What is the Purpose of a Business Incubator?
Business incubators are organizations that nurture the development and growth of businesses in the early phases to help them persevere in their most vulnerable stages. Incubators provide numerous resources and support services to aid in the development of businesses. The general purpose of incubators is job creation, business retention, enhancing entrepreneurial climate, growing local industries and economies. Approximately 93% of North American incubators are nonprofits focused on economic development. About 7% are typically set up to receive returns from shareholders investments. (Business Incubation FAQs)
What to Expect
It is important to conduct research on the incubator(s) and consider the advantages and disadvantages before embarking upon the application process and working with an incubator.
- Conduct Ample Research: It is important to understand that incubators will have their own set of unique offerings for their entrepreneurs. The package offered should help meet the needs and goals of the company. The location of the incubator should allow for a flourishing business, with a market that can sustain the business for the duration of the term of stay. The mentors and specialists available should also have experiences and networks beneficial to your business.
- Related costs: Some incubators will charge monthly fees, like a typical leasing agreement. However, other incubators may accept in exchange for equity. It is beneficial to consult with an attorney to review the terms and contract.
- Speak to alumni: If the incubator has a list of previous tenants, speak to them about their personal experiences. This first hand testimony will give you further insight and help you determine if the incubator is right for your business.
- Prepare your proposal: If you decide to apply, be sure to prepare and rehearse your pitch and distinguish yourself from other businesses and business owners. Incubators want businesses that are sustainable. In your proposal, be sure to discuss how your business will succeed with accompanying financial projections.
What are the main business models?
As mentioned previously, each incubator will have a unique set of offerings. The list of business models below should give you an idea of what to expect as you conduct your research.
- Rent Model: Rent is charged to businesses which can help incubators be self-sustainable. In some cases initial rents are subsidized. The subsidy rate usually declines over time to gradually introduce commercial discipline to the business.
- Equity Model: Incubators take marginal stakes in the business, usually in exchange for low rent periods.
- Royalty Model: Royalty payments are made based upon the amount of revenue earned by the business.
- Deferred Debt Model: The services offered to the business, as well as the overhead is charged at a decided upon future date as an incubation fee. The incubator could decide the repayments (partial payments or lump sum) are due when the business leaves the incubator or when the business reaches an agreed upon financial target.
What are the main advantages and disadvantages?
- Low cost workspace allowing for reduced overhead
- Offered resources such as mentorship, capital, office space and services
- Offered curriculum and business development programs
- Mentorship and networking
- Constant networking and coaching could alter focus
- Meticulous and competitive application process
What does the Research Reveal?
Business incubators profess to be beneficial to businesses and aid in their future success. However, what does the research show about whether incubators are effective. According to Emily Fetsch, incubators may not be more effective at creating success than non-incubated businesses. On average, an incubator will have less than two full time staff serving approximately 25 businesses. This level of service may be inadequate for this number of businesses. (Fetsch)
The research available does not compare incubator businesses with similar non-incubated businesses, which would aid in confirming whether incubators positively affect businesses. Research available shows that there are minimal performance differences in incubated and non-incubated businesses. Incubated businesses have slightly higher employment and sales growth, but have slightly lower survival rates after incubation. (Fetsch)