Business Incubators: How they help Start-Ups
Startup Life Cycle
The chart above illustrates the typical life cycle of a startup business. Entrepreneurs generally start of without any capital, using their personal savings and taking loans from friends and family. They rely on Angels and Business Incubators to help them out in their early phases. After they have a solid product, they get funding from venture capital and private equity firms. Eventually they go public so that their initial investors can recoup their investments.
From the start-up life cycle we see that Business Incubators help businesses in the early stages of their life cycle, when they have minimal capital, no resources or connections and inexperienced entrepreneurs leading them. This is because start-ups require to be nurtured and supported. Business Incubators offer both Tangible and Intangible Services to new startup firms.
- Shared equipment such as copy machines, phones, faxes, computers and internet access;
- Shared common spaces – conference rooms and lounges – for meetings with clients, and more informal interactions with other incubator tenants;
- Shared business services such as computing, secretarial, accounting, marketing, and legal services;
- Assistance with basic business activities such as marketing plans, joint promotion, business plans, financial systems, bookkeeping etc;
- Greater flexibility with the timings and amounts of rent and other payments; are more sensitive to the businesses needs;
- Joint purchasing of business supplies and other business components
- Guidance to inexperienced entrepreneurs, Incubators are generally run by experienced entrepreneurs or academics who have knowledge in the field;
- Assistance in securing start-up capital; Incubators have a proven track record with Venture Capital firms and a reputation to maintain;
- Ability for business owners to act as a support system; Incubators have multiple start-ups and the entrepreneurs can learn and gain experience from each other;
- Networking Activities provide linkages with investors and strategic partners.
Business Incubators offer these services to start-ups at a reduced or subsidized cost. They often also invest a small amount of capital in the businesses they incubate for a small amount of equity. The small businesses take part in incubators because they have no experience in entrepreneurship and have limited capital on their hand. But all the business incubators differ from each other in the type of businesses they accept and the services they offer.
Y-Combinator: It offers more intangible services in the form of guidance and advice and access to capital. They offer almost $150,000 to entrants for an equity stake of 6-12% depending on the company. It has a lot of successful alumni from its program like, Airbnb and DropBox, which is valued at $4 billion.
TechStars: Offers a 12-week intensive mentoring program where it guides and advises the participants. At the end of the program it also has a demo day for the participants in front of a lot of prospective investors.
500 Start-Ups: Has an excellent network of 160 international mentors, and also invests $50,000 in seed money in the accepted participants.
Thus we see that different Business Incubators have different offerings and strategies with which they help new businesses. But there are also problems with the concept of incubation.
Financing: Arranging adequate financing for an incubator is critical, as most incubators are not self-sufficient and don’t become for at least 10 years.
Nature of Incubator: An Incubator can be focused only in one area of expertise, therefore might not be able to help with regards to giving advice and providing the adequate facilities.
Time Limits for Tenants: Most of the times the incubator programs have time limits till when the company can stay with the Incubator. Sometimes they let a company out before it is ready, which eventually leads to the company failing.
Give False Hope: Sometimes incubators take in entrepreneurs who do not have an idea that will work. This might give the entrepreneur false hope that his idea is valid and the company might end up failing.
The key objectives of business incubators are to promote entrepreneurial activity, encourage technology transfer, and stimulate economic development in the local community. Incubators also have other value-added contributions like:
- To reduce start-up costs and early stage operational costs, and risk of doing business by providing a protective environment for start-ups.
- Promote regional technology development policy. Incubators are used as effective policy tools in various countries for reducing unemployment, and new job and venture creation.
- Enhancing University – Industry collaboration via University Incubators.
- Stimulating networking among firms, tenant firms and entrepreneurs can benefit from peer group effects.
- Reversing or preventing brain drain. Israel used incubators to absorb the immigration of 11,000 high-skilled scientists from Russia in the 1990’s. China created “Innovation Parks for Returned Scholars” to attract students and researchers who live abroad.
In these tough times, business incubators are gaining greater popularity here in the United States as communities are looking toward entrepreneurship and small business development to diversify their communities. Increasingly we are seeing communities’ business incubators as part of a larger business incubator network that provides a cohesive, integrated target network to promote economic development goals of a region.