L3. Financial Models to Build and Sustain a

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1 Tool Summary This tool is designed for community college chancellors, presidents and deans to provide a fundamental understanding about financing and staffing a virtual incubator at a college. A separate tool, Financing the Entrepreneurs: Pitfalls and Suggestions, focuses on funding entrepreneurs. This tool was created using the perspectives and strategies of colleges and experts across the country. Just as every business doesn t survive on revenues from a single customer, every successful venture, like a virtual incubator, shouldn t plan on surviving on a single funding source. Financial diversity increases sustainability. With any discussion of resource acquisition, the college and the funder/partner should remember the ultimate goal is getting entrepreneurs the supports they need to build viable businesses. The following funding suggestions are used by colleges in support of virtual incubation. The VIN has found that the four supports most frequently drawn upon by their colleges are: grants, program income, district supports and general funds and community partnerships. Most colleges use a combination of three or more of funding sources along with some of the additional options described below. The VIN strongly encourages college leaders to remember that these funding sources are presented as considerations only; funding streams for virtual incubators vary depending on their local partners, levels of support and engagement and opportunities available. grants from government PRimary-money to the college all supports Field-Tested Perspectives: Colleges often leverage support from local governments to secure state and federal support. For example, county commissions or city governments that are willing to invest in economic development may not have the capacity to run the programs. By demonstrating their support before requesting state and federal funds, colleges can provide a level of credibility and validity that often make the investment by others outside their geographic region possible. Once a college decides to go beyond local government funding, there are many government entities to consider, including the Department of Labor (DOL), Department of Commerce (DOC) Minority Business Development Agency (MBDA), Small Business Administration (SBA), U.S. Department of Agriculture (USDA), Economic Development Administration (EDA), Department of Transportation (DOT), National Science Foundation (NSF), Department of Energy (DOE), and others. For example, Perkins funding from the U.S. Department of Education encourages the investigation or implantation of ideas that may lead to growth and revenue-generating activities. Perkins funding generally funds projects that will lead to either a self-funded or college-funded educational program. The key is to identify requests for applications that align with the community college interest in business assistance, and enlist partners within the community to create a collaborative to strengthen a competitive grant application. PAGE 1

2 grants from private foundations PRimary-money to the college all supports Field-Tested Perspectives: Many private foundations provide support in entrepreneurship/ businesses development in very specific target areas and with a particular focus. These include large, well-known national foundations focused on entrepreneurship (Kauffman Foundation, Coleman Foundation, Edward Lowe Foundation), economic development and financial security (Bank of America, Wells Fargo) or corporate community-supports (Verizon). In addition, many colleges secure support from state and community-focused foundations and financial institutions, as most have Community Reinvestment Act (CRA) funds. Program Income/membership fees PRimary-money to the college staffing Field-Tested Perspectives: Colleges can support limited staff costs by establishing a fee structure for entrepreneurs who use their virtual incubators to access community college technical staff and facilities. The models across colleges range from calling the entrepreneurs affiliate members and virtual tenants of the incubator to offering them lower rates than those paid by on-campus colleagues who use the services and spaces more frequently. naming rights and individual donations PRimary-money to the college physical space for staff or place-bound services Field-Tested Perspectives: Several colleges sell naming rights of campus spaces to investors who want their brand/name associated with an institution of learning and economic development. Naming rights can be in the form of a plaque on a wall of supporters, the naming of a meeting room for virtual clients to use when they need a physical place to meet on campus or even the naming of a building or campus wing for virtual incubator staff members. Alumni and community leaders are ideal candidates for providing these supports. PAGE 2

3 alumni gifts or pay it forward dollars PRimary-money to the college general program operations/staffing Field-Tested Perspectives: Community colleges may explore opportunities to tap into their alumni networks to raise funds for launching and sustaining the virtual incubator or business development services. The college may also want to consider establishing an alumni program focused on providing business development services for a fee. business assistance organizations secondary-money to a partner to be leveraged comprehensive business assistance and/or staffing Field-Tested Perspectives: Business assistance organizations such as the U.S. Small Business Administration s Small Business Development Centers (SBDCs), SCORE, Community Development Financial Institutions, Veterans or Women s Business Centers and Economic Development Corporations often partner with community colleges to provide complementary business assistance services. The assistance provided may range from start-up assistance to supports for well-established businesses, including business retention and attraction. The key to partnering with these organizations is to find a mutual benefit in services to small businesses. Often a community college can offer the partner in-kind support such as office space on campus to operate and deliver business support services, or may provide business training in exchange for business consulting services. chambers of commerce secondary-money and staffing to a partner to be leveraged comprehensive business assistance and/or staffing Field-Tested Perspectives: Chambers provide resources to their members, which are primarily community-based business owners. Community colleges may consider joint business networking and training events to benefit the local Chamber membership. PAGE 3

4 equity investment secondary-money to a partner to be leveraged all supports Field-Tested Perspectives: To help build out long-term support for incubation, some colleges may consider taking an equity stake or contribute services in the form of a convertible note. This type of funding can provide the opportunity for generating significant income, but also requires a great deal of due diligence and monitoring. Equity financing is a particularly attractive option when a company that works with the incubator has a short runway for launch; for example, IT or web-based companies have much shorter start-up phases than a biomedical company that may take 10 years to reach market entry. Equity financing is selling ownership in a company for the exchange of capital. External equity comes from the owners investment or a third-party investment in the company, while internal equity comes from retaining company profits. External equity is selling someone part of the company from the owners, friends, family, angel investors, investment bankers or venture capital firms. It may be a semi-permanent arrangement, like selling shares, or a temporary one, like using angel investors or venture capitalists. In general, entrepreneurs prefer debt financing over equity financing because the effective interest rate is usually lower and there is no dilution of control. New firms will have difficulty in arranging for short-term or long-term debt financing if they do not proper equity in the company. New firms have difficulty in creating proven sales and sustained profits and will need a proper amount of equity to obtain the debt financing needed. city/county/regional economic development efforts primary or secondary-depending on the partnership comprehensive business assistance and/or staffing Field-Tested Perspectives: City, county and regional economic development agencies, redevelopment agencies and port authorities have economic development programs focused on local business assistance and retention. They may have secured funding specifically allocated to providing business assistance. Community colleges would do well to either partner with the agency to offer these services or to seek a contract from these entities to build and deliver business assistance services on their behalf. Working with these local agencies requires the kind of strong relationships within the community that many community colleges enjoy. PAGE 4

5 community bond projects primary or secondary-depending on the partnership all supports Field-Tested Perspectives: Community colleges may be in the position of providing leadership in convening key partners in community bond projects and acting as the neutral party. Bond projects or applications to the Economic Development Administration for a specific building project with a sustainable business plan for operating an incubator/accelerator program is a major undertaking. However, it has the potential of delivering long-term and lasting benefits to the economic vitality of a community. community college foundations or on-campus enterprises primary or secondary-depending on the partnership all supports Field-Tested Perspectives: Foundations at community colleges that are able to raise funds from the business community may also be a source of funding, as appropriate, for business incubators. In addition, a community college with a successfully revenue-generation division, such as Contract and Community Education, may use some of those revenues to provide business assistance services. Other revenue generators include the non-class-time use of space and equipment (e.g., for FabLabs 1, community wine presses 2, prototyping machine 3 ) and campus enterprises such as a bookstore, restaurants, or even car repair services. Several colleges noted that fund seeking for virtual incubators must be coordinated with college foundation efforts. Some colleges have restricted donor lists to prevent duplicate requests, and some college presidents require that all asks cross their desks and serve as knowledge management. An example of one of these enterprises is a community-accessible FabLab at Lorain County Community College in Ohio. Modeled after the MIT FabLab developed by Dr. Neil Gershenfeld, it provides open access to students, community members and businesses to do desktop-level prototyping. More information on the FabLab at LCCC, can be found at 1 See For an example of a college using a FabLab to raise funds, see Mott Community College or Lorain County Community College. 2 Examples of using a wine press to raise funds include Umpqua Community College, Walla Walla Community College and Redlands Community College. 3 For an example of a college using a prototyping machine to raise funds, see Fox Valley Technical College. PAGE 5

6 Additional Options: Perspectives from the Field on Common Funding Challenges VIN colleges noted the short-term funding from grants/projects left few resources for long-term planning and expansion. As a result, colleges have considered which services and resources should be priced and the range of fees for that would be reasonable. Both of these questions relate to the market for delivery. The VIN encourages community colleges to strive to make their virtual incubators self-sustaining, rather than self-sufficient, in the early stages of development. Self-sufficient virtual incubators cover all costs through payments for the services they provide. The programs require no external subsidies to cover operating costs. Although this is a worthy goal, the VIN found that few incubation programs achieve this status, especially in their first several years. Self-sustaining virtual incubators have diverse, dependable income sources, such that if one source of funding fails the incubation program still will be fully functional. To identify a variety of sources, community colleges need to ask: What options are out there? Possible Revenue-Generating Streams: Charging for seminars and/or events open to incubator clients and the wider business community. Charging for use of conference and strategic planning rooms, offices and classrooms. Assessing membership fees associated with the use of incubator services. Offering naming rights for facilities and programs in exchange for donations. Offering area businesses such as banks sponsorships to offset costs of programs, seminars and other services. Working with the community college s foundation to secure donations to fund programs, equipment and staff. PAGE 6