalachian incubators. When those five very large incubator facilities are removed from the sample, the average Appalachian incubator size is about 41,000 square feet. This appears reasonable, given a national average of about 47,000 square feet.
• Considering only the subset of 2004 ARC survey respondents that excludes the five largest incubators, the net leasable portion of the ARC incubators is 77 percent. This is consistent with net leasable areas reported by national consulting organizations.
• However, the substantial number of small incubators in ARC's service area is cause for concern. As shown in Figure 2, approximately 30 percent of the surveyed incubators have 15,000 square feet of space or less. Incubators of this size can seldom be financially self-sufficient and are less likely to be self-sustaining. Therefore, almost one-third of the Appalachian incubators are so small that their long-term financial viability is questionable. (Some members of the ARC Business Incubation Committee feel a small incubator is of lesser concern if it is technology focused. Of the incubators in the 2004 ARC survey that consist of 15,000 square feet of space or less, only three indicated that they are exclusively technology oriented, while the majority are either mixed-use or targeted [e.g., kitchen or food, or arts and crafts incubators]).

Tenants and Clients

"Service providers" are a second category of tenants found in incubators. They are the companies that primarily provide business assistance and similar services to the incubating tenants. ARC respondent incubators housed an average of 3.5 service providers, as shown in Table 1. This is a higher number than expected (roughly one service provider for every 2.5 incubating tenants). Moreover, because only 39 incubators indicated that they had service provider tenants (out of 53 incubators responding to this question and used to calculate the 3.5 average), the average would be much higher if limited to only those incubators actually having service provider tenants.(It is possible, however, that some of the respondents mistakenly reported general service businesses in this category. This could explain, in part, the higher-than-expected number of service providers reported.)

The large average number of service providers is a positive indicator in three respects. First, it indicates that Appalachian incubators are making business assistance services readily available to their tenants and clients. Second, it indicates that these incubators are relying in part on outside service providers to meet the needs of tenants and clients, which both reduces the burden on incubator staff and increases the quality of the service provided. Third, it indicates that Appalachian incubators are finding creative ways to find tenants to help fill the incubator space, which helps achieve important synergy among tenant companies and provides additional rental income for the incubator.

The third category of tenant indicated in Table 1 is "anchor or key tenant." This category consists of tenants that are in the incubator not because they need traditional incubator services to grow and prosper, but instead are often stable businesses and organizations that locate in the incubator for other reasons. The responding incubators to the 2004 ARC survey indicated that they have an average of 1.6 anchor or key tenants, compared to the national average of 2.0 such tenants reported in the 2002 NBIA State of the Incubation Industry study. Once again, the number of incubators that responded to this question (55) is much larger than those that actually have anchor or key tenants (38), so the 1.6 average is an understatement of how many anchor or key tenants are found in Appalachian incubators that actually have anchor or key tenants. The presence of anchor tenants in a significant percentage of 2004 ARC survey respondents is seen as a positive indicator for two reasons. First, the presence of anchor or key tenants can influence whether an incubator is financially viable. Second, anchor or key tenants can provide important services and benefits to incubating tenants, ranging from providing supplier or service-provider opportunities to acting as mentors.

The fourth category shown in Table 1 is "other tenants," which is a catch-all category. The responding incubators to the 2004 ARC survey report an average of 2.4 other tenants in their facilities. These tenants may include, for example, academic space for a host community college or university or offices for governmental entities. Some incubators that reported having other tenants may have included a tenant that other respondents would define as an anchor or key tenant, so there may be a gray area in distinguishing these two categories in the survey. Provided that these other tenants are not detrimental to the purpose or function of the basic incubator, their presence is not a negative attribute, and again may indicate creativity on the part of Appalachian incubators and their host governments/universities by co-locating incubators with other activities. These other tenants also may be indicative of incubators that are serving other important community functions in addition to business creation and growth.

The subtotal line in Table 1 indicates that the average Appalachian incubator has almost 16 tenants. This is a reasonable number to achieve the desired level of activity and interaction in an incubator facility, provided that the incubating tenants are not dominated by the other categories of tenants. Because more than half of the tenants in the average Appalachian incubator are incubating tenants (8.4 out of 15.9), this does not appear to be a problem in most of the surveyed incubator programs.

The second-to-last line of Table 1 indicates that the responding incubators to the 2004 ARC survey have an average of more than 13 "affiliate clients." Affiliates are defined as companies that receive services at an incubator, but are not tenants of that incubator. This average of 13 affiliate companies with the Appalachian incubators compares well with the national average of 15, as reported in the 2002 NBIA State of the Incubation Industry report. Once again, the Appalachian average may be somewhat understated because 60 survey respondents answered this question but only 39 of them actually have affiliates; therefore, the average number of affiliates among the 39 incubators that have affiliate clients is larger.

The presence of affiliate clients is an important attribute of an incubator for several reasons. First, affiliate companies are evidence that the incubator is not restricting its influence and benefits to only its tenants. Second, affiliates may become tenants at a future date. Third, affiliates are evidence that an incubator is catering to the increasing number of home-based businesses found in many communities, some of which do not have a strong need to locate in the incubator facility. Fourth, affiliate clients remind us that there is a larger entrepreneurial presence in the Region than merely the firms physically housed within an incubator.

The bottom line of Table 1 suggests that the average Appalachian incubator serves almost 30 tenants and clients. Given the number of incubators in Appalachia, this suggests that more than 2,500 entrepreneurs, small businesses, service providers, anchor tenants, and affiliates were benefiting from or contributing to business incubators in Appalachia in 2004. (This is only the first indicator of the impact of incubators on Appalachia—more will be described in the next subsection.)

An assessment of the number of tenants and clients among the respondents to the 2004 ARC incubator survey leads to the following conclusions:

• The average Appalachian incubator compares favorably to both NBIA national data and GCGI's own experience, in terms of the number of tenants and clients served.
• Many Appalachian incubators are taking a mature approach to incubation, as they are opening their programs to more than the traditional start-up businesses. This action also helps improve an incubator's viability by expanding its client base.
• Appalachian incubators are taking important steps to improve their effectiveness and viability, such as including service providers and anchors among their tenants.
• Many Appalachian incubators are providing services to nontenant companies, known as affiliates, suggesting they are expanding their benefits and influence far beyond the tenants that they house.

Businesses Graduated and Jobs Created

As indicated in Table 2, almost 1,300 businesses have graduated from business incubators in Appalachia. Since portions of 12 states and West Virginia lie within the ARC service area, this represents an average of almost 100 companies per state that have left the incubators and established permanent operations.

Additionally, survey results indicate that Appalachian incubators have created almost 25,000 jobs through their graduated tenants as well as through companies they are currently housing. This is an average of 344 jobs per incubator, or almost 1,900 jobs per state.

In addition to the jobs created by the tenants and graduates of incubators, another valuable measure of economic impact is the number of jobs created indirectly. In other words, an incubator's job impact is not only the jobs created among the tenants and graduates, but also the jobs created elsewhere in the community due to the increased need for goods and services demanded by these employees, incubator tenants, and incubator graduates. A common technique used to estimate this additional economic impact is to calculate an employment multiplier that approximates how many indirect jobs are created for each direct job created by the incubator tenants and graduates.

Table 3 summarizes employment multipliers for a recent NBIA analysis, in which four incubators were studied using a macroeconomic model from Regional Economic Models, Inc. (L.A. Molnar, et al. Business Incubation Works, NBIA, 1997.) As indicated, two incubators in the sample were mixed-use incubators, and two were technology-oriented. Two incubators were in unspecified northeastern locations, and the other two were in the southern and western United States. Only the western incubator was noted as being rural; therefore, the other three are assumed to be urban or suburban.

Based on these estimated employment multipliers, an approximation of the number of additional, indirect jobs created by the Appalachian incubators in this survey is shown in Table 4. Using the multipliers in Table 3, a weighted average was derived for the ARC Region based on the number of ARC survey respondents indicating the type of incubator they operate. (Types include mixed-use, manufacturing, service, technology, targeted, and other, as explained later in this report. The weighted average assumed multipliers of 1.8 for manufacturing (because Incubator 3 in the NBIA analysis had a larger portion of manufacturing tenants/graduates), 1.3 for technology, and 1.6 for all other types.) This weighted average employment multiplier of 1.55 suggests an additional 13,450 jobs have been created indirectly by the Appalachian incubators, for a total job creation of almost 38,000 jobs in the ARC Region. This translates into an average of 534 jobs created per incubator, or more than 2,900 jobs created in each state in the ARC Region. It should be noted that these are understated estimates of total job creation, as the employment multiplier considers only indirect jobs created within the immediate geographic area of the incubator, and does not include jobs created in more distant communities.

The business and job creation results of Appalachian incubators are significant, in total numbers as well as in averages per incubator and per ARC state. It is expected that Appalachian incubators will continue to create jobs and spin-off companies, most of which will remain in the Region. (The 1997 NBIA study Business Incubation Works reported that 84 percent of companies graduating from an incubator stay in the same community. The rate was slightly lower (80%) for graduates of rural incubators.) Given the high unemployment rates in many parts of Appalachia, the creation of almost 38,000 jobs by the incubators responding to the 2004 ARC survey suggests that incubators are a key engine for job creation in the Region.

Incubator Types and Affiliations

Figure 3. Percentage of Incubators That Are Nonprofit

The 2004 ARC survey suggests that many Appalachian business incubators are, in some way, affiliated with an academic institution. As shown in Figure 4, slightly more than half of the incubators surveyed had such an affiliation. It appears that some Appalachian incubators are tied to major universities, while others are affiliated with community and technical colleges.

Figure 4. Percentage of Academic-related Incubators

In addition to their nonprofit status and university affiliation, incubators also can be characterized by the type of incubating tenant they serve. Figure 5 shows the types of incubators found in Appalachia. A "mixed-use" incubator is one that serves tenants and clients in a wide variety of industries and markets. A "manufacturing" incubator caters to small and start-up manufacturing and assembly-oriented businesses. "Service" incubators have tenants who are in the service industries, while "technology" incubators work with tenants and clients who have some high-tech component to their businesses. "Targeted" incubators are an interesting category; they are defined as incubators that focus on a particular industry, typically an industry that is the focus of local economic and business development efforts. Among the targeted incubators in Appalachia, the most common focus on food processing (also referred to as "kitchen incubators") and arts and crafts. Also represented are two wood industry incubators and two incubators that cater to companies in the powder metallurgy industry. Figure 5 indicates that the most common type of incubator in Appalachia is mixed-use, followed by technology. Manufacturing and service incubators are almost equally represented among Appalachian incubators, while targeted incubators make up the smallest category.

Figure 5. Number of Appalachian Incubators, by Type

Several conclusions can be drawn from this analysis of the types of incubators in Appalachia and their affiliations:

• Nationally, most business incubators are managed by nonprofit entities. The Appalachian incubators are following this trend.
• The percentage of incubators in Appalachia that are related to an institution of higher education appears to be higher than the national average. This is perhaps indicative of the role that academia plays in business and economic development in Appalachia. This affiliation with academic institutions undoubtedly also plays an important role in the financial underwriting of Appalachian incubators, both in the initial funding for construction as well as the long-term provision of operational subsidies.
• A strong majority of Appalachian incubators consider themselves mixed-use. This is the most inclusive and flexible category of incubator, and therefore is best suited to the small towns and rural areas of Appalachia, where it may be difficult to identify and attract enough entrepreneurs in more narrowly defined industry segments.