What is a business incubator?
Business incubators exist to help companies to grow. Although many people think of them as startup incubators, in fact, they can also offer services and resources to established ventures.
For example, if a mature company wants to expand into a new market by creating an innovative product, a business incubator may choose to provide the support needed to do this.
In either case, the business incubator is there as a catalyst. It can be a driving force behind the rapid growth of a new company or a new division in an existing business.
Business incubators should not be confused with startup business accelerators. The two have similar remits in some ways, but they are, in fact, very different.
Generally speaking, business incubation is about bringing new ideas to market and the services the incubator company provides will reflect this.
In contrast, startup accelerators aim to speed up the growth of new firms. They focus less on the ideas and more on the revenues the business generates.
What is the business incubation process?
The full definition of business incubation spans several different areas. Virtual business incubators focus on advising from a distance but may also provide physical premises such as hotdesking spaces.
Physical business incubators take this a step further, with co-working spaces and centralized delivery of business support.
For small business owners, this provides access to like-minded entrepreneurs who are also in the process of bringing innovative and disruptive business ideas to market.
In some cases, the level of support offered by the business incubator company is higher at the start of the agreement.
Over several years, you might gradually receive less support and pay more rent for the premises you occupy at the incubator facility
This reflects the fact that over the same period, your product or service should hit the market, and you should raise revenues that mean you no longer need the incubator's subsidies.
Your initial financial support from the incubator may derive from several different sources of funding:
- From the incubation company's parent organization
- From local authorities and development organizations
- From previously incubated companies who now pay full rates
- From venture capitalists or angel investors that have become interested in your company
In this way, business incubation is a positive feedback loop of benefits, as the success of previous ventures means there is more available for the incubation company to invest in small businesses of the future.
What does a business incubator do?
Taking all of the above into account, what is a business incubator definition that best reflects what the incubation company does?
Frequently used definitions vary, but they have some common characteristics:
- Business incubators help new business ventures to survive and succeed
- Incubation often takes place at physical premises with co-working spaces
- The incubator provides relevant support services under the same roof
Services provided by an incubator can include professional advice like lawyers and accountants, as well as business mentorship and valuable networking opportunities.
Economic development is just one goal of the incubator. Beyond just generating sales, the shared workspace enables greater collaboration between entrepreneurs and can help to bring innovations to market faster and more successfully.
What are the most prevalent business incubation companies?
You can find business incubator companies all over the world, but some big names have seen significant success time and time again.
Just a few examples of the biggest business incubation companies in recent years include:
Y Combinator was founded in 2005 and chooses around 200 projects from 13,000 applications each year.
Some of its past successes include Reddit, Dropbox and Airbnb. About a third of the ventures it supports are from outside the USA.
Y Combinator reports several forms of minority data, including how many of its supported companies were founded by a woman or by race.
Techstars is a global business incubation program that aims to support new technologies and innovations, no matter where the entrepreneur lives.
It has thousands of active projects worldwide and a range of mentorship accelerator programs available to small businesses.
The organization also has a capital investment fund, Techstars Venture, which has had significant successes in the past, including investing in Uber.
Seedcamp is based in the UK and runs on the theory that human intelligence is more useful to early-stage companies than financial support.
To deliver on this theory, Seedcamp offers training and consultancy to new businesses so that they don't have to face the same old problems alone.
By accelerating the startup process, this delivers faster economic development so that new companies generate funds organically rather than from outside investment.
These are just some of the most widely known names among business incubation companies; there are hundreds more, including smaller regional incubators and sector-specific providers.
Remember that the big-name business incubators are also among the most heavily oversubscribed, so if you want the best chance of a successful application, you might also want to consider smaller, less well-known incubators in your local area.
What are the benefits of a business incubator?
A business incubator by nature provides a range of benefits to the startup companies it accepts; however, remember that the incubator also exists to help itself by supporting successful new ventures.
The combination of the two means partnering with a business incubator should be a win-win scenario. While your venture gets the tools it needs to succeed, the incubator can reinvest its share of the profits in supporting further new startups in the future.
Business incubators differ, but some of the most common benefits you might expect to find include:
Most incubators (other than virtual incubators) provide office space you share with other entrepreneurs, which creates networking opportunities and helps you to reduce overheads compared with leasing premises at the full market rate.
It's normal for business incubators to offer development programs, including panels and workshops, which again means you can meet like-minded innovators and learn from their experiences.
Sometimes figures from academic institutions may appear to give talks and classes. These could be relevant only to particular industries, or they might be more general. It is not uncommon for incubators to offer some sort of management training.
Third-party investors often go back to the same business incubator time and time again to build on past success. This gives you a much better chance to find an investor who wants to fund the next stage of your development after incubation.
Mentorship and Expertise
When you need advice, you can ask your mentor or advisor. Business incubators have a vested interest in helping you to get past any bumps in the road of your startup company, while you learn essential skills and knowledge at the same time.
Your business incubator's premises are likely to have facilities such as:
- high-speed professional internet access
- office hardware like printers and photocopiers
- telephones and videoconferencing equipment
- enterprise licenses for essential software
These may vary, so it's worth asking upfront if your chosen business incubator provides the kind of facilities you think you will need.
In some cases, business incubators are sector-specific, which means they can give you guidance that is an even better fit for your chosen industry. This can help you to find the best business incubator for your innovation, but it can also mean some opportunities are not suitable for you.
What are the drawbacks of a business incubator?
While the benefits of a business incubator can be persuasive for many new startups, there are also some downsides to take into account.
Business incubators are heavily oversubscribed. If you apply for a place, you are likely to have a success rate of 1-2% or less.
The most popular and successful business incubators receive even more applications for each space they make available, so you'll need more detailed information to have a chance.
The business incubator might ask you to share a detailed business plan and complete a lengthy application process, all for a minimal chance of offering you a place.
You might be highly committed to your venture, but that doesn't necessarily match with the kind of commitment a business incubator will want from you.
Expect to work long hours with a steep learning curve, often with a minimum number of hours per week.
This is not an arrangement that lasts just a few weeks but, in most cases, the duration of a business incubator contract will be from one year to several years' commitment.
Loss of Control
Agreeing to the terms of a business incubator means losing some control over your business activities.
The incubator may expect you to attend certain training and mentorship at specified times and to report back to your mentor as you would to a manager or boss.
Although you benefit from their expertise, reporting directly in this way won't suit everyone, especially if you started your business in the first place to gain more autonomy.
Everyone is Different
Finally, remember that business incubators are different in terms of the services and expertise they offer.
High levels of competition for places mean you might count yourself lucky to be offered one business incubator opportunity, let alone several.
But if you receive offers from multiple incubators, make sure to assess them individually and against one another to be satisfied that you accept the opportunity that is the best fit for your venture.