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Business Incubation
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Many entrepreneurs don't have the space or desire to start a business out of their
home, yet find renting space and setting up essential support functions is
overwhelming financially and energy draining just at a time when their financial
resources and energy are most needed for development of the business itself. A
business incubator can be the perfect solution for such a person.
Business incubators are designed specifically to help start-up firms. They usually
provide:
•
•
•
•
•
•
flexible space and leases, many times at very low rates
fee-based business support services, such as telephone answering,
bookkeeping, secretarial, fax and copy machine access, libraries and meeting
rooms
group rates for health, life and other insurance plans
business and technical assistance either on site or through a community
referral system
assistance in obtaining funding
networking with other entrepreneurs
The primary goal of a business incubator is to produce successful businesses that are
able to operate independently and financially viable.
The first identifiable business incubator was launched in Batavia, New York in 1959.
More followed on a limited scale until 1984 when the U.S. Small Business
Administration (SBA) began strongly promoting incubator development. At that time
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there were 20 incubators in operation. Over the next few years that number rose
rapidly. The National Business Incubation Association, a private membership
organization of incubator developers and managers, was launched in 1985 by industry
leaders. From an initial membership of 40, it has grown to almost 800 members
today.
According to the National Business Association (NBIA) Survey of Business
Incubators, by 1997 the number of business incubators had expanded to 550 in the
United States alone. New incubators have been opening at the rate of about one a
week since 1986. It is estimated that there are more than 8,000 startup firms housed in
incubators and another 4,500 entrepreneurial ventures currently operating on their
own were originally launched through incubators, including a number of the Inc. 500.
Over 80 percent of firms that were started through an incubator are still in operation.
Business incubation is on the rise on a global scale. The United Nations Industrial
Development Organization (UNIDO) actively monitors and promotes the
development of business incubators worldwide. They estimate that there are at 500
incubators in developing and transition countries with an annual growth rate for new
incubators being about 20 percent annually.
There are a wide variety of reasons for operating an incubator. There may be a need
for job creation in the community, promotion of economic self-sufficiency for a
selected population group, diversification of the local economy, transfer of
technology from universities and corporations, or sharing venture experiences with
new companies by successful entrepreneurs and investors. There is no question that
whatever the motivation behind the incubator, it is an economic boon for the
community, providing jobs and an expanded business base.
Business incubators have a wide variety of structures and supportive mechanisms.
Some of the most common are:
Sponsor Arrangement
%
Nonprofit, public or private
51
Academic related
27
Hybrid: joint effort among government, nonprofit agencies
and/or private developers
16
Private, for profit
8
Other sources such as art organizations, private industry
councils, church group, and chambers of commerce
5
\
Globally there is less private sector involvement in the incubation process, but that is
expected to change as private enterprise realizes the reduction in risk of early-stage
failure for incubator initiated businesses.
The most common types of firms using business incubators are light manufacturing,
technology and service firms and those developing new products or engaged in
research and development. There are a limited number of construction-related, sales
and marketing, or wholesale and distribution firms using incubators. A retail
operation is considered a poor fit for incubation.
Choosing the Right Incubator
In deciding to use a business incubator, the NBIA suggests exploring the following
items before making a commitment:
A. Space and Service-related Issues:
1.
2.
3.
4.
5.
What are the charges for space and services at the incubator?
How do those rates compare to market rates locally?
What services does the incubator provide?
What are the lease requirements?
Is there room for your business to grow?
B. Quality:
1. What information does the incubator provide about the extent and quality of
the services the incubator provides?
2. Does the incubator management seem to understand your business needs and
can they offer on-site assistance and access to valuable contacts and
community business services needed by your firm?
C. Success Rates
1. If the incubator has been open long enough to have a track record, what is the
experience of firms who made use of the incubator for a few years and have
now moved to other space?
2. How do the current tenants feel about the incubator?
3. Ask for references and check them.
D. Policies and Procedures
1.
2.
3.
4.
What are the policies and procedures of the incubator?
Are some services provided free of charge?
How long can you remain a tenant?
Is there a graduated rent structure as your firm matures or does the incubator
want to take royalties or an ownership right in its tenants' businesses in return
for reduced charges?
5. Can you leave easily if your business turns bust?
6. Does the incubator provide seminar or training programs in addition to other
business assistance services?
E. Management
1. Does the incubator appear to be managed well?
2. Does the management appear to have good ties with and knowledge of the
business community?
3. Does the incubator have the continuing support and commitment of
sponsoring organizations? Who are these sponsors and what are their goals
and reasons for supporting the incubator?
One other area to consider carefully is whether your business is really ready for this
step. The business must be entrepreneurially sound, able to function on its own, if
needed. The incubator cannot replace business initiative, personal effort and
resourcefulness. There is a term used called "incubator syndrome" in which the
entrepreneur allows their initiative and judgment to be replaced by those of the
consultants in the center. While the consultants may give superb advice, it is the
entrepreneur's responsibility to make the business succeed.
A growing trend in incubators is for the incubator to receive a piece of the action in
exchange for office space, cash and lots of business support. They are essentially
becoming venture capitalists with the benefit of being on site to help get the business
off the ground. The usual amount such incubators ask is about a 20 percent equity
stake. Many of the incubators that operate this way style themselves as "startup
junkies." They know a lot about what gets a company off the ground right and are
enormously helpful in getting a business off on the right foot. For an investment of
anywhere between $100,000 to $300,000 plus office space and services, they receive
the vicarious thrill of being part of a startup and substantial returns if the business
succeeds. For each spot available there are at least 20 applicants so this new type of
venture definitely is appealing to all. So far results have been impressive if you are
one of the lucky ones to win a place in these incubators.
Finding incubators can be challenging. The National Business Incubation Association
lists their members globally, but that is a small fraction of what is available. Local
business directories and business schools can be a helpful resource.
Books:
A Comprehensive Guide to Business Incubation
Growing New Ventures, Creating New Jobs : Principles and Practices of Successful Business Incubation
Incubators: A Realist's Guide to the World's New Business Accelerators
Small Business Financing: How and Where to Get It
Related:
Business Incubation as a Profit Making Venture
Definition of Business Incubation
Venture Capital
Angel Investors
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