Business incubation isn’t a new concept. Many American universities started business incubators in the late 1980s and early 1990s, and today, more than 1,700 business incubators exist in the United States.
While the traditional “brick and mortar” mixed-use incubator model is still alive and well, new trends promise to enhance the effectiveness of business incubators as key tools in entrepreneurial ecosystem development.
Business incubation is about programs and people — not about buildings and furniture. Most business incubators are “mixed-use” programs, handling everything from information technology startups to food businesses to engineering firms and even laboratory/biotechnology companies — all in one incubator.
Isn’t That Special?
But in the past decade, specialty incubators have become more common. These specialize in one area, such as an incubator full of biomedical technology companies, food businesses, information technology startups or — yes — even wine enthusiasts. In addition to a focus on a specific business segment, some specialty incubators build facilities to accommodate advanced manufacturing, commercial kitchens and biotech/biopharma. This trend continues as new business segments such as virtual reality emerges and the need for incubation in these areas continues to grow.
Other more recent trends involve the inclusion of several different models into a single program. For example, one incubator recently established a “coworking” space model within its incubation program; another incubator started an accelerator.
Accelerator models differ from traditional incubation in that accelerators provide some financial support and are programs of a fixed time period. They are designed to fail or succeed rapidly to determine the viability of startups.
Incubators, which also provide access to equipment and specialized facilities, typically accept “rolling” admissions and do not have time limits for occupancy. Many incubators have also set up “proof of concept” or “translational science” spaces so that individuals or teams with minor grant funding can have a small and/or shared space to develop their concepts and prove they can provide working business models.
Typically, these centers cap participation in the program at one year, and then the business is expected to either “move in or move on,” taking up residence in the incubator or abandoning the effort.
In recent years, however, some incubators have adopted a “continuum of assistance and development” by setting up coworking spaces, accelerators, makerspaces and specialty spaces under one roof. This also provides a “pipeline” of potential new resident companies for incubators.
Where’s the Money?
Another trend involves funding. We all know “it’s the money that makes it work!” Startups are constantly searching for early sources of funding for proof of concept, prototype construction and early stage growth.
Many incubators are setting up their own investment funds to assist their clients. Most of these funds make early pre-seed or seed stage investments, often capped at a maximum level of $150,000-$300,000.
This early stage money helps companies attract other investments and can act as a catalyst for angel investors and venture capital firms to consider investing in a company. It also decreases the risk profile of the incubator client, thereby increasing the chances of a successful growth pattern in the incubator.
While the incubator itself may not experience a rapid direct return on investment, an increase in client success rates helps attract other new clients and improves the entire entrepreneurial ecosystem served by the incubator.
Incubators also continue to develop programs for business education and management training. Many incubator managers have set up carefully planned curricula for teaching scientists and engineers the basic principles of business management, and some incubators use standard programs such as the Wendy Kennedy (WKI) module entitled “So What? Who Cares? Why You?”
The WKI course (wendykennedy.com) provides a workbook to guide participants through understanding basic business principles of concept explanation, market identification, cost analysis and budgeting and sales channels. Courses such as this one ensure that entrepreneurs understand the basis of business growth: cash flow!
New startup managers need to know their business, their market and their budget. They often request advice regarding market approaches from their incubator managers and incubator business mentors — and it sure helps if the CEO comprehends the advice!
Speaking of Advice…
One of the most prominent trends in incubation is the use of mentors, advisers or entrepreneurs-in-residence. These individuals are typically local and are seasoned entrepreneurs, experienced businesspeople or technical experts. Often, incubators invite other individuals from support or service firms to provide legal, accounting and other advice for their clients.
Using individual mentors increases the viability of startup firms, leads to great accountability and enriches the potential of new companies to achieve milestones that lead to success. Typically, incubators assign a mentor or adviser to each client upon admission, and these volunteer advisors work regularly with the client to provide direction on business and/or technical matters.
In addition, local, regional, and national service providers often provide discounted services and advisement to incubator clients, understanding that today’s startups are tomorrow’s growth companies and those clients will most likely stick with the service providers that were good to them during their early years.
Incubators continue to evolve with the needs of the entrepreneurial ecosystem. New programs, new models, and new mechanisms for funding and advisement continue to add to the success profile of business incubation.
Business incubators are an important part of a successful startup company landscape, and incubator managers know the best, most successful clients are those who are informed, assisted, driven to succeed and properly supported.
As new trends in entrepreneurial support and education develop, business incubators will be on the forefront of adoption of these techniques and trends, and they will continue to play a major role in economic development and business growth.