Business Incubation

Many entrepreneurs don't have the space or desire to start a business out of their home, yet find renting space and setting up essential support functions is overwhelming financially and energy draining just at a time when their financial resources and energy are most needed for development of the business itself. A business incubator can be the perfect solution for such a person.

Business incubators are designed specifically to help start-up firms. They usually provide:

  • flexible space and leases, many times at very low rates
  • fee-based business support services, such as telephone answering, bookkeeping, secretarial, fax and copy machine access, libraries and meeting rooms
  • group rates for health, life and other insurance plans
  • business and technical assistance either on site or through a community referral system
  • assistance in obtaining funding
  • networking with other entrepreneurs

The primary goal of a business incubator is to produce successful businesses that are able to operate independently and financially viable.

The first identifiable business incubator was launched in Batavia, New York in 1959. More followed on a limited scale until 1984 when the U.S. Small Business Administration (SBA) began strongly promoting incubator development. At that time there were 20 incubators in operation. Over the next few years that number rose rapidly. The National Business Incubation Association, a private membership organization of incubator developers and managers, was launched in 1985 by industry leaders. From an initial membership of 40, it has grown to almost 800 members today.

According to the National Business Association (NBIA) Survey of Business Incubators, by 1997 the number of business incubators had expanded to 550 in the United States alone. New incubators have been opening at the rate of about one a week since 1986. It is estimated that there are more than 8,000 startup firms housed in incubators and another 4,500 entrepreneurial ventures currently operating on their own were originally launched through incubators, including a number of the Inc. 500. Over 80 percent of firms that were started through an incubator are still in operation.

Business incubation is on the rise on a global scale. The United Nations Industrial Development Organization (UNIDO) actively monitors and promotes the development of business incubators worldwide. They estimate that there are at 500 incubators in developing and transition countries with an annual growth rate for new incubators being about 20 percent annually.

There are a wide variety of reasons for operating an incubator. There may be a need for job creation in the community, promotion of economic self-sufficiency for a selected population group, diversification of the local economy, transfer of technology from universities and corporations, or sharing venture experiences with new companies by successful entrepreneurs and investors. There is no question that whatever the motivation behind the incubator, it is an economic boon for the community, providing jobs and an expanded business base.

Business incubators have a wide variety of structures and supportive mechanisms. Some of the most common are:

Sponsor Arrangement
%
Nonprofit, public or private
51
Academic related
27
Hybrid: joint effort among government, nonprofit agencies and/or private developers
16
Private, for profit
8
Other sources such as art organizations, private industry councils, church group, and chambers of commerce
5
\

Globally there is less private sector involvement in the incubation process, but that is expected to change as private enterprise realizes the reduction in risk of early-stage failure for incubator initiated businesses.

The most common types of firms using business incubators are light manufacturing, technology and service firms and those developing new products or engaged in research and development. There are a limited number of construction-related, sales and marketing, or wholesale and distribution firms using incubators. A retail operation is considered a poor fit for incubation.

Choosing the Right Incubator

In deciding to use a business incubator, the NBIA suggests exploring the following items before making a commitment:

A. Space and Service-related Issues:

  1. What are the charges for space and services at the incubator?
  2. How do those rates compare to market rates locally?
  3. What services does the incubator provide?
  4. What are the lease requirements?
  5. Is there room for your business to grow?

B. Quality:

  1. What information does the incubator provide about the extent and quality of the services the incubator provides?
  2. Does the incubator management seem to understand your business needs and can they offer on-site assistance and access to valuable contacts and community business services needed by your firm?

C. Success Rates

  1. If the incubator has been open long enough to have a track record, what is the experience of firms who made use of the incubator for a few years and have now moved to other space?
  2. How do the current tenants feel about the incubator?
  3. Ask for references and check them.

D. Policies and Procedures

  1. What are the policies and procedures of the incubator?
  2. Are some services provided free of charge?
  3. How long can you remain a tenant?
  4. Is there a graduated rent structure as your firm matures or does the incubator want to take royalties or an ownership right in its tenants' businesses in return for reduced charges?
  5. Can you leave easily if your business turns bust?
  6. Does the incubator provide seminar or training programs in addition to other business assistance services?

E. Management

  1. Does the incubator appear to be managed well?
  2. Does the management appear to have good ties with and knowledge of the business community?
  3. Does the incubator have the continuing support and commitment of sponsoring organizations? Who are these sponsors and what are their goals and reasons for supporting the incubator?

One other area to consider carefully is whether your business is really ready for this step. The business must be entrepreneurially sound, able to function on its own, if needed. The incubator cannot replace business initiative, personal effort and resourcefulness. There is a term used called "incubator syndrome" in which the entrepreneur allows their initiative and judgment to be replaced by those of the consultants in the center. While the consultants may give superb advice, it is the entrepreneur's responsibility to make the business succeed.

A growing trend in incubators is for the incubator to receive a piece of the action in exchange for office space, cash and lots of business support. They are essentially becoming venture capitalists with the benefit of being on site to help get the business off the ground. The usual amount such incubators ask is about a 20 percent equity stake. Many of the incubators that operate this way style themselves as "startup junkies." They know a lot about what gets a company off the ground right and are enormously helpful in getting a business off on the right foot. For an investment of anywhere between $100,000 to $300,000 plus office space and services, they receive the vicarious thrill of being part of a startup and substantial returns if the business succeeds. For each spot available there are at least 20 applicants so this new type of venture definitely is appealing to all. So far results have been impressive if you are one of the lucky ones to win a place in these incubators.

Finding incubators can be challenging. The National Business Incubation Association lists their members globally, but that is a small fraction of what is available. Local business directories and business schools can be a helpful resource.