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146

IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. EM-34, NO. 3, AUGUST 1987

Managing the Incubator System: Critical Success
Factors to Accelerate New
Company Development
R A Y M O N D W. SMILOR

Abstract—The
new business incubator is an innovative system that
provides a variety of support systems to entrepreneurs to accelerate new
company development, speed the commercialization of technology, and
contribute to economic growth. This article presents empirical data on the
incubator as a system for entrepreneurship and describes its resources,
organizational structure, and objectives. It details ten factors related to
managing this system effectively. The factors emerged from data
collected through a national survey, on-site review, case study analysis,
and interviews with incubator directors and managers.

INTRODUCTION

A

N E W B U S I N E S S incubator is a n innovative system
designed to assist e n t r e p r e n e u r s , particularly technical
entrepreneurs, in the development of n e w firms. By providing
a variety of services and support to start-up a n d e m e r g i n g
companies, the incubator seeks to link effectively talent,
technology, capital and k n o w - h o w to leverage entrepreneurial
talent, accelerate the d e v e l o p m e n t of n e w c o m p a n i e s , and thus
speed the commercialization of technology.
The w o r d i n c u b a t e " takes on fascinating connotations
when applied to new business development. T o incubate is to
maintain under prescribed a n d controlled conditions favorable
for hatching or developing. It also means to cause to develop
or to give form and substance to something. In this context, an
incubator is a facility for the maintenance of controlled
conditions for cultivation.
T o incubate fledging c o m p a n i e s implies an ability or desire
to maintain prescribed and controlled conditions favorable to
the development of n e w firms. A n e w business incubator,
thus, seeks to give form a n d substance, i . e . , structure and
credibility, to start-up o r e m e r g i n g ventures by maintaining
controlled conditions t o assist in the cultivation of new
companies. The " c o n t r o l l e d c o n d i t i o n s " include four types of
support systems: secretarial support, administrative assist­
ance * facilities support, a n d business expertise, including
management, marketing, accounting and finance. In addition,
the incubator attempts to extend the networking capabilities of
the entrepreneur through affiliations with the private sector,
universities, government entities, and nonprofit institutions.
4

T h e expectation is that this system can result in viable tenant
companies that generate e c o n o m i c development, technology
diversification, j o b creation, profits, and successful p r o d u c t s .
This framework for commercialization is depicted in F i g . 1,
T h e Incubator System.
GROWTH OF INCUBATORS

T h e n e w business incubator is attracting widespread atten­
tion in t h e United States and in many other countries,
including F r a n c e , Germany, S w e d e n , England, J a p a n , a n d
China. It g o e s under a variety of n a m e s including " i n n o v a t i o n
c e n t e r , " " e n t e r p r i s e c e n t e r , " and " b u s i n e s s and technology
center."
Data o n new business incubators in A m e r i c a w a s collected
by means of a mail survey. T h e survey w a s conducted in July
and August 1985. Traditional mail survey research techniques
and p r o c e d u r e s were employed when collecting the data,
including follow-up telephone calls and questionnaires t o
initial nonrespondents. T h e original population consisted of
117 incubators that included all the operating o r planned
incubators in the United States at that time. (There a r e
approximately 170 incubators in the United States t o d a y . )
Responses w e r e received from 5 0 incubators. T h i s represents
an effective response rate of 4 3 percent.
T h e n u m b e r of incubators in t h e United States has g r o w n
rapidly in recent years. Eighty-nine percent of the incubators
responding t o the national survey have been opened since
1983, a n d 3 4 percent w e r e opened in 1985 alone. T h e s e
incubators a r e widely geographically dispersed in the United
States. T h e y have developed in 2 8 states and in every region of
the country.
T h e concept has generated great enthusiasm. A n e c o n o m i c
development publication called it " t h e most potent e c o n o m i c
development tool to be introduced in this d e c a d e " [28]. It h a s
also caused skepticism. A February 1985 article in Venture
magazine wondered if tenant c o m p a n i e s , those firms o c c u p y ­
ing space in the incubator, might not be giving u p far m o r e
than they are getting by being in an incubator [ 5 ] .
Two BROAD STRATEGIES

Manuscript received July 2 1 , 1986; revised January 8, 1987. This work was
partially supported by the Small Business Administration's Office of Private
Sector Initiatives and by Peat, Marwick, and Mitchell & Co. through
sponsorship of the national survey on new business incubators.
The author is with the I C Institute, The University of Texas at Austin,
Austin, TX.
IEEE Log Number 8714679.
2

A s the concept began to evolve in the late 1970's and the
early 1 9 8 0 ' s , t w o broad strategies e m e r g e d . O n e approach
was to renovate older o r vacant buildings such as school
buildings, factories, o r w a r e h o u s e s , and lease space at
relatively inexpensive rates. T h e strategy focused m o r e o n

0018-9391/87/0800-0146$01.00

© 1987 I E E E

SMILOR: MANAGING THE INCUBATOR SYSTEM: CRITICAL SUCCESS FACTORS

147

INCUBATOR AFFILIATION
ECONOMIC
DEVELOPMENT

Τ
NEW
INCUBATORS

t

BUSINESS
EXPERTISE

JOB
CREATION

C
0
M
ρ
A
Ν
I
Ε
S

SUPPORT SYSTEMS
SECRETARIAL

TECHNOLOGY
DIVERSIFICATION

Τ
Ε
Ν
A
Ν
Τ

PROFITS

VIABLE
COMPANIES

ADMINISTRATIVE
SUCCESSFUL
PRODUCTS

FACILITIES

Fig. 1.

The incubator system.

providing entrepreneurs with access t o space than on building
c o m p a n i e s , i . e . , expanding the operations, personnel, a n d
markets for tenant firms. Success w a s defined in t e r m s of
leased space and in terms of the e n t r e p r e n e u r ' s ability t o m e e t
monthly expenses.
T h e second strategy was a m o r e conscious attempt t o build
c o m p a n i e s , that i s , t o leverage resources to help c o m p a n i e s
g r o w . W i t h this strategy s o m e incubators sought a n equity
position in tenant c o m p a n i e s . While providing space w a s still
important, t h e focus was o n developing firms. Success w a s
defined in t e r m s of tenant c o m p a n y e x p a n s i o n and its ability t o
stand eventually o n its o w n .
As the incubator concept h a s d e v e l o p e d , there h a s been a n
increasing emphasis on the second strategy—helping c o m p a n ­
ies to g r o w . A n d incubators have b e e n experimenting with a
variety of n e w organizational systems to link talent, technol­
o g y , capital, and k n o w - h o w .
T o appreciate business incubator d e v e l o p m e n t , it is i m p o r ­
tant t o realize that t h e idea is relatively n e w . It is still a n
experiment. A s with all experiments, there is a great deal of
testing taking place.
DIVERSITY OF INCUBATOR M O D E L S

T h e testing is reflected in t h e diversity of incubator
organizational m o d e l s . There a r e university-related incubators
such a s t h e o n e at Rensselaer Polytechnic Institute in T r o y ,
N e w Y o r k , a n d t h e Georgia A d v a n c e d Technology C e n t e r at
the Georgia Institute of Technology in Atlanta, Georgia. T h e r e
a r e private incubators such a s the U t a h Innovation C e n t e r in
Salt Lake C i t y , U t a h , and the Tennessee Innovation C e n t e r in
Knoxville, T e n n e s s e e . There are corporate/franchise incuba­
tors operated by Control Data Corporation in Minneapolis,
Minnesota, and b y Technology C e n t e r s International in
Montgomeryville, Pennsylvania. A n d there a r e c o m m u n i t y
supported incubators such as the F u l t o n - C a r r o l l C e n t e r in
Chicago, Illinois, a n d the L o s A l a m o s Innovation C e n t e r in
L o s A l a m o s , N e w M e x i c o , which is indirectly associated with

TABLE I
INCUBATOR GOALS AND ORIENTATIONS
PRIORITIES
TYPE O F "
JOBS
INCUBATOR

Universityrelated
Communitysupported
CorporateFranchise
Private

PROFITS

ECONOMIC
DEVELOPMENT

ECONOMIC
DIVERSIFICATION

TAX BASE
EXPANSION

INVESTMENT
OPPORTUNITY

X

X

X

X

X
X

X

X

X

X

X

X

X
X

X

the national laboratory there [ 2 3 ] . Incubator models a r e
diverse in the goals and orientations a s shown in Table I .
K E Y RESEARCH FINDINGS

A s incubators have e m e r g e d across the country a few
studies have begun to shed light o n the incubator concept [ 4 ] ,
[8], [ 1 7 ] , [ 2 1 ] .
Campbell and M i h a i l o published the first major survey o f
incubators through the H u b e r t H . H u m p h r e y Institute o f
Public Affairs at the University of Minnesota. T h e y conducted
and reported on a 50-incubator survey in 1984 [ 8 ] , [ 1 7 ] .
M o s t incubators at that t i m e , according to the survey, w e r e
established in existing, a n d frequently vacant buildings. M a n y
had been purchased a n d renovated with t h e assistance o f
funding by a variety of g o v e r n m e n t loans and g r a n t s . Others
had been purchased with state o r locally issued industrial
revenue bonds. A few buildings h a d been donated or sold
cheaply by private corporations.
Most of the incubators acted as brokers between n e w
business and potential investors b y making introductions t o
key people o r by assisting in the development of proposals a n d
loan packages. Publicly sponsored incubators sought primarily
to create j o b s whiie university affiliated incubators aimed t o
transfer research and development activities and spin-off
university research efforts.

148

IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. EM-34, NO. 3, AUGUST 1987

T h e M i h a i l o - C a m p b e l l study identified a n u m b e r of ele­
ments in incubator operations: flexibility in leasing and
management of space; centralized services t o help reduce
overhead costs of tenant companies; and various types of
business assistance. T h e research also discovered a unique
social atmosphere that encouraged " t r a d i n g r e l a t i o n s h i p s . "
In September 1985, D . N . Allen from the Institute of Public
Administration at the Pennsylvania State University completed
a special report for the Economic D e v e l o p m e n t Administra­
tion Research and Evaluation Division of the U . S . Department
of C o m m e r c e [4]. T h e study reported on a survey of 4 6
incubators and 217 tenant firms operating at the start of 1985.
Allen's concept of an incubator comprised four dimensions:
1) an organization o r network of organizations providing
people with business skills and k n o w l e d g e , and motivat­
ing t h e m to start companies,
2) a tie t o " U . S . real estate experience with building or
renovating and managing multitenant facilities,"
3) a way to " p r o v i d e business consulting services to small
business c l i e n t s , " and
4) " s h a r e d office services and rental space available for
small b u s i n e s s e s . "
T h e study identified three organizational types of incuba­
tors: public/nonprofit, private, and university. It also identi­
fied three general categories of services provided to tenants:
logistical o r physical, shared office support, and management
consulting. After analysis of the n u m b e r and types of tenants,
size of facilities, source of support, entry and exit routes, and
types of services p r o v i d e d , the study concluded that " a l m o s t
twice as m a n y firms succeed as f a i l . " Success meant a firm
moving out of the incubator; failure meant a firm discontinu­
ing operations while in the incubator.
A third major project, " I n n o v a t i o n and Enterprise: A Study
of N S F ' s Innovation Centers P r o g r a m , " w a s prepared for the
National Science Foundation (NSF) a n d submitted to N S F in
D e c e m b e r 1985 [ 2 1 ] . It reported on the programmatic
activities and the viability of the nine federally funded centers,
the first of which w a s started in 1 9 7 3 .
T h e study found that the long-term financial survival of the
eight existing NSF-funded centers is " s t i l l precarious, and
financial viability is still a major center p r e o c c u p a t i o n . " It
reached five tentative conclusions:
1) " S u p p o r t for an Innovation C e n t e r within a university
budget is unlikely, unless the university has strong
e c o n o m i c development ties with the local c o m m u n i t y . "
2) T h e belief that a center can b e c o m e self-sustaining by
obtaining an equity position in tenant companies has not
yet been confirmed. Ten years of external funding may
b e required before the equity m e c h a n i s m w o r k s .
3) Five to 10 y e a r s should b e allowed before expecting
strong e c o n o m i c development results from a center
functioning with public funds.
4) Most public funding cycles are not congruent with center
development since the cycles range from 2 - 5 years
between elections.
5) S o m e center activities may be supported on a fee-for-

service basis, but strong management and networking
skills a r e necessary.
According to the study, the effort to develop viable
companies h a s to this point met with m i x e d results. In t e r m s of
program activities for tenant c o m p a n i e s , however, it con­
cluded that " t h e r e is g o o d reason to a r g u e that the Innovation
C e n t e r s ' business assistance efforts w e r e successful, o v e r a l l . "
Evidence suggested " r e a l linkages between innovation and
entrepreneurship education and later o u t c o m e s . "
SUCCESS FACTORS

Unlike these studies which dealt primarily with providing
information about incubator development, the focus of this
research effort w a s to understand h o w the incubator concept
works in practice. Consequently, in addition to a national
survey, the research incorporated on-site review, case study
analysis and in-depth interviews with incubator managers and
directors. A s a result o f this p r o c e s s , ten factors e m e r g e d as
important to the effective m a n a g e m e n t of the incubator
system:
•
•
•
•
©
•
•
•
•
•

on-site business e x p e r t i s e ,
access t o financing and capitalization,
in-kind financial support,
c o m m u n i t y support,
entrepreneurial n e t w o r k ,
entrepreneurial education,
perception of success,
selection process for tenants,
tie to a university, and
concise p r o g r a m milestones with clear policies
procedures.

and

Not all successful incubators necessarily incorporate e a c h of
these factors. But there does seem to b e a direct correlation
between successful incubator development and the extent to
which each o f these factors is consciously implemented by
most of the incubator m a n a g e m e n t s . T h e more extensively
these factors a r e incorporated into the incubator, the greater
the chance o f success for the tenant companies and the
incubator of which they a r e a part.
On-Site

Business

Expertise

E m e r g i n g c o m p a n i e s require business expertise. Very often
they will h a v e the talent, i d e a s , and e v e n capital to launch a
new venture. But they most often lack in various degrees the
business k n o w - h o w to transform these assets into viable
business enterprises.
T h e importance of this expertise w a s reinforced in the
national survey. T h e consulting services considered most
important to provide to tenant companies, in o r d e r of
importance, included business planning, marketing, account­
ing and m a n a g e m e n t . W h e n important and most important
evaluations a r e c o m b i n e d , m a n a g e m e n t a n d marketing support
rank highest. (See Fig. 2.)
T h e marketing function is essential in both differentiating
the products o f the c o m p a n y and establishing the credibility of
the firm in a highly competitive environment. Marketing is

149

SMILOR: MANAGING THE INCUBATOR SYSTEM: CRITICAL SUCCESS FACTORS

BUSINESS PLAN
MARKETING
ACCOUNTING
MANAGERIAL
EVALUATING FINANCIAL OPTIONS
ACCESS T O LOANS & GRANTS
GENERAL COUNSELING
LOAN PACKAGING
INTRO T O VENTURE CAPITALISTS
40

•

LEAST IMPORTANT
Fig. 2.

50

60

70

80

90

100

MOST IMPORTANT

E3 I M P O R T A N T

Importance of consulting services provided.

especially difficult in technologically innovative companies,
particularly when they are addressing n e w needs and markets.
Marketing must deal with several p r o b l e m s unique to techno­
logically-based c o m p a n i e s :
• technological obsolescence,
• hesitation to b u y early-generation technologies,
• the uncertainty of selecting the right initial market for a
new technology w h e r e there is the potential for multiple
applications across a variety of industries,
• the need to educate potential u s e r s , and
• difficulties in forecasting market d e m a n d for innovative
products for which users m a y h a v e little or no frame of
reference.
M a n a g e m e n t determines how e m e r g i n g companies will
respond to changes in the marketplace and especially h o w
effectively they will deal with g r o w t h . Managing human,
financial, and technological resources d e m a n d skills that very
often need to be learned by enterpreneurs and then honed
through experience.
Business planning requires that e m e r g i n g companies look
past their first product. They need to anticipate new products
and chart the general direction and future needs of the
c o m p a n y . Planning m a y include not only the growth of the
firm but also its eventual acquisition b y a larger company.
T h e accounting function in start-up ventures is a key part of
the control and oversight m e c h a n i s m for the firm. It is
particularly important t o tenant c o m p a n i e s in terms of coming
to grips with cash flow.
Regardless of what form incubators t a k e , they can provide
on-site business expertise in a variety of w a y s . T h e know-how
that is internally available in incubators m a y be leveraged into
tenant companies through:
• an incubator director o r president w h o brings experience
and professional management and marketing savvy to the
incubator,
• a b o a r d of directors that e n c o m p a s s e s a range and mix of
expertise that can be passed on t o tenant companies,
• an advisory council made u p of key professionals to
w h o m the tenant companies h a v e access, and

• a consultant network w h i c h can provide services, often
o n a favorable fee basis.
Access

to Financing

and

Capitalization

Capital is the iifebiood of emerging c o m p a n i e s . C o n s e ­
quently, a c c e s s t o working capital financing a n d equity and
debt capitalization comprised the second tier of consulting
services considered most important to tenant c o m p a n i e s . In
order of priority, this access included evaluation o f financial
options, access to loans a n d grants, loan p a c k a g i n g , a n d
introduction to venture capital institutions and v e n t u r e capital­
ists. (See F i g . 2 . )
Given t h e r a n g e and complexity of financing alternatives in
t o d a y ' s m a r k e t p l a c e , companies need assistance in under­
standing the alternatives and in determining which m a y be best
for them. T h e ability to perceive and appreciate what start-up
entrepreneurs give up and what they get through any particular
financial option is important in launching a n d developing a
new v e n t u r e . C o m m e r c i a l b a n k i n g , investment b a n k i n g , Small
Business Administration support, Research a n d D e v e l o p m e n t
Limited partnerships, and private investors, t o n a m e a few
alternatives, all present different advantages and disadvan­
tages which n e e d to b e identified and evaluated. T h i s process
involves not only understanding the technical a n d financial
dimensions of an alternative but also recognizing the attitudes,
perspectives a n d concerns—the mind set—of t h o s e providing
funds to the venture. This is particularly true as a c o m p a n y
considers t r a d i n g equity for control.
M a n y e m e r g i n g companies finance their early development
through personal loans and government grants. A n u m b e r of
incubators try t o provide access to individuals, institutions,
and agencies that provide loans and grants. Access h e r e
implies the ability to " g e t to the right p e r s o n " a n d t o m o v e
m o r e expediously. Sources of loans and grants not only
include traditional funding mechanisms like b a n k s but also
n e w e r m e c h a n i s m s such as the Federal Small Business
Innovation Research p r o g r a m and key individuals o r " a n g e l s "
in t h e c o m m u n i t y .
Most entrepreneurs w h o start companies are not very
experienced in dealing with banks and other lending institu-

150

IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. EM-34, NO. 3, AUGUST 1987

PRIVATE SOURCE
CITY GOVERNMENT
OTHER LOCAL SOURCE
P R I V A T E INDUSTRIAL COUNCIL
COUNTY GOVERNMENT
UNIVERSITY
CHAMBER O F COMMERCE
INDUSTRIAL REVENUE BONDS
0

Fig. 3.

10

20
30
40
50
60
70
80
PERCENT O F INCUBATORS RECEIVING ASSISTANCE
FROM T H EGIVEN SOURCE

1

Some venture capital firms d o set aside a small amount of
their venture pool, p e r h a p s 3 - 1 0 percent, to make selected
seed capital investments. A n d some funds devoted to seed
capital are being d e v e l o p e d . But most venture capitalists
prefer to wait until a c o m p a n y has a track record, proven
management, and d e m o n s t r a t e d market competence before
making an investment. Consequently, an incubator can p r o ­
vide an important link t o the venture capital community b y
focusing early attention o n tenant c o m p a n i e s , by making
introductions a s the c o m p a n y proves itself in the marketplace,
and especially by e d u c a t i n g t h e entrepreneur t o the venture
capital process and t h e mind-set of the venture capitalist.
Incubators can be a source of and provide access to seed
capital, which is the h a r d e s t type of funding to generate. T h e
national survey s h o w e d that a variety of community related
sources provide financial assistance to incubators which pass
on some of those r e s o u r c e s to tenant companies. (See Fig. 3.)
In addition, s o m e state and federal government financial
support is being directed t o n e w business incubators.
Financial

Support

A type of seed capital financing that incubators provide to
tenant companies c o n c e r n s financial assistance through in-kind
service support. T h e s e in-kind services include secretarial,
administration, and facilities support. T h e most important
1

100

Community related sources of incubator support.

tic i. The ability to p a c k a g e a loan o r an application for a
grant, therefore, is a n i m p o r t a n t service that c a n be provided
to tenant companies.
Finally, m o s t i n c u b a t o r s think it is important to provide
tenant companies with introductions to the venture capital
industry. This is especially important after a company has
developed for a time in the incubator. F e w venture capital
firms are interested in start-up companies, a n d most do not
make seed capital i n v e s t m e n t s . Because start-up companies
require a great deal of h e l p , h a v e a higher chance of failure,
take u p a lot of time of t h e venture capital staff, and have little
management o r m a r k e t i n g experience, most venture capital
firms prefer to make investments in m o r e developed enter­
prises.

In-Kind

90

For a discussion of the venture capital process, see [16].

secretarial services to tenant c o m p a n i e s , in o r d e r of impor­
t a n c e , a r e photocopying, receptionist, word processing, and
general typing. (See Fig. 4 . ) T h e key administrative services
a r e equipment rental, mailing, accounting help, and contract
administration. (See Fig. 5.) T h e m o s t important shared
facilities services a r e other (janitorial, parking, e t c . ) , security,
c o m p u t e r s , loading dock, and conference r o o m . (See Fig. 6.)
B y assisting with secretarial, administrative, and facilities
s e r v i c e s , incubators help provide a r a n g e of basic but muchn e e d e d services that start-up companies require but may often
neglect, ignore o r cannot afford.
T e n a n t companies pay the cost o f these services in a variety
of w a y s . T h e incubator m a y p r o v i d e a relatively low or
subsidized rent to the tenant c o m p a n i e s . It m a y charge a
competitive rent but tie access t o services into the rental
a g r e e m e n t . It may provide these services for an equity share in
the c o m p a n y . O r the tenant c o m p a n y m a y be charged only on
an as-used basis, which helps keep its o w n costs d o w n . As part
of t h e arrangement, most incubators provide extremely flexi­
ble lease terms.
Community

Support

C o m m u n i t y support plays an important role in sustaining
incubator development. Most incubators in some way reflect a
c o m m u n i t y ' s effort to diversity its e c o n o m y , create j o b s , and
l e v e r a g e entrepreneurial talent for a m o r e viable long term
e c o n o m y . (See F i g . 7.) Part of the p r o c e s s , however, involves
recognizing that companies take time to develop. Economies
d o not change overnight. A n d an incubator should be only one
tool in a broader economic development plan.
T h e national survey showed that there is indeed some
e v i d e n c e that incubators contribute to the process of building
indigenous companies. That is, they c a n keep h o m e grown
talent at h o m e and develop c o m p a n i e s that in turn help
g e n e r a t e j o b s for the community. Since t h e incubator concept
is relatively n e w , not many companies h a v e actually graduated
o r left the incubators. H o w e v e r , o f the thirty companies that
w e r e found to have graduated from incubators in the national
s u r v e y , 2 0 percent remained in the same neighborhood as the
incubator, 6 0 percent in the same city and 2 0 percent in the
s a m e state. N o doubt, some companies will be lured or opt to

151

SMILOR: MANAGING THE INCUBATOR SYSTEM: CRITICAL SUCCESS FACTORS

10

0

20

30

40

50

60

70

80

90

100

%

•

LEAST IMPORTANT

IMPORTANT

Β

Fig. 4.

M MOST IMPORTANT

Importance of secretarial services provided.

EQUIPMENT R E N T A L
MAILING

•••••••

ACCOUNTNG
CONTRACT ADMINISTRATION
BILLING
HEALTH INSURANCE
0

10

20

30

40

50

60

70

80

90

100

%

•

LEAST IMPORTANT
Fig. 5.

0

H

IMPORTANT

B

MOST

IMPORTANT

Importance of administrative services provided.

10

20

30

40

50

60

70

80

90

100

%

•

LEAST IMPORTANT
Fig. 6.

tH I M P O R T A N T

S

MOST

IMPORTANT

Importance of shared facilities provided.

m o v e to other states in the future. But early indications are that
incubators m a y b e a viable economic development tool.
Because of this, incubators do gain the financial, moral,
a n d / o r public relations support of c o m m u n i t i e s . This support
may come from private individuals, city government, private
industrial councils, county g o v e r n m e n t , universities, and
c h a m b e r s of c o m m e r c e . This s u p p o r t is also crucial in

leveraging additional assistance from professionals and others
in the community w h o may b e able to provide business
expertise to the tenant companies. W h e n the incubator is
perceived as a reflection of community goals and as a potential
asset to economic development and diversification, then it is
able to a degree to rise above self-interest and thus garner
more broad-based support.

152

IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. EM-34, NO. 3, AUGUST 1987
JOB CREATION
ECONOMIC DEVELOPMENT
E N T R E P R E N E U R S ^ DEVELOPMENT
OTHER
TECHNOLOGY DEVELOPMENT
ECONOMIC DIVERSIFICATION
FROriT
TAX BASE EXPANSION
PROMOTE WAGE OF SPONSOR
UNIVERSITY AFFILIATION
0

Fig. 7.

Entrepreneurial

10

20

Network

2

Incubators thus try to a d v a n c e tenant company d e v e l o p m e n t
by providing the interface for a broader and richer r a n g e of
networking opportunities to entrepreneurs.
Education

If tenant companies a r e t o grow they must eventually stand
o n their o w n . At some point, they must cut the umbilical cord
t o the incubator. But this is not easy to d o .
One persistent problem that most incubators encounter is the
reluctance of tenant companies to move out on their o w n . T h e
For a discussion of the relationship between networks and entrepreneurial
development, see H. Aldrich and C Zimmer, "Entrepreneurship through
social networks," in [22].
2

40

50
PERCENT

60

70

80

90

100

One of incubators top three objectives.

Entrepreneurship is a d y n a m i c process. A s such it necessar­
ily requires links or relationships not only a m o n g a n d b e t w e e n
individuals but also a m o n g and between a variety of institu­
tions. T h e stronger, m o r e c o m p l e x , and m o r e diverse t h e w e b
of relationships, the m o r e the entrepreneur is likely to h a v e
access t o opportunities, t h e greater his chance of solving
p r o b l e m s expeditiously, a n d ultimately the greater t h e c h a n c e
of success for a n e w v e n t u r e .
A n entrepreneurial n e t w o r k can provide links a n d relation­
ships that can p r o m o t e and sustain new ventures in an
incubator. A university provides business and r e s e a r c h cen­
ters, continuing business education (especially in m a n a g e m e n t
and marketing skills) and potentially a base for r e s e a r c h and
development which also helps develop entrepreneurs. M a j o r
firms provide key credibility to emerging c o m p a n i e s as
customers, and are sources of spin-off opportunities. E m e r g ­
ing firms provide a tier of peer support, find critical h e l p in
peer organizations and establish important links with and
through suppliers and c u s t o m e r s . Professional support c o m e s
through networks t o accountants, lawyers, and financiers.
State and local government provide incentives, direct a i d , and
access t o contracts while responding to the creative p r e s s u r e s
of emerging business interest groups. Other support n e t w o r k s
take a variety of forms: key individuals, consultants, w o r k ­
shops, business education p r o g r a m s , and social and civic
groups.

Entrepreneurial

30

protected environment of the incubators is h a r d t o leave. T h e
expectations of tenant companies for continued support, the
reinforcement of p e e r s , the ability to tap b u s i n e s s expertise,
and the general comfort of working in an e n v i r o n m e n t that o n e
k n o w s , all can m a k e the process of graduation from the
incubator a difficult o n e .
T o deal with this p r o b l e m , many incubators a r e addressing
t h e need for entrepreneurial education. Entrepreneurial educa­
tion helps prepare the entrepreneur to d o b u s i n e s s outside the
incubator. It seeks to develop the skills—to instill s o m e of the
necessary know-how—in entrepreneurs s o that they extend
their own abilities in running a company.
Training and education in incubators m a y b e a formal and
structured p r o g r a m of both theoretical and h o w - t o topics, o r it
m a y be an informal process of interaction, discussion, and
e x c h a n g e . P r o g r a m s m a y be developed i n - h o u s e , related to
continuing education efforts in a university, o r provided by
consultants, academics, and experienced practitioners. Train­
ing and education activities may address a variety of topics:
estate planning, tax advise, business planning, product devel­
o p m e n t , marketing techniques, management skills, competi­
tive contract bidding, grant application, a n d accounting
practices.
Part of the education process also o c c u r s through p e e r
interaction. T h e opportunity t o meet and talk with other
entrepreneurs w h o h a v e experienced and solved similar
problems o r faced similar business situations is a valuable
learning experience that the incubators can h e l p facilitate.
Perception

of

Success

A n important intangible element plays a r o l e in incubator
development. Incubators need t o create a perception of
success. This perception can help establish t h e incubator a s a
resource for the c o m m u n i t y . It can also h e l p position the
tenant companies in the market.
If the incubator is perceived a s successful, then it can attract
resources more easily, get stronger start-up v e n t u r e s to seek
admission, and help tenant companies build credibility.
There a r e a variety of ways to establish a perception of
success:
• a new and/or attractive facility,

SMILOR: MANAGING THE INCUBATOR SYSTEM: CRITICAL SUCCESS FACTORS

153

HJGH-TECHNOLOGY
MQHT MANUFACTURING
OTHER SERVICES
INDUSTRY

N O N HIGH-TECHNOLOGY
OTHERS
PROFESSIONAL SERVICES
HEAVY MANUFACTURING

Fig. 8.

One of incubators top three choices for tenants industry type.

CREATE N E W JOBS
BE ABLE T O PAY OPERATING COST
HAVE A WRITTEN BUSINESS PLAN
A PROSPECTIVE
TENANT COMPANY
MUST:

HAVE A UNIQUE OPPORTUNITY
E E A N E W S T A R T UP COMPANY
BE LOCALLY O W N E D
HAVE FAST G R O W T H POTENTIAL
BE HIGH T E C H .

•

L O W IMPORTANCE

Fig, 9,

H

MEDIUM IMPORTANCE

Essentially b y inference ( w h o is associated with the incuba­
tor), b y reference (what others say about the incubator a n d its
tenants), and ultimately by evidence (what the incubator
actually p r o d u c e s ) , a perception of success c a n b e established
that s e r v e s both the incubator a n d the tenant c o m p a n i e s .
Process

for

VERY

IMPORTANT

Importance of selected criteria in tenant selection.

• affiliation w i t h key institutions, both public and p r i v a t e ,
in the a r e a ,
• a n experienced ( i . e . , " s u c c e s s f u l " ) incubator m a n a g e r ,
• a key b o a r d o f directors,
• a noted advisory council,
• a g r o u p o f promising start-up c o m p a n i e s , and
• successful graduated firms.

Selection

9

Tenants

If a n incubator seeks to build c o m p a n i e s , then it must h a v e a
selection p r o c e s s through which it evaluates, r e c o m m e n d s ,
and selects tenant firms. By what criteria will it a d m i t
c o m p a n i e s into the incubator? H o w will the incubator j u d g e
success? W h e n a n d under what circumstances will it " p u l l t h e
p l u g " on tenant companies? W h a t , if a n y , exit policy e x i s t s ,
and h o w d o e s this apply to the selection of incoming firms?
T h e criteria for tenant selection are important a n d m a y vary
with t h e mission and objectives of the incubator. Incubators

favor high technology and light manufacturing firms. (See
F i g . 8.) Criteria for tenant c o m p a n y selection includes the
ability t o create j o b s , pay operating e x p e n s e s , present a written
business plan, h a v e a unique opportunity, b e a start-up
c o m p a n y , be locally owned, have fast-growth potential, and b e
high technology related. (See F i g . 9.)
Unless there is s o m e set of criteria by which t o determine
tenant company selection, there is no frame of reference for
j u d g i n g whether a company is o n or off t r a c k and n o way t o
decide whether a n d to what degree it m a y need additional
resources.
Most incubators have established s o m e p r o c e s s b y which
firms a r e reviewed and approved for admission into the
facility. Usually t h e incubator m a n a g e r o r a selection commit­
tee is involved in t h e review process. In s o m e cases, t h e b o a r d
of directors b e c o m e s involved. Admission into the incubator
often requires a decision by the board o r by the incubator
manager. In s o m e cases, a selection committee may b e
involved.
T h e r e are exceptions to all selection criteria. But, impor­
tantly, the clearer a n d the more developed t h e set of selection
criteria, the greater the likelihood of admitting companies that
can be successful.

154

IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. EM-34, NO. 3, AUGUST 1987

TABLE II
MEASURES OF SUCCESS IN SELECTED INCUBATOR MODELS
^"S,.
^S-

Measures
of Success

Incubator
Models

Tie to a

Number
of
Tenant
Companies

Jobs
Created

Equity
Position
in Tenant
Companies

Chief
Entrance
Criteria

yes
(2%)

Technical Company
Business Plan
RPI Technology

yes
(up to 1/3)

Proprietary
Technology
Potential for $5 Million
in sales annually
within 5 years

University Related
Rensselaer Polytechnic Institution
Troy, New York

30
since
1980

500

Private
Tennessee Innovation Institute
Troy, New York

8
since
1985

40

Corporate/Franchise
Control Data Corporation
22 nationwide

735
since
1979

6,100

353

no

No specific
criteria
(ability to pay
rent)

Community
Fulton-Carroll Center of Industry
Chicago, Illinois

53
since
1981

325

14

no

No specific
criteria
(ability to pay
subsidized rent)

University

Most incubators have established ties to a university. In the
national s u r v e y , over SO percent o f the incubators had some
kind o f affiliation with a university. T h e s e ties have developed
because the relationship has p r o v e n t o b e mutually beneficial.
These ties can be formal or informal. T h e incubator may
actually b e a part of the university o r a particular college. In
this case, the facility may be on c a m p u s , and the incubator
may b e subject to the rules and regulations of the university
system.
Through a n informal affiliation, t h e incubator may b e on
campus but operate as an independent entity that leases space
from the university.
In addition, incubators have d e v e l o p e d other types of ties to
a university which includes h a v i n g former university profes­
sors as managers or advisors, o r having university faculty
entrepreneurs in the tenant c o m p a n i e s .
Incubators affiliated with a university are also physically
close to the university. A m o n g t h e survey respondents, 39
percent are 5 - 1 0 minutes b y c a r from the university; 27
percent are within walking d i s t a n c e ; 18 percent are 10-60
minutes by c a r from the university; a n d 15 percent are actually
on a university campus.
While incubators benefit from the direct and indirect
support of the university, there a r e also advantages to a
university arising from its relationship to an incubator. The
incubator provides a mechanism t o commercialize university
research. It helps a university partly fulfill an emerging
obligation o f directly contributing t o economic development.
It also provides an opportunity for university faculty and
graduate students to d o research.
Concise Program
Procedures

Graduated
Firms

Milestones

with Clear Policies

and

W h e t h e r a n d how rapidly c o m p a n i e s develop in an incuba­
tor is partly dependent on the " c h e m i s t r y " between those
managing t h e incubator and the entrepreneurs in the tenant

12

...

c o m p a n i e s . T e n a n t c o m p a n i e s need t o know what will b e
expected of t h e m , what the incubator will provide, h o w they
will b e evaluated, and what the day-to-day procedures and
general operating policies of the incubator will b e . T h e s e
issues b e c o m e all t h e m o r e important for tenant companies in
those incubators that take a n equity position in the incoming
firms.
All e m e r g i n g c o m p a n i e s experience problems and uncer­
tainties. T o help minimize t h e difficulties, it is incumbant upon
incubator m a n a g e m e n t to communicate and entrepreneurs to
understand the p r o g r a m milestones by which tenant c o m p a n y
performance will be m e a s u r e d as well as the incubator's
policies and p r o c e d u r e s for dealing with tenant c o m p a n y
development.
T h e relationship between the incubator and the tenant
c o m p a n y can b e a sensitive o n e , especially if the expectations
of each are different o r if there is confusion over what each
contributes t o and what each gets from the association.
C o n s e q u e n t l y , t h e m o r e concise the p r o g r a m milestones and
t h e clearer the policies and procedures, the greater the
likelihood that expectations o n both sides will be met, that
misunderstandings will be minimized, and that each side will
benefit from the relationship.
CONCLUSION

T h e incubator idea is still new and experimental. C o n s e ­
quently s o m e incubators will fail; others will b e modified; and
still n e w e r variations o n the concept are likely to e m e r g e . Yet
s o m e key findings are already emerging.
N e w business incubators d o seem to help provide an
infrastructure condusive t o the development of start-up and
e m e r g i n g c o m p a n i e s . T h e y d o provide a practical mechanism
for risk-taking and risk-sharing in the early and most uncertain
stages of entrepreneurial ventures. They d o promote c r o s s institutional n e t w o r k i n g . A n d there is a correlation between
incubators and indigenous company development. Table II
highlights s o m e measures o f success in four selected incubator
m o d e l s . F o r these c a s e s , the incubators have effectively

SMILOR: MANAGING THE INCUBATOR SYSTEM: CRITICAL SUCCESS FACTORS
attracted tenant c o m p a n i e s . T h r e e of t h e four m o d e l s c a n point
to successfully g r a d u a t e d f i r m s . A n d each h a s created new
jobs.
Incubator managers and directors
ways

to

implement

critical

must continually

success

factors

in

find

incubator

o p e r a t i o n s . T h e m o r e that t h e s e factors a r e incorporated in the
incubator,

the

greater

the

chance

of

success

for

tenant

c o m p a n i e s . Building c o m p a n i e s r e q u i r e s not only resources
but a l s o an understanding o f t h e e n t r e p r e n e u r i a l p r o c e s s . By

155
[5]
[6]

[7]
[8]
[9]
[10]

integrating the t w o , t h o s e r u n n i n g incubators will h a v e m o r e
effective operations.
E n t r e p r e n e u r s will h a v e t o b e mindful of their o w n interests
and m o r e fully u n d e r s t a n d the incubation p r o c e s s . Being in an
incubator requires n o less w o r k a n d d e d i c a t i o n than n o t being
in o n e . Each e n t r e p r e n e u r m u s t ultimately b e responsible for
his o r h e r o w n c o m p a n y . C o n s e q u e n t l y , the e n t r e p r e n e u r must
ask questions and e v a l u a t e o p t i o n s . H e m u s t b e a w a r e of what
he g i v e s u p and w h a t he gets t h r o u g h an association with an

[11]
[12]
[ 13]
[14]
[15]
[16]

incubator, especially o n e that t a k e s equity in t h e firm a s part of
the a r r a n g e m e n t . T h e m a t c h c a n b e effective if t h e " c h e m i s ­
t r y " is right a n d if e a c h side k n o w s w h a t is involved in the

[17]

association.
N e w business i n c u b a t o r s will c o n t i n u e t o increase in the
United

States and

in

many

other

countries because

[18]

they

p r o v i d e an alternative for e c o n o m i c d e v e l o p m e n t , an o p p o r t u ­

[19]

nity for diversification a n d m o r e c h o i c e s for e n t r e p r e n e u r s .
[20]
ACKNOWLEDGMENT
T h e author gratefully a c k n o w l e d g e s the r e v i e w a n d critique
of D r . G . Kozmetsky and D r . R . P e t e r s o n , t h e contribution of
M . D . G i l l , w h o h e l p e d d e v e l o p the survey questionnaire on
n e w business i n c u b a t o r s , a n d t h e r e s e a r c h assistance of F .

[21]

[22]
[23]

S. C l a r k .
[24]
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[1]
[2]

[3]

[4]

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4



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