One of the main goals of the university incubator is to help start-up companies on their way to reach the position of health and financial viability. When establishing university incubator, it is important to consider how the incubator will be able to achieve the position of health and financial viability for itself and at the same time thinking about ways how to sustain in this position long-term. In other words, to develop a business model, which can take your incubator towards sustainability in the future.

Business model of university incubator describes the rationale of how the incubator creates, delivers and captures value. Business model of your university incubator reflexes the logic how the incubator intends to make money to reach and sustain in the position of health and financial viability.

Business model consists of following parts (Business model Canvas):

• Intended customer base;
• Customer relationships;
• Value proposition;
• Channels to reach the intended customers;
• Key partners;
• Key activities;
• Key resources;
• Cost structure;
• Sources of revenues.

Figure: Business Model Canvas

Intended customer base

To build an effective business model, university incubator must identify, which customers it tries to serve. University incubator then mobilizes resources on behalf of these actors and is simultaneously dependent on these actors to be able to do so. Since the main customers of the university incubator are the end users of the incubator created mainly by students, university staff and start-up companies - they are usually not able to pay for the full costs of services offered. University incubators are therefore forced to find ways how to compensate for these revenue shortfalls, for example through funding by public bodies or corporate sponsors, which are understood as customers of incubator as well. Other possibility is to offer paid services or facilities (incubation program, lectures, trainings and workshops, participation on events, office space…) to external users (individuals, established businesses or corporates).

Hence, customers of your university incubator can be divided into 2 main groups:

• Users of the university incubator and
• sponsors of the university incubator.

Understanding intended customer base of university incubator often goes hand in hand with clarifying objectives of the incubator. Different wider purpose and objectives of the university incubator attract different users and potential sponsors as customers of the incubator as well as potential partners for collaboration. At the same time, the customers and collaboration partners change in time as the university incubator develops. Different incubator phases – or its stages of development require different key customers and collaboration partners to grow and become successful.

For more information, please see the block Mission and Goals – Why are we founding our incubator? and Stakeholders – Who are possible partners for collaboration?

Customer relationships 

To ensure the survival and success, you must identify the type of relationship you want to create with university incubator customers - who are created by the sponsors / funders and the end users of the incubator. Each of these two fundamental customer segments needs different approach in how to create and develop the relationship with university incubator.

While personal assistance and dedicated personal assistance may be preferred when attracting, building and maintaining relationships with (potential) sponsors, different forms of relationship management practices can be used for creating relationships with users of the university incubator. These may include for example creating the community, which allows for a direct interaction among different users and the incubator. Very important is to link the university incubator with the academic program and staff of your university or to promote the incubator at chosen universities. University incubators may be linked into the university to different degrees. Some may be very integrated, making full use of the research knowledge available and fully integrated into teaching and learning activities while some to lesser degree. In our survey of entrepreneurship support organizations, the majority of university incubators from our sample seem to have ad-hoc relationships with academic staff both in terms of accessing research knowledge and linking in with teaching activities, so it seems that they are not making the most of their connections to universities (SUPER survey report).

Value proposition 

Value proposition reflects the collection of services, which the university incubator offers to meet the needs of its customers (sponsors and users). Value proposition clearly identifies what advantages your customers will receive. These are supposed to be in line with defined wider purpose and main objectives of your university incubator. The four basic values that are offered by an incubator to (potential) entrepreneurs - users of the incubator are shown in figure below.

Figure: Value Propositions to Entrepreneurs in Business Incubation

Channels to reach the intended customers

University incubator delivers its value proposition to its targeted customers (sponsors and users) through different channels. Effective channels will distribute value proposition and attract collaboration partners in ways that are fast, efficient and cost effective. An incubator can reach its clients either through its own channels, partner channels (major distributors), or a combination of both.

Key partners

For more information, please see the block Stakeholders – Who are possible partners for collaboration?

Key activities

Key activities cover the most important activities in executing incubator's value proposition. For more information, please see the block Services – What do we offer / provide to our tenants / members?

Key resources

Resources are considered to be an asset to your university incubator, which are needed to sustain and support the incubator existence. These resources could be human, financial, physical and intellectual. For more information, please see the block Resources – Where to find money, people and knowledge to start?

Cost structure

Possible items of financial demand when establishing your university incubator can be as follows (Dietrich et al, 2010 and InfoDev Incubation Toolkit):

Initial Investment costs:

• Pre-operating Expenditures – Start–up costs prior to the incubator’s establishment and occurring when the incubator is set-up such as cost for the notary, registration, consultants, bank audits, lawyers…,

• Physical Facilities - purchase of a plot of land, construction or reconstruction costs,
• Equipment – movable infrastructure such as furniture, communication technologies, light machinery, laboratory equipment, etc)  and immovable infrastructure (heavy machinery, laboratory infrastructure, etc.),
• Initial Investments to Human Resources,

• Initial General Expenditures such as advertising, insurance, maintenance costs, telecommunication costs, supplies, banking services, utilities, etc,

• Reserves through establishing the reserve fund.

Operational costs:

• Personal / staff costs,
• utilities (electricity, water, sewage),
• transportation costs (running cost of a car, reimbursements of travel cost of employees),
• rent (in case university incubator rents the space),
• insurance costs - a decision should be made if the insurance will also cover the property belonging to the incubates,
• administrative costs (office supplies, software licenses, subscriptions for printed- and e-media, telephone/ fax, internet, mail, insurance, leasing),
• marketing and sales costs (Advertising fees, printing-cost, sales seminars, conference participation and exhibitions),
• entertainment costs (incubator manager attending and hosting social events or hosting targeted individuals to attract investors and business opportunities for the incubatees),
• rental equipment costs in case equipment is being rented,
• repairs and maintenance costs,
• external expertise for the clients,
• external service providers (accountant, tax ad-visor, lawyer, etc.),
• raw material (for production only)…

Sources of revenues

It is always advisable to differ between revenues generated by your university incubator itself (by renting services and facilities, organizing events for customers or public or delivering services under contract to bigger customers - for example corporates…) and revenues generated via third party (such as public and private sponsorships or grants). Possible items of sources of revenues can be following:

Examples of university incubator generated revenues:

• Revenues from fees to external clients for participation in incubation program,
• revenues from fees to university students and staff for participation in incubation program,
• revenues from fees for services such as training, consulting, mentoring, use of conference rooms and other facilities…),
• income from contracts with corporates,
• revenues from fees to commercial tenants,
• revenues from fees for organizing special projects (speaker series open to public, training programs for public…),
• revenues from royalty agreements.

Examples of third party generated revenues:

• Government grants (regional, national),
• international development agency grant,
• revenues from alumni donors,
• corporate sponsorship.

Issues to think about:

Who are your (potential) customers (sponsors and users) and what services do you provide within university incubator related to your stated mission, wider purpose and goals? What are the needs of your customers? Do the activities / services offered by your university incubator meet the needs of your customers?

How do you communicate with your customers?

To what extent is your university incubator and its activities linked to the academic program and staff of your university?

Dee et al (2015) mentions three core strategies used by incubation programs to finance their activities:

• Independent,
• fee-driven and
• growth-driven strategy.

These strategies can be used as the basis when defining different types of business models / funding models of university incubators. Looking at global practices, incubators tend to use a mix of more strategies to manage their revenues streams and do not keep exclusively one funding model. The funding strategy also depends on the stage of development, in which the university incubator occurs, as the funding strategy can change in time as the incubator develops.

Independent (externally funded) model

By this it is meant that the incubators do not rely on the start-ups or other users of incubation services 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.

As these types of programmes do not rely on the start-ups for generating income, they can service a wider range of stages of the start-up journey. Independently financed programmes tend to focus on the pre-start-up and start-up phase.

It is important to emphasize that particularly in the initial stages of the university incubator, public sector funding is critical to ensure that incubator becomes operational and this funding strategy is often applied by (university) incubator throughout the initial/starting phase also in the case when incubator decides to use other funding strategies in later phases.

Potential entities, which can provide (initial) funding to your (university incubator can include following stakeholders:

• Government Entities through government funding, such as Ministries, governmental agencies, SME development and support agencies, trade agencies.
• International Donor Agencies: for example, through EU funds and grants, etc.
• Corporate Sponsors - Companies (especially large corporations) through their private sponsorship or contributions as part of their corporate social responsibility programs. To receive the company sponsorship, it is crucial to communicate the benefits of the partnership to the company, which can include focus on the same technology area or sharing the creative and innovative culture with company employees through offered courses and events. 
• Other Academic Institutions, which can participate on the incubator for example through a consortium of educational institutions.
• Non-Profit Organizations with similar mission (for example trade unions, industry associations, chambers of commerce, etc.)

Grants can cover the costs related to the establishment of the incubator – incubators infrastructure. They can also cover part of incubators operation costs (incubators management and staff for a selected time period, external expertise for consultancy to clients, facilities).

Figure: Business Model Canvas for Independent (External Funding) Business Model

Fee-driven model

In fee-driven business model the incubator programs are financed directly by the start-ups who are charged regular fees such as rent, membership fees or service fees. As start-ups have to pay in order to participate in such programs, fee-driven models tend to support start-ups that have already established a revenue-stream or have investment from which they can pay the fees. This means that they are not likely to support pre-start-up entrepreneurs or very early stage start-ups. It is also important to point out that incubators need to achieve a significant size before rent becomes a major income source.

Sources of university incubator revenues can be following:

• Fees to external clients for participation in incubation program
• Fees to clients for services such as training, consulting, mentoring, use of conference rooms and other facilities…)
• Fees to commercial tenants
• Fees for for special projects (speaker series open to public, training programs for public…)

This strategy has some limitations when adopting by university incubators. Unlike typical business incubation centres, which are funded through tenant rental and service fees, university start-up incubators are often offered free-of-charge to university participants.

Nevertheless, services can be offered and fees can be charged to non-university participants. This strategy then requires focus on potential future clients’ segmentation and development of segmented price list. University incubators can decide to provide services, such as training or consulting, use of rooms and other facilities, bar and restaurant, also to non-incubated clients.

Figure: Business Model Canvas for Fee-Driven Business Model

Growth-driven model

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 requirement means that growth-driven financed programmes tend to focus on ventures in early or later stage.

This strategy usually requires a long until the revenues are reached, so patient stakeholders are a must.

When applying the equity model, incubator takes equity stakes in the tenant companies with a view to realizing a return through trade sale at exit once the value of the company has increased, or even through IPOs or in some cases dividend payments.

Another model for capturing returns from participants is via royalty agreements, or loans usually only paid back upon success. According to this model, revenues earned by the client will legitimate a royalty payment for the incubator. Usually the royalty is at around 5% of the revenue and is limited in time (on average 5 years). As the royalty can undermine the financial management of clients that are in their start-up phase thus needing sources, it might happen that incubators agree to postpone payments at when companies can afford them. This type of model requires then a lot of trust, communication, and exchange between the parties.

Incubators can finance their activities also via so called deferred debt model. In this model, the services provided to the start-up along with incubators overheads are valued and charged in the incubation fee. Once the start-up company leaves the incubator and reaches the agreed financial target, the repayment can start - up to 10 years after incubation.

Figure Business Model Canvas for Growth-Driven Business Model

Issues to think about:

In which development stage is your university incubator now?

Which funding strategy(ies) do you / will you use in each development stage during your university incubator development?

                Differentiation among customer segments (value proposition, pricing policy, etc…)

“Financial self-sustainability is reached when the university incubator can cover its expenses with predictable, reliable sources of funding.” (Colbert et al) To reach the self-sustainability your university incubator should not depend on a single source of external support - some literature sources recommend having around six to ten revenue streams, the outside funding should be either reliable or replaceable and the incubator should generate (or have the goal to generate) also its own revenues. “Some incubation programs take the concept a step further and make it a goal to cover all expenses from their own operations, known as “financial self-sufficiency””. (Colbert et al)

“Financial self-sustainability is essential to an incubation program’s long-term survival; to its ability to grow strong, lasting companies; and to its ability to have a significant positive impact on its community. A self-sustaining incubator enables staff to focus on growing new companies and implementing new ideas rather than worrying about finding the cash to pay next month’s electric bill.” (Cammarata).

Issues to think about:

How reliable and predictable are the sources of funding of your university incubator?

Do you have any other options to get funding / receive sponsorship (replaceability of failed revenue source)?