Entrepreneurship University
College of Entrepreneurial Studies (CES)

Business Incubators

Business incubators can offer startups various forms of assistance from economies related to shared business services, to expert advice, and access to venture funding opportunities.  

Dinah Adkins, executive director of the National Business Incubation Association (NBIA) suggests that, except for restaurant and retail operations, most start-up businesses are well-suited for an incubator. “The main areas [incubators] cover include research and development, manufacturing and service.”

Entrepreneurs can find support in one of three main types of incubators. NBIA statistics show that most incubators are mixed-use, meaning they serve a variety of industries. Technology incubators, which target clients involved in creating and commercializing new technologies, are another major category. Generally, these two types of incubators aim to bring outside investments into a particular geographic area to expand the tax base.

The third type involves a smaller number of incubators (only 5 percent), but it appears to be a fast-growing segment. Known as empowerment incubators, these mixed-use facilities focus on clients considered underprivileged and underserved, such as minorities and women. Such empowerment incubators are often situated in economically distressed areas in hopes of revitalizing the regions.

Perhaps one of the biggest benefits of incubators is being part of what is essentially an entire entrepreneurial community, says Joel Wiggins, assistant director for the Austin Technology Incubator in Austin, Texas. “There’s a synergy that develops within incubators. Everyone celebrates when someone gets a contract.”

It’s this type of “doorway consulting” that makes incubators so valuable, says Sam Pruett, executive director of the Genesis Technology Incubator in Fayetteville, Arkansas. “Our experience has been that there is a huge feeling of isolation for many start-up businesses,” he says. “The incubator keeps them connected to other entrepreneurs in similar situations.”

Although the drawbacks to incubator life are minimal, as you might have guessed, there are a few. Perhaps the biggest is that you’re expected to participate in various communal incubator events, which, though helpful, will take you away from your business. You must also be willing to accept help.

The acceptance policy varies among incubators, but in general, they’re looking for business ideas with potential and entrepreneurs who can make their visions realities. This often includes writing a solid business plan and submitting a personal financial statement.

Most incubators require tenants to graduate and move out after a specified period of time, usually after four or five years. Being booted from the nest may seem harsh, but if you’ve used your time there to the fullest, your business will be more than ready to spread its wings and fly unassisted to even greater heights.

Incubator facilities vary widely in size as measured by the square footage or total startup costs and the number of tenants resident in the facilities. One recent survey indicated total startup costs ranging from $175,000 to over four million dollars with the median being $412,500. The largest incubator had 69 startup tenants. The median number of startup tenants was 12.

Technology-oriented incubators are increasingly locating near research parks, universities or research labs to offer “technopreneurs” access to a wider range of facilities, individuals and opportunities within their field. Tenant firms can have access to the research facilities and personnel of established firms, universities and research institutes. Additionally, they are able to network more easily with experienced and successful technopreneurs and may even engage in strategic alliances to exploit business opportunities either as a sub-contractor or a supplier.

Venture Accelerators

Technology incubator facilities are designed to help “technopreneurs” develop their business skills in an environment that promotes company development. Many entrepreneurs have a market-worthy idea, and think that all they need is capital to succeed. But speed to market, and a well-developed concept are critical components of business success. Deep, valuable resources from the start enhance the initiation, survival prospects, and growth of a venture. These resources can provide:

    business development services, such as,

  • business plan and market strategy assistance,
  • mentoring and coaching, on-site and through universities and area professionals
  • contacts with leading technology corporations and service companies,

    reduced cash requirements, and access to investment capital,

  • Conference Room, administrative support, copier, fax, mail, etc.
  • subsidized professional services expense, “survival” funding,
  • connections with angel investors and venture capital firms, and

    infrastructure conducive to building world-class companies

  • Internet server access and support, firewall security,
  • financial software to track client progress, and,
  • the latest web application development tools.

The accelerator can create an environment for technology start-ups to find financial support, business infrastructure and guidance from business professionals. Infrastructure is a major component of the acceleration process; Web developers can concentrate on their strategic plan with much of the preparatory work done for them.

Virtual accelerator clients can also be considered, that is, companies that do not have physical presence at the accelerator, but use its e-commerce infrastructure. Anchor tenants with key specialties, basically commercial tenants who receive offsets for services provided to clients, can also be considered.

Client services can be provided in exchange for equity, a more readily available commodity for startups than cash. As a (very rough) ” rule of thumb,” a promising company could be valued today at 3 times a credible 3rd year earnings estimate, adjusted for risk. Equity share taken by the accelerator or investors is determined by the value of services provided, and amounts of investments, as percentages of valuation.

The basic idea underlying the mentoring and coaching function provided by technology incubators is to link new entrepreneurs with highly successful and experienced entrepreneurs (mentors) so that the mentors can provide advice and assistance to new technopreneurs on a regular basis. Various versions of such programs exist. For example, an advisory committee may consist of 5 or 6 members from disciplines such as accounting, law, marketing, etc. These members are volunteers who provide services free of charge. Also, mentoring programs for new startup businesses may be structured differently from mentoring programs for businesses, which have passed the initial startup phase and are moving into the growth stage.

Wishing you success,

John B. Vinturella, Ph.D.

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