Business incubators are a relatively new concept.
In fact, we would be surprised if you never heard of them.
So, what are they and what makes them so great?
The incubator is a business company that supports startups. They provide various types of help but primarily training and office space.
A private company does not necessarily own a business incubator. Lots of them are within the public domain, and they are created to support economic growth and networking.
The primary purpose of startup incubators is to teach young entrepreneurs new skills and to help them connect with other like-minded individuals.
We can put them in 5 different groups:
- Non-profit development corporations
- For-profit property development ventures
- Venture capital firms
- Academic institutions
- Combinations of previously mentioned organizations
Now, while venture capital firms can be regarded as incubators, they usually aren’t such.
Venture capital companies focus on providing funds to startups, and in return, they get a part of the company. Incubators, on the other hand, rarely offer funds.
They are also different from research facilities and tech parks.
Unlike these two, incubators are done on a much smaller scale while tech parks have various departments, labs, and facilities that are meant to help out entrepreneurs within them.
It is also worth noting that these organizations are different from Small Business Development Centers that were set up by the US Government. Unlike these development centers, incubators are much more exclusive.
With the incubators, there is always some list, and only several clients can attend to them. On the other hand, Small Business Development Centers are meant to support all the entrepreneurs seeking help. All you need to do is contact them, and you can get on the list. Furthermore, development centers will help organizations regardless of their development stage or age.
But perhaps the biggest misconception comes in the form of the differences between incubators and accelerators.
Here are the main things you need to know.
Accelerators vs. Incubators
People who don’t know much about startups or running a company probably haven’t heard about these two terms. So, it is not surprising they wouldn’t know the differences between them.
However, even if you are a young entrepreneur, there might be certain misconceptions regarding these two concepts. Indeed, there are lots of similarities between them, so it is necessary to know what is what.
Let’s first start by analyzing accelerators.
Perhaps the most significant difference between these two is the fact they have a different structure of programs.
When it comes to accelerators, it is usually at a set time how much a company can spend within the training center. This can go from several weeks to a few months; it all depends on the organization that is providing the support. Given that these are usually held by private companies or autonomous organizations, you have to apply beforehand.
Keep in mind that accelerators like incubators have a limited number of spots available. This makes the whole process very selective, unlike Small Business Development Centers.
According to data, only around 2% of applicants will be selected. Certain organizations will have a fixed number of applicants instead of percentages. Again, these fixed numbers tend to be very low.
If a company does get some funding, it usually goes with the ability to access a vast network of new connections and special training. The company compensates the accelerators by giving up a part of their equity.
The real value of these programs doesn’t come in the money, though.
Unlike venture capital companies that only focus on the financial side of the deal, accelerators are much more interested in giving startups proper access to mentors. These mentors come from various fields and have a different experience.
In that regard, you might work with industry experts and venture capitalists. That in itself can propel your organization to the next level.
Some of you might think that these mentorship networks are rather small, and you would be wrong.
Some of the more prominent accelerators have access to hundreds of mentors and are willing to share them with your startup.
The whole program works based on incentives. Given that money isn’t a priority, there are various other ways how mentors, accelerators, and joining startups can benefit from each other. But, for such a deal to work, all parties involved have to be satisfied with the service they received.
When the accelerator program is over, companies are prepared to be “put on the market.” There is usually some sort of a demonstration day (might remind you of graduation), where lots of media and shareholders will come together.
In a nutshell, an accelerator is meant to help startups develop much quicker than they would otherwise.
In most cases, startups take around 2 years to get on their feet; with an accelerator, they can do it in a few months.
Incubators have lots of similar concepts and work under a similar premise.
The main difference is the time when a company steps into a program.
When it comes to accelerators, these organizations help companies that are already set up and want to hasten the start of their work. Incubators deal with the earliest parts of the process and are especially great for entrepreneurs who haven’t set things in motion.
Incubators are relatively similar to accelerators in terms of funding and organizing. They are usually led by venture capital companies, angel investors but also by non-profit organizations and government entities.
Incubators may also differ from accelerators in how they are selecting the candidates.
While they might have a selection process similar to accelerators, candidates are usually recommended or come through partners. This is very important as unlike accelerators, where a company is already in place, here you minimal information about a candidate.
Incubators may also vary in terms of their market or niche. Most of them specialize in something, so depending on your direction and the type of company you want to open, you have to choose a proper incubator to approach.
Keep in mind that with incubators, it is presumed that a startup will work with other similar startups. In that sense, you will have to relocate to an incubator’s office or facilities where you can spend time with others.
Incubators can be used for various things besides connecting with other likeminded individuals. Here, you can develop ideas, work out a proper business plan, check whether or not your product or service is feasible, detect potential flaws, etc.
If we were to describe an incubator to a person who doesn’t know what it is, the best approximation would be modern co-working spaces. Needless to say, incubators cannot come close to co-working spaces given the access of resources you have within the prior.
Furthermore, it is worth noting that while some incubators provide similar space to that of co-working companies, most of them try to keep things more quiet and intimate. This is especially important if you have a big team, and you cannot allow yourself too much distraction, but also need other experts nearby.
Both of these options are awesome.
Bear in mind that your startup can benefit from both of these experiences as they come at a different time of a company’s development. Still, you also need to be realistic about your needs as you shouldn’t give too much in return for this kind of experience.
Why do incubators exist?
So far, incubators seem like a fantastic concept that most startups can benefit from.
But what’s in it for the institutions that are organizing incubators?
Well, if we are talking about public institutions, it is evident that incubators are a great way to improve the economy. They can boost new entities and give them the necessary knowledge and confidence that would allow them to compete not only on domestic but also on international markets.
If we were to be a bit more precise, incubators could help by building a proper entrepreneurial culture within a society. It can boost technology and innovations and can help communities that are developing slowly or not developing at all.
When talking about incubators located in the United States, more than 30% of them are supported by various economic organizations. When it comes to municipal entities, they make for roughly 20% of incubators, and after that, an additional 20% are supported by various academic and research institutions.
Of course, these figures vary from country to country.
Sometimes, there are specific incubator practices in place.
When we’re talking about incubators in the US, most of them have no ties with governmental institutions. They are often community-based.
As previously mentioned, the Economic Development Administration sponsors most of these projects but only during developmental stages. Once the program is up and running, it no longer gets federal support but instead is expected to survive on its own. In rare cases, incubators will be completely controlled and centralized by a particular municipality or state.
Having that in mind, we get back to the initial question: how do they survive?
The answer is through rents.
Each incubator charges fees that account for about 60% of total organizations’ revenues. There are also other sources, such as cash operating subsidies as well as grants.
Incubators were one of the main ways of countering economic crises and recessions. Recently, the government has introduced Project Socrates. According to it, the government will support these organizations by giving them tech-based data regarding the current state of the market, competitors, partners, etc. It is another way to help startups and make them more competitive in both local and global markets.
When it comes to private, profitable incubators, most of them were introduced during the late 1990s.
They were similar to all other ventures in a sense they meant to bring in hefty profits to organizers. Unfortunately, a lot of them perished during the dot com bubble. As such, the whole idea had to be restarted.
Like we mentioned in the previous section, incubators are usually not seeking equity, nor are they providing funds. In some cases, however, they might. According to the national data, 25% of all incubators take ownership as a type of payment for their services. Still, fixed fees are much more common.
History of incubators
We mentioned the 1990s as the period when private incubators became more popular. But, the concept is much older than that.
Like most other economic entities, they were first introduced in the United States. This happened in 1959 when Joseph L. Mancuso opened Batavia Industrial Center.
The concept quickly spread all over the States, and it appeared in Europe during the 1980s. This was when incubators became more innovative and diverse as each country and region had different views and tried various solutions to get an edge on the global level.
According to rough estimates, nowadays, there are more than 7,000 incubators located all over the world.
This is a significant increase compared to just a decade or two ago. For example, in 2002, the European Commission established that there are 900 incubator-like projects in Western Europe.
When talking about the US, there were only 12 incubators in 1980, which rose to more than 1,400 in 2006.
A similar increase happened in the United Kingdom. They went from 25 incubators in 1997 to 270 in 2005. Needless to say, the same trend was noticed all over Europe (at least in developed, progressive economies).
Big companies are putting more accent on creating their own incubator environments.
While incubators were a concept that was exclusive to developed parts of the world, nowadays, you can find them even in less developed countries. Organizations such as the World Bank and UNIDO are putting a lot of effort to open these institutions in less fortunate countries.
Most of these incubators are geared towards tech companies, but they will also support organizations from other industries.
Some of them are very versatile, providing training to startups from various branches.
No matter what, both incubators and accelerators are great for hastening and improving your internal processes. Keep in mind that most young entrepreneurs have awesome ideas and products, but they might have trouble executing them.
In order to make things happen, you need incubators that will take care of investment and the administrative side of things.
Hopefully, this article has shed some light on this unusual and amazing concept!