Business Incubation Frequently Asking Questions

(adapted from National Business Incubation Association - NBIA)

 

What are business incubators?

Business incubators nurture the development of entrepreneurial companies, helping them survive and grow during the start-up period, when they are most vulnerable.

Business incubators provide their client companies with business support services and resources tailored to young firms. These services and resources include management guidance, assistance with business planning, and help obtaining financing. Incubators typically also offer companies rental space with flexible leases, shared basic office services and access to equipment - all under one roof. The main goal of most business incubation programs is to produce companies that create jobs and wealth in their communities.

 

Is business incubation a new industry?

No. The term "business incubator" gained popularity in the media with the explosion and subsequent demise of so-called Internet incubators between 1999 and 2001, but the business incubation model traces its beginnings to the late 1950s.

 

How many business incubators are there?

Today, there are about 1,500 business incubators in North America, up from only 12 in 1980. There are about 4,000 business incubators worldwide. The incubation model has been adapted to meet a variety of needs, from fostering commercialization of university technologies to increasing employment in economically distressed communities to serving as an investment vehicle.

 

What are the different types of business incubators?

Incubation programs come in many shapes and sizes and serve a variety of communities and markets:

• Most North American business incubators (about 90 percent) are nonprofit organizations focused on economic development. About 10 percent of North American incubators are for-profit entities, usually set up to obtain returns on shareholders investments

• 47 percent are "mixed-use," assisting a range of early-stage companies

• 37 percent focus on technology businesses

• 7 percent serve manufacturing firms

• 6 percent focus on service businesses

• 3 percent concentrate on community-revitalization projects or serve niche markets

• 44 percent of business incubators draw their clients from urban areas, 31 percent from rural areas and 16 percent from suburban areas. Nearly a tenth (9 percent) of all programs draw clients from outside their region or from outside the United States

Who sponsors business incubators?

Incubator sponsors - organizations or individuals who support an incubation program financially - may serve as an incubator's parent or host organization or may simply make financial contributions to the incubator.

• About 25 percent of North American business incubators are sponsored by academic institutions

• 16 percent are sponsored by government entities

• 15 percent are sponsored by economic development organizations

• 10 percent are sponsored by for-profit entities

• 10 percent are sponsored by other types of organizations

• About 5 percent of business incubators are "hybrids" with more than one sponsor

• 19 percent of incubators have no sponsor or host organization

• Almost 60 percent of business incubators either exist without subsidy or could exist without current subsidies if the subsidies ceased

What makes a business incubator successful?

To lay the groundwork for a successful incubation program, incubator developers must first invest time and money in a feasibility study. An effective feasibility study will help determine whether the proposed project has a solid market, a sound financial base and strong community support - all critical factors in an incubator's success. Once established, model business incubation programs commit to industry best practices such as structuring for financial sustainability, recruiting and appropriately compensating management with company­growing skills, building an effective board of directors, and prioritizing management time to place the greatest emphasis on client assistance.

 

How do incubators help start-ups get funding?

Incubators help client companies secure capital in a number of ways:

• Managing in-house and revolving loan and microloan funds

• Connecting companies with angel investors (high-net-worth individual investors)

• Working with companies to perfect venture capital presentations and connecting them to venture capitalists

• Assisting companies in applying for loans

How do incubators contribute to local and regional economies?

Incubator graduates create jobs, revitalize neighborhoods and commercialize new technologies, thus strengthening local, regional and even national economies.

• NBIA estimates that North American incubator client and graduate companies have created about half a million jobs since 1980. That is enough jobs to employ every person living in Denver, Colorado

• Every 50 jobs created by an incubator client generate approximately 25 more jobs in the same community

• In 2001 alone, North American incubators assisted more than 35,000 start-up companies that provided full-time employment for nearly 82,000 workers and generated annual earnings of more than $7 billion

• Business incubators reduce the risk of small business failures. Historically, NBIA member incubators have reported that 87 percent of all firms that have graduated from their incubators are still in business

Why are business incubators worthy of government subsidies?

Government subsidies for well-managed business incubation programs represent strong investments in local and regional economies. Consider these returns:

• Research has shown that for every $1 of estimated public investment provided the incubator, clients and graduates of NBIA member incubators generate approximately $30 in local tax revenue alone

•  NBIA members have reported .that 84 percent of incubator graduates stay in their communities and continue to provide a return to their investors

• Publicly supported incubators create jobs at a cost of about $1,100 each, whereas other publicly supported job creation mechanisms cost more than $10,000 per job created

Do business incubators that receive local funding and/or tax abatements compete unfairly with local landlords?

No. Business incubators actually contribute to the long-term viability of the local real estate market. Incubation programs graduate strong and self-supporting companies into their communities, where these companies build, purchase or rent space. Because incubated companies are more likely to succeed than nonincubated firms, landlords of incubator graduates face far less risk than they otherwise would. Also, while they're in the start-up phase, incubator client companies can obtain flexible space and leases that are more appropriate to their stage of growth than they could on the commercial market.

 

How do business incubators differ from research parks?

Research parks (sometimes called science parks or technology parks) are property-based ventures consisting of research and development facilities for technology- and science-based companies. Research parks often promote community economic development and technology transfer. They tend to be larger-scale projects than business incubators, often spanning many acres or miles. Research parks house everything from corporate, government, and university labs to big and small companies. Unlike business incubators, research parks do not offer comprehensive programs of business assistance. However, an important component of some research parks is a business incubator focused on early-stage companies.

 

How do business incubators differ from SBDCs?

The U.S. Small Business Administration administers the Small Business Development Center (SBDC) program to provide general business assistance to current and prospective small business owners. SBDCs (and similar programs) differ from business incubators in that they do not specifically target early-stage companies; they often serve small businesses at any stage of development. Some business incubators partner and share management with SBDCs to avoid duplicating business assistance services in a region.

 

How do business incubators differ from business accelerators?

People sometimes use the term business accelerator as another term for business incubator in an attempt to differentiate themselves in the market. During the dot-com boom that occurred around 2000, numerous terms like "accelerator" emerged to describe business incubation programs. In the current market, many of these terms have fallen away, but accelerator remains a relatively popular term to describe business incubation programs.