What is a Startup Incubator and How Does It Work?

What is a business incubator and how does it work?

If you are a current or prospective entrepreneur, you likely heard a lot about business incubators but do not completely understand the purpose of an incubator.  

For instance, you may have completed your business plan and feel ready to launch your company but do not quite feel ready to go. In these scenarios, you may want to partner with an incubator and learn how this affiliation can help new and small businesses, especially start-up companies, improve their chances of success.

Here are a couple of definitions of 'business incubator' from reliable sources:

“An organization designed to accelerate the growth and success of entrepreneurial companies through an array of business support resources and services that could include physical space, capital, coaching, common services, and networking connections.” (Entrepreneur.com).

“A business incubator is a company that helps new and startup companies to develop by providing services such as management training or office space. The National Business Incubation Association (NBIA) defines business incubators as a catalyst tool for either regional or national economic development. NBIA categorizes their member's incubators by the following five incubator types: academic institutions; non-profit development corporations; for-profit property development ventures; venture capital firms, and combination of the above.” (Wikipedia.org).

Business incubators have been around since the late 1950s in the US. They rapidly expanded into Canada and the UK before spreading across the globe. They have evolved but have consistently provided services to help start-ups with navigating such activities as identifying space, funding sources, legal, accounting, and technology services.  

Some incubators operate in a virtual environment, with infrequent face to face meetings. The virtual model saves the costs associated with maintaining a building. However, having a physical presence allows entrepreneurs to assist each other and facilitates incubator management to monitor their activities, problems, and successes (Bizfluent.com).

Listed below are a few types of business incubator structures, which all share the goal of promoting growth:
 

• Academic institutions: Many business incubators are run by universities or have academic affiliations. Some programs work with university students, while others accept the cohorts of young companies.
• Non-profit development corporations: Both non-profit and government agencies use incubators to stimulate economic development. These programs may specifically accept companies geared toward public welfare.
• For-profit property development ventures: Larger corporations develop many incubators for various purposes. These programs may be an investment opportunity or a way to fund subsidiaries, develop technology, or find partnerships.
• Venture capital firms: Some venture capital firms establish incubators as an investment opportunity. These incubators may invest in start-ups in exchange for equity or offer funding further along in the program.

Here is a long, but by no means, a complete list of typical services often provided by business incubators:

•            Help with business basics
•            Networking activities
•            Marketing assistance
•            Market Research
•            High-speed Internet access
•            Help with accounting/financial management
•            Access to bank loans, loan funds, and guarantee programs
•            Help with presentation skills
•            Links to higher education resources
•            Links to strategic partners
•            Access to angel investors or venture capital
•            Comprehensive business training programs
•            Advisory boards and mentors
•            Management team identification
•            Help with business etiquette
•           Technology commercialization assistance
•        Help with regulatory compliance
•           Intellectual property management

A successful business incubator model reflects the needs of the local entrepreneurial community. They are often the result of widely distributed surveys to accurately define the market opportunity, the needs of key stakeholders in the community, and then deliver the services (both programs and facilities).  

These surveys are subsequently followed by a feasibility study to evaluate the opportunities via interviews with entrepreneurs, economic development leaders, industry representatives, and political leaders. All can provide insight into conditions and opportunities within the community. 

Roughly 40% of incubators that are closely associated with research universities focus on technology start-ups, while the balance of incubators provides 'mixed-use' incubation, meaning they do not necessarily focus on a particular specialty (Bizfluent.com).

Incubators often offer co-working space, which involves people assembling in a neutral area where they either work independently on different projects or in groups on the same project. 

Co-working space offers many of the same services that you would find in a traditional office, including high-speed internet, a meeting room, access to scan/fax computer labs. The target audience for co-working space includes those from the rapidly growing gig economy worker segment, work from home professionals, virtual and transient workers.

Incubators may also include maker space, which is a collaborative workspace inside the facility, for making, learning, exploring, and sharing that uses high tech to no tech tools.  

Maker spaces provide hands-on learning, help with critical thinking skills, and even boost self-confidence, and again, assist would-be entrepreneurs with amenities and assistance to develop, design and prototype everything from physical products to online platforms. 

Such spaces often provide sophisticated software and a variety of equipment (including 3-D printers), not generally available to entrepreneurs with limited financial means.

Business incubators continue to evolve to adapt to the changing needs of entrepreneurs and small firms, especially in the tech segment and emerging high growth potential segments.   

They also serve to enhance the links between research institutions, universities, and the business community and can be a vital component of employment, wealth creation, and industry cluster development.