Client Graduation--Move 'Em Out!

What is the ultimate goal of a business incubator program? To move successful clients out of the incubator and into the local economy. Best practice #6 sounds simple, doesn't it? But let companies hang around inside the incubator too long and you risk operating a real estate program, where mature companies never leave so new companies never get a chance to develop. On the other hand, if young companies are kicked out too soon, they face an increased risk of failure. So how does an incubator manager determine when it's time for companies to leave the nest and fly to new digs? There is no cut and dried answer to this question. However, there are four aspects that should be examined when evaluating a company's readiness for graduation.

First, consider the company's need for physical space within the incubator. Typically, a company should occupy no more than 25% of the rentable space in an incubator. Allowed to grow to this size or larger, the company will leave a large hole when it does exit, potentially causing a cash flow issue until new companies can be recruited to fill the space. Plus, if a company is in a rapid growth mode, the confines of an incubator program may inhibit the company's ability to add personnel as needed.

Next, take into account the company's financial stability. Before graduating, a company needs to be able to survive in an unsubsidized environment. Stability can be in the form of a sizable outside investment, a large grant, or reliable revenue stream (like consistent break-even for a minimum of 6 months). Sometimes the bundled nature of an incubator's services prevents a company's leadership from truly understanding the fully burdened cost of being outside an incubator environment. It's imperative that the company be prepared to manage the complexity of facility management and afford market rates.

Another aspect of graduation readiness is management talent. Does the company have all the people that it needs to successfully function on its own? Only if the management team if well rounded and capable of leading the company forward will it have a strong chance of survival outside of the incubator.

Lastly, consider the amount of time the company has spent in the incubator. It is a mistake to mandate graduation after a specific amount of time, like three years. After all, a company could be six months away from a major funding point or product launch, and pushing the company out too soon could contribute to its failure. On the other hand, if a company has been incubating for five, six, seven years, you have to evaluate if it is really making progress towards milestones that will lead to graduation or if it has simply become the "living dead," a company that is able to scrape by only within the subsidized walls of the incubator.

There is no formula to turn to when determining graduation criteria, no rule to employ. What is important is to match graduation policy to mission and to be flexible. It may be helpful to utilize a bit of a "stick" by raising rental rates over time via a graduated fee structure. As long as the incubator management relies upon growth criteria to evaluate a company's readiness to graduate and grants extensions when appropriate, strong graduate companies should result.

But an incubator's involvement with its graduates shouldn't end with graduation. Not only is post graduation follow-up important because it provides economic impact data for evaluation of program effectiveness but it is also a way to keep graduates engaged with the program and with new clients. Post-graduation policies should identify services that will continue beyond graduation, provide companies help in locating new facilities, and ensure continued contact and support.

Establishing graduation policies at the start of the incubation program is just as important as establishing intake criteria. As Stephen Covey says, "Begin with the end in mind." Think through your business incubation program and determine not only how companies will be selected but how they will be exited. The results should be a good number of strong graduated companies that will sing your program's praises and showcase your program's effectiveness.