Reading: Incubators

Incubators

Think chickens
A good way to get to the heart of what incubators are and what they do is to tease out the metaphor behind the word “incubator.” Incubators are self-contained environments that regulate the lives of chicks so they only need worry about eating and growing. Business incubators are exactly the same: they provide fledgling ventures with office space, basic equipment, access to various professionals (accountants, lawyers, marketing experts, mentors), and in some cases seed money so the businesses can focus on getting the venture off the ground.

Why bother incubating? Why can’t young businesses just go at it alone, like they used to (and for the most part, in fact, still do)? The answer has three parts.

Making the local scene vibrant Stimulating the local economy is a prime reason for the existence of most incubators. These programs want to produce mature, successful businesses—“graduates” of the program—that will go on to create jobs and offer products and services that enhance the local economy.

The “new” economy The world is changing in terms of how business is conducted. In the past, traditional economic transactions consisted of an exchange of money for goods, materials, or services, but more and more often the important economic transactions of today involve knowledge. Incubators—particularly technology business incubators—facilitate these academic, government and business collaborations that produce leading-edge, next-generation systems and in the process get a leg-up in a hypercompetitive, knowledge-based marketplace.

High-tech help While there has been a rapid and spontaneous burgeoning of technology-based start-up companies in recent years, quite a few of the entrepreneurs behind them have negligible experience in managing and growing a small enterprise. Assisting emerging high-tech entrepreneurs with this process is a fundamental motivation driving incubators.

What incubators look like
Incubators can be private or public, for-profit or non-profit. They can focus on high-tech, life sciences, manufacturing, service, or niche markets. Some charge a fee for their services, while others require an equity share in the company. A typical incubator, like Baltimore-area InfoAge, has wired space for rent on a monthly or hourly basis, and offers fundamental business support services such as fax/copy machines, networking seminars and forums, voice mail, a mailbox and address, Website space, and conference and multimedia presentation room use.

Finding the right match
Before committing to an incubator, ask yourself these questions:

Does the incubator offer the services and contacts you need?
What services do you need to make your venture successful? Business plan development, legal/accounting advice, marketing, laboratory space, manufacturing facilities? Be sure the incubator offers what you need or can connect you to service providers who can meet those needs.

Do you meet the incubator’s criteria?
Find out the incubator’s qualifications for accepting clients before applying—some incubators expect prospective clients to have fully developed business plans, whereas others require a less developed idea and offer business plan development assistance.

Is the fee structure right for you?
Most for-profit incubators exchange space and services for an equity share in their client companies, whereas most non-profits charge fees for space and services. If a large cash infusion and speed to market are essential for your success, then giving up equity in your company in order to secure quick cash might be the way to go. But if you don’t want to give up equity and are willing to build your company more slowly, then paying fees for services and space may be a better choice.

Ups and downs
As with just about everything, there are advantages and disadvantages to incubating your business. Some advantages are:

• Reduced rent (on average, business incubators charge 25-50% less than normal rents)
• Access to business and entrepreneurial wisdom
• Ease of networking
• Sharing ideas and a culture of innovation with peers
• Legitimacy, which can go a long way toward luring investors

Some disadvantages:

• Some business incubators are more successful at accomplishing their goals than others
• Subsidized rent, camaraderie, expert advice, and free help are hard to beat. Some companies graduating from incubators aren’t sufficiently battle tested.
• You may not need to incubate at all. Why give away equity to get services you can seek independently? In many instances, it is not clear what value the incubator adds.