Initial funding of the university incubator during the foundation phase is usually provided by founders and sponsors of the incubator. Different mission, goals and wider purpose of the university incubator attract different (potential) co-founders and sponsors. According to the World Bank, “particularly in the initial stages (of incubator), public sector funding is critical to ensure that incubators become operational” (The World Bank, 2010). The research results of our survey of entrepreneurship support organizations confirmed the importance of initial funding since the most frequently mentioned hindrance by respondents was the availability of funding for their organization, both for university and non-university incubators (SUPER survey report 2016).  

Potential sponsors of the university incubator (in addition to their university hosts) in its foundation phase may include organizations such as economic development agencies on local, regional or national level, NGOs, business organizations, alumni donors or other investors, who / which share the wider purpose and goals of the university incubator. For further information about sponsors please read the block Stakeholders – Who are potential partners for collaboration?

In later stages of incubators development, the university incubator can focus on increasing its portfolio of customers by its paying users to reduce its dependence on the willingness of its (initial) sponsors while heading to reach its (financial) sustainability.

Dee et al (2015) mentions three core strategies used by incubators to finance their activities: Independent, fee-driven and growth-driven strategy. University incubator can use mix of these strategies or change them in time depending on its development stage.

1. Independent strategy: By this strategy it is meant that the incubators do not rely on the start-ups as a source of income and revenue comes from other sources, such as public bodies and corporate sponsors who see an advantage in establishing and running an incubator or through running events, hiring out spaces and providing catering using the incubator space.
2. Fee-driven strategy: In fee-driven strategy the university incubators are financed directly by the start-ups or other paying customers, who are charged regular fees such as rent, membership fees or service fees. As start-ups have to pay in order to participate in programs or to use incubators facilities and services, fee-driven models tend to support established companies and start-ups that have already established a revenue-stream or have investment, from which they can pay the fees.
3. Growth-driven strategy:  In the growth-driven business model the programme is designed to eventually be financed by the supported start-ups by generating revenue from equity, taking a share of the start-ups earnings or through appealing to business angels and venture capitalists. This funding model relies on the incubators having access to a stream of high-growth businesses but also backers who are willing to support the incubator for a number of years until returns from investment can be realised. This strategy usually requires a long until the revenues are reached, so patient stakeholders are a must.

For more information about these strategies focused on obtaining revenues please see the block Business Models - How do we make our endeavour sustainable?

Costs of university incubator

It is advised to use following breakdowns when constructing the cost spreadsheet of incubator establishment (Dietrich et al, 2010 and InfoDev Incubation Toolkit):

Initial investment costs:

• Pre-operating Expenditures – all disbursements prior to the incubator’s establishment, such as a feasibility study, cost for the use of legal services, real estate agency, consultancy fees and any other applicable professional services.
• Physical Facilities - all disbursements required for the adaptation and/or construction of the physical facilities of the incubator, such as construction costs of a new building or costs associated with modification of an existing space, fixtures and fittings, etc.
• Equipment - all disbursements required for the purchase of items that are necessary to start-up and continue the activities of the incubator, such as furniture (desks, chairs…), computers, printers, copy machines, routers, etc.
• Initial Investments to Human Resources - all the expenditures of the incubator in relation to its staff, including possible recruitment costs and consultancy fees. For the second and third year, it is recommended to consider possible increases in the number of staff, so that they might deal with the greater number of clients. The breakdown structure of human resources costs can be recruitment costs, wages, consultancy fees, social security costs and costs related to staff training.
• Initial General Expenditures, which can include expenditures that may be required for the implementation and establishment of the incubator. Such costs are advertising, insurance, maintenance costs, telecommunication costs, supplies, banking services, utilities, etc.
• Reserves created through establishing the reserve fund to build up cash reserves in case unexpected expenditures are required or if revenue falls short of projections.

Operational costs:

• Staff – including salaries (of incubator’s management and other staff), the related social security, retirement benefits and medical aid payments, training costs and the use of outside services - outsourced expertise such as human resource functions, legal advice, accountancy functions. Staff costs usually represent one of the highest cost item of a business incubator.
• Utilities containing costs such as electricity, water, gas (or other such fuel), security and sewage treatment costs. The utilities and fuel costs are impacted by the type of companies that are incubated. Technology based companies will, on average, cause the incubator to have higher utilities and fuel costs compared to non-technology companies, for instance due to laboratory and manufacturing equipment that may be required.
• Transportation costs: the use of a vehicle, train or airplane while conducting activities of the incubator.
• Rent: Costs for rental of the space in case incubator has not invested in real estate. If the incubator has invested in real estate, then the real estate investment is a capital investment that should be tracked within investment costs – physical facilities.
• Insurance costs: A decision should be made if the insurance will also cover the property belonging to the incubatees.
• Information and Communications Technology: office and mobile telephones, internet, and video conferencing usage costs.
• Publicity, Communications and Advertising, which is necessary to attract new customers (incubator users).
• Entertainment costs associated to the incubator manager attending social events or hosting targeted individuals to attract investors and business opportunities for the incubator or its incubatees.
• Rental equipment costs: When the decision is made that it is more cost effective to rent equipment rather than purchase it. This could include computers, printers, copiers, and furniture.
• Repairs and Maintenance costs such as painting, decorating and repairing of broken equipment.
• External service providers (accountant, tax ad-visor, lawyer, etc.).
• Raw material (for production only)…

Authors of InfoDev Incubation Toolkit recognized following crucial responsibilities of the incubator manager (who may also be called Incubator Director, Incubator President or Chief Executive Officer (CEO)):

• Leading and managing the staff of the incubator;

• Managing the infrastructure and services offered by the incubator;
• Acting as the “face” of the incubator in dealings with the Board of Directors and other external stakeholders, such as sponsors and public authorities, as well as the client companies;
• Acting as the principle liaison point between the incubator and the Board, and the incubator and the client companies;
• Managing the relationship with the clients. He/she ensures that mutual trust is built between the client and the business incubation environment so that the relationship between both parties is mutually beneficial.

One of the most significant reasons for the failure of incubators is the appointment of inappropriate people into key positions. Management and leadership styles of incubators vary especially according to their ownership model, with the largest discrepancy between public or private ownership. When the owner is a public entity (what is the probable case of the university in the position of the incubator founder / co-founder), the incubator will probably operate according to the public institution model. University incubators owned by universities (and other public organizations) commonly face following issues and it is important to consider these risks of public ownership model related to management and leadership style of incubator manager:

• Incubator manager can have the tendency to focus more on bureaucratic aspects, spending too much time with local stakeholders embroiled in local politics and devote less time for engagement with clients while the bureaucratic administrative procedures prevent the incubator from becoming a successful entrepreneurial role model for its incubated companies;
• Incubator manager can be less selective in entry procedures to its (incubation / acceleration) programs;
• The salary scales of incubation staff are aligned with public sector salary scales and these are usually lower than private sector salary scales. This may not reflect the level of knowledge, skills and experience, which is required for the position of successful incubator manager;
• Incubator manager of university incubator with high probability cannot take the equity in the incubator, what can make the position less attractive to the very best entrepreneurially oriented managers.
• The post of incubator manager becomes part of an appointment system where the needs of the incubator are not central to the decision.

One of the main goals of an incubator is to support entrepreneurial orientation of its users through helping start-up companies on their way to become fast growth businesses and to reach the position of health and financial viability. When establishing an incubator, it is very important that the incubator itself is considered as such company being able to achieve growth and the position of sustainability for itself. The university incubator needs to act with clear commercial orientation to become a successful entrepreneurial role model for its incubated companies.

In order for the incubator manager to perform the roles and duties mentioned previously, it is recommended that they should posses the following attributes (Infodev Incubation Toolkit):

• A private sector orientation and the ability to manage the business incubator with an entrepreneurial mindset;
• Leadership abilities;
• Credibility , particularly with potential clients, investors, the Board and stakeholders;
• Relevant experience in business, innovation, and entrepreneurship with demonstrated ability to manage start-up ventures (including financial, legal, marketing management skills);
• Empathy with clients;
• Early stage investment knowledge;
• Excellent interpersonal and networking skills;
• Excellent business counseling and facilitation skills;
• A high tolerance for ambiguity and flexibility - there are many contradictory aspects to the manager’s role that include business counselor, mentor, investor, landlord, and debt collector, as well as responsibility to the tenants in terms of helping them grow their business, the board in terms of managing the business incubator, and investors who have invested in the incubator and/or the incubatees;
• Above average commitment to the project and openness to working longer than average hours;
• Achievement and outcome driven;
• Confidence, passion and enthusiasm for the incubator’s mission;
• Marketing and public relations skills and abilities;
• Knowledge and particularly relevant experience of the industries on which the business incubator focuses.

Besides focusing on the attributes and entrepreneurial mindset of the incubator manager / management, it is important that the founder of the university incubator (university):

• Has formulated and communicated with the incubator manager the wider purpose and objectives of established university incubator;
• Is clear and communicates with the incubator manager the level of finances gained from sponsors / grants;
• Has set and communicated the performance measures, which are being regularly analyzed;
• The terms and conditions of employment contract of the incubator manager ensures an award system based on encouraging success with a clear system for replacement if success is not forthcoming.

The university incubator can be established through two basic organizational set-ups:

• A Separate Legal Entity where university (can or cannot figure as the lead stakeholder) together with other stakeholders establish the Board of Directors of the university incubator with incubator manager reporting directly to the Boards of Directors;

• An Integrated Entity, where the university can contain the university incubator within its organization.

In both cases, university can offer the space for the incubator use, assign faculty staff to incubator and offer mentors and other university services for the use by university incubators clients.

Figure: Organisational framework for an independent legal entity

(Source: Dietrich et al, 2010)

Figure: Organisational framework for a university integrated TBI

(Source: Dietrich et al, 2010)

To make the decision about the university incubator building and its location, it has to be considered the basic needs of the client companies, so the incubator can facilitate the clients’ business and product development needs. ”It is usually recommended that the space of the incubator be large enough to accommodate between 20 and 30 resident clients so as to spread the costs of the facilities and operations among a larger number of tenants.” (Dietrich et al.)

It is important to keep balance between common / shared spaces and tenant spaces rented by paying users of the university incubator. “It is recommended that no more than 30% of the floor space of the building be unrentable.” (Dietrich et al.)

The un-rentable common spaces can include:

• the office spaces for incubator management and staff,
• the lobby/reception area,
• conference and meeting rooms,
• kitchen/beverage areas,
• hallways, stairways, and all other spaces used by all of the clients.

Figure: A Basic Business Incubator Premises

(Source: Dietrich et al, 2010)

For more information about premises of the university incubator please see the block Services - How do we admit our members?