Business incubators are business assistance programs that provide entrepreneurs with an inexpensive start-up environment and a range of administrative, consulting, and networking services. In essence these programs—which may be managed by economic development agencies, local governments, for-profit businesses, or colleges and universities—serve as homes for new companies. "They offer low-cost space, shared equipment, and the comradeship of fellow entrepreneurs," wrote Richard Steffens in Planning. "An incubator usually houses about a dozen tenants, who stay two to three years, then 'graduate' to commercial space. At their best, incubators help new firms create jobs and revive communities." Indeed, statistics indicate that incubator firms have a significantly greater chance of survival than do other start-up businesses. In addition, the world's increasingly technology-driven economy has spawned new wrinkles in the incubator concept in recent years, such as Internet incubators and incubator-like arrangements within existing companies.
Development of Incubators
The growth in the number of incubators across the United States has been traced to a wide variety of factors, including increased entrepreneurship, corporate downsizing, new technologies, increased involvement of educational institutions in technology transfer, and economic globalization. Early incubator programs first appeared in the Northeast in the late 1950s and early 1960s. But programs similar to today's versions did not arrive on the scene until the 1970s and early 1980s. The 1990s saw a surge in incubator creation as statistical and anecdotal evidence of their effectiveness—both for entrepreneurs and the incubators themselves—emerged. The Los Angeles Business Journal, for example, reported in 2000 that companies that launched in incubators remained in business five years later a startling 87 percent of the time, while only 20 percent of all new business startups reached the five-year mark. In the late 1990s, meanwhile, a growing number of for-profit Internet incubators were created in the United States to capitalize on the explosion in e-commerce.
Of those incubators in existence in the late 1990s, about 70 percent were maintained by economic development agencies or local government agencies. These organizations use incubators as a tool to boost regional economic growth or blunt the impact of big lay-offs and other bad economic news in the region. The remainder are operated by universities and colleges or for-profit businesses. These programs exist in a wide variety of demographic regions, from rural areas to urban settings.
Advantages of Incubators
Given the myriad advantages associated with membership in an incubator program, small business consultants often counsel their clients to at least investigate the possibility of securing a spot in one. Strengths of incubators include the following:
SHARED BASIC OPERATING COSTS. Tenants in a business incubator share a wide range of overhead costs, including utilities, office equipment, computer services, conference rooms, laboratories, and receptionist services. In addition, basic rent costs are usually below normal for the region in which the fledgling business is operating, which allows entrepreneurs to realize additional savings. It is worth noting, however, that incubators do not allow tenants to remain in the program forever; most lease agreements at incubator facilities run for three years, with some programs offering one or two one-year renewal options.
CONSULTING AND ADMINISTRATIVE ASSISTANCE.
Incubator managers and staff members can often provide insightful advice and/or information on a broad spectrum of business issues, from marketing to business expansion financing. Small business owners should remember that the people that are responsible for overseeing the incubator program are usually quite knowledgeable about various aspects of the business world. They are a resource that should be fully utilized.
ACCESS TO CAPITAL. Many business incubators can provide entrepreneurs with "access to the kind of early-stage capital that emerging companies desperately need," wrote Entrepreneur's David R. Evanson. "According to a recent survey of [National Business Incubation Association] members, 83 percent of incubator owners and directors provide access to seed capital. Seventy-six percent provide assistance with obtaining federal grants, 74 percent assist with preparing financial proposals, 60 percent can help obtain royalty financing, and 57 percent can lend a hand in obtaining purchase-order financing."
LEGITIMACY IN THE COMMUNITY. Many entrepreneurs have stated that when their start-up businesses are accepted into business incubator programs, the rewards include an aura of legitimacy and credibility among both vendors and customers. "The fact that a business has been accepted into an incubator offers due diligence value to potential investors," Adkins told Entrepreneur. "They have already passed an important litmus test by simply being there."
UNIVERSALITY OF INCUBATOR CONCEPT. One of the key advantages of incubators is that the concept works in all communities of all shapes, sizes, demographic segments, and industries. As Richard Steffens observed in Planning, "a particular strength of an incubator is its ability to aid companies that fulfill specific needs: technology transfer, revitalizing neighborhoods, creating minority jobs, among others." In many cases, the incubator naturally takes on some of the characteristics of the community in which it is located. For example, rural-based incubators may launch companies based on the agriculture present in the area. But whether based in a small town in the Midwest or a large urban area on the West Coast, proponents of incubator programs contend that the small business people in the community would know more about how to start and operate such businesses than major corporations that focus on mass production.
COMRADESHIP OF FELLOW ENTREPRENEURS.
Many small business owners that have launched successful ventures from incubators cite the presence of fellow entrepreneurs as a key element in their success. They note that by gathering entrepreneurs together under one roof, incubators create a dynamic wherein business owners can 1) provide encouragement to one another in their endeavors; 2) share information on business-related subjects; and 3) establish networks of communication that can serve them well for years to come. "Incubators provide psychological support for entrepreneurs, who are far more likely to persist as a result," stated Steffens. "This support is, perhaps, the incubator's unique place in economic development."
Factors to Weigh in Choosing an Incubator
Many incubators have been pivotal in nourishing small businesses to the point where they can make it on their own. But observers note that the programs are not fool-proof. Some small businesses fail despite their membership in such programs, and incubators themselves sometimes fold, crippled by any number of factors. "According to many incubator managers, the most common causes of failure are lack of sustained funding, lack of tenants, and inexperienced management," wrote Steffens. "A poorly run incubator or an underfinanced one will go under, as will any other small business." Entrepreneurs, then, need to recognize that some incubators are better suited to meet their needs than others. Considerations to weigh when choosing an incubator include the following:
- Is it a True Incubator?—Some office building owners falsely advertise themselves as incubators in order to lure tenants. Entrepreneurs need to study the details of each offer to determine whether such claims are legitimate.
- Length of Operation—"Incubators take time," said Steffens. "To get funding, incubator promoters and managers tend to promise all things to all people. Then, if early results are not promising, the supporters often panic. One manager told me that creation of an incubator typically takes two years from concept to opening, then two more years from opening to full occupancy."
- Incubator Leadership—Many analysts contend that entrepreneurs can learn a great deal about the fundamental quality of an incubator program simply by studying the program's leadership. Is the incubator managed by people with backgrounds in business, or by general college or agency administrators? Can the managers provide long-term business plans that show how they intend to guide the incubator to financial independence?
- Location—Does the incubator's setting adequately address your fledgling company's needs in terms of target market, transportation, competition, and future growth plans?
- Financing—Is the incubator's financial base a reliable one, or is it on shaky ground?
Entrepreneurs interested in exploring the incubator concept can request information from several sources, including the Small Business Administration, area economic development agencies, area educational institutions, or the National Business Incubation Association.
Would-be small business owners should have a complete business plan in hand before applying for entrance into an incubator program. Most incubators maintain a stringent screening process to ensure that their resources are put to the best possible use.
Recent Incubator Innovations
INTERNET INCUBATORS. "Internet incubators—a for-profit variant of the old-time government- or academic-supported not-for-profit entities—are sprouting up like dandelions in summer," wrote Thea Singer in Inc. As with traditional incubators, Internet versions provide dot-com startups with office space, business information and advice, financial assistance (either directly or by connecting them to potential sources of seed money), and management, accounting, and other infrastructure services. According to Internet incubators, these kinds of assistance can provide entrepreneurs with essential tools to accelerate their all-important "speed to market" in the fast-paced Internet economy. "No longer can a great idea or concept for a company take years to develop," confirmed Jerry Brandt in Los Angeles Business Journal. "Trial and error and time to perfect a great idea will leave the entrepeneur in the dust watching another company or individual succeed…. In today's Internet economy [speed to market] is more than a [driving force], it is the difference between success and failure." The price of membership in an Internet incubator can be steep, however. In return for providing their various services and funding, incubators receive a percentage (anywhere from 5 to more than 50 percent) of the dot-com's equity.
Entrepreneurs who are considering membership in an Internet incubator should study the benefits and drawbacks closely before making a final decision. Potential other sources of funding and assistance should be explored, as well as the level of autonomy that is present in the program. In addition, entrepreneurs should examine whether their e-business is prepared to take advantage of the incubator's ability to accelerate the launch process. Analysts note that speed to market is of little benefit if you do not have a complete, focused business plan in place. Finally, entrepreneurs need to objectively weigh whether increased speed to market is worth giving up a piece of the company.
INTERNALIZED BUSINESS INCUBATORS. Another recent wrinkle in incubator creation has emerged in the corporate world in recent years. Weary of mass defections of valuable employees who decide to launch entrepreneurial ventures of their own, some companies have established business incubators within their own corporate structures. In these programs, employees can use the company's resources (including their already established name and reputation) to build and romote their own new business ideas. "The company will provide the management guidance, infrastructure, and financial support to 'incubate' these ventures," explained David Cuthill in Los Angeles Business Journal. "The outcome is a clear win-win. Existing companies stem the hemorrhaging of top talent to Internet start-ups, while profiting from the high multiples investors are willing to pay for a share in Internet ventures…. And entrepreneurial employees get the challenge—and the profits—of creating their own 'companies' with little of the risk they would face on their own."
Further Reading:
Brandt, Ellen. "Incubators: A Safe Haven for New Business." Journal of Property Management. January-February 1991.
Brandt, Jerry. "To Incubate or Not to Incubate, That is the Question." Los Angeles Business Journal. March 27, 2000.
Cutbill, David. "Incubators: The Blueprint for New Economy Companies." Los Angeles Business Journal. March 27, 2000.
"Due Diligence Advised in Picking Biz Incubator." Business First-Columbus. September 1, 2000.
Evanson, David R. "Fertile Ground." Entrepreneur. August 1997.
"Incubators Lay an Egg." Business Week. October 9, 2000.
Rosenthal, Tracey. "Business Incubators Give Fledglings Warm Place to Grow." Business First of Buffalo. January 2,1995.
Singer, Thea. "When It's Time to Market that Matters Most, the Extra Heat of an Incubator can be a Lifesaver." Inc. July 2000.
Steffens, Richard. "What the Incubators Have Hatched: An Assessment of a Much-Used Economic Development Tool." Planning. May 1992.
