Business Incubators Law and Legal Definition

Business Incubators

As the phrase itself implies, business incubators are programs intended to help small businesses get off the ground. They almost always provide both services and rental space to fledglings. The services typically include administrative help, consulting, and referral. Incubator programs are managed by public and private agencies. According to the National Business Incubation Association (NBIA), around 5,000 incubators were operating around the world in 2006; 1,000 of these were located in North America (http://www.nbia.org/).

In its Web-site article titled "The History of Business Incubation," NBIA names the Batavia Industrial Center (Batavia, NY) as the first incubator, founded in 1959. "But the concept of providing business assistance services to early-stage companies in shared facilities did not catch on with many communities until at least the late 1970s," NBIA reports. "In 1980, approximately 12 business incubators were operating in the United States—all of them in the industrial Northeast, which had been hard-hit by plant closures in the previous decade." Other important influences were promotional efforts by the U.S. Small Business Administration (mid-1980s), a program enacted by the Pennsylvania legislature in 1982, and the efforts of Control Data Corporation (Minneapolis) under the leadership of its founder, William Norris.

NBIA provides a profile of the incubator movement in 2006 on its Web site. Ninety percent of incubators are not-for-profit, the rest are for-profit entities hoping to benefit from start-up growth. Nearly half (47 percent) have a mix of clients; 37 percent focus on technology businesses, 7 percent serve manufacturers, 6 percent serve service organizations, and 3 percent serve niche markets and concentrate on community revitalization projects. Forty-four percent of incubators draw clients from urban, 31 percent from rural, and 16 percent from suburban locations.

The sponsorship of incubators in 2006 was 25 percent academic institutions, 16 percent government agencies, 15 percent economic development agencies, 10 percent for-profit entities, 10 percent other, and 5 percent hybrids. The remainder had no formal host or sponsor.

ADVANTAGES OF INCUBATORS

Given the myriad advantages associated with membership in an incubator program, small business consultants often counsel their clients to at least investigate the possibility of securing a spot in one. Strengths of incubators include the following:

Shared Basic Operating Costs

Tenants in a business incubator share a wide range of overhead costs, including utilities, office equipment, computer services, conference rooms, laboratories, and receptionist services. In addition, basic rent costs are usually below normal for the region in which the fledgling business is operating, which allows entrepreneurs to realize additional savings. It is worth noting, however, that incubators do not allow tenants to remain in the program forever; most lease agreements at incubator facilities run for three years, with some programs offering one or two one-year renewal options.

Consulting and Administrative Assistance

Incubator managers and staff members can often provide insightful advice and/or information on a broad spectrum of business issues, from marketing to business expansion financing. Small business owners should remember that the people that are responsible for overseeing the incubator program are usually quite knowledgeable about various aspects of the business world. They are a resource that should be fully utilized.

Access to Capital

Many business incubators help entrepreneurs acquire capital by means of revolving loan and micro-loan funds, according to NBIA. They link businesses to investors by referral. They assist entrepreneurs in preparing presentations to venture capitalists, and assist companies in applying for loans. Start-ups are helped in raising capital merely by having been accepted by an incubator program. These programs act as a qualifying filter. Those who are accepted gain legitimacy in the business community.

Universality of Incubator Concept

One of the key advantages of incubators is that the concept works in all communities of all shapes, sizes, demographic segments, and industries. In many cases, the incubator naturally takes on some of the characteristics of the community in which it is located. For example, rural-based incubators may launch companies based on the agriculture present in the area. But whether based in a small town in the Midwest or a large urban area on the West Coast, proponents of incubator programs contend that the small business people in the community would know more about how to start and operate such businesses than major corporations that focus on mass production.

Comradeship of Fellow Entrepreneurs

Many small business owners that have launched successful ventures from incubators cite the presence of fellow entrepreneurs as a key element in their success. They note that by gathering entrepreneurs together under one roof, incubators create a dynamic wherein business owners can 1) provide encouragement to one another in their endeavors; 2) share information on business-related subjects; and 3) establish networks of communication that can serve them well for years to come.

FACTORS TO WEIGH IN CHOOSING AN INCUBATOR

Many incubators have been pivotal in nourishing small businesses to the point where they can make it on their own. But observers note that the programs are not foolproof. Some small businesses fail despite their membership in such programs; incubators themselves sometimes fold, crippled by any number of factors. Entrepreneurs, then, need to recognize that some incubators are better suited to meet their needs than others. Considerations to weigh when choosing an incubator include the following:

  • Is It a True Incubator?—Some office building owners falsely advertise themselves as incubators in order to lure tenants. Entrepreneurs need to study the details of each offer to determine whether such claims are legitimate.
  • Length of Operation—Incubators take some time to establish their reputation in an area unless they are sponsored by a very high-profile corporation or a well-funded government agency.
  • Incubator Leadership—Many analysts contend that entrepreneurs can learn a great deal about the fundamental quality of an incubator program simply by studying the program's leadership. Is the incubator managed by people with backgrounds in business, or by general college or agency administrators? Can the managers provide long-term business plans that show how they intend to guide the incubator to financial independence?
  • Location—Does the incubator's setting adequately address your fledgling company's needs in terms of target market, transportation, competition, and future growth plans?
  • Financing—Is the incubator's financial base a reliable one, or is it on shaky ground?

Entrepreneurs interested in exploring the incubator concept can request information from several sources, including the Small Business Administration, area economic development agencies, area educational institutions, or the National Business Incubation Association.

Would-be small business owners should have a complete business plan in hand before applying for entrance into an incubator program. Most incubators maintain a stringent screening process to ensure that their resources are put to the best possible use.

RECENT INCUBATOR INNOVATIONS

Internet Incubators

"Internet incubators—a for-profit variant of the old-time government- or academic-supported not-for-profit entities—are sprouting up like dandelions in summer," wrote Thea Singer in Inc. As with traditional incubators, Internet versions provide dot-com startups with office space, business information and advice, financial assistance (either directly or by connecting them to potential sources of seed money), and management, accounting, and other infrastructure services. According to Internet incubators, these kinds of assistance can provide entrepreneurs with essential tools to accelerate their all-important "speed-to-market" in the fast-paced Internet economy. The price of membership in an Internet incubator can be steep, however. In return for providing their various services and funding, incubators receive a percentage (anywhere from 5 to more than 50 percent) of the dot-com's equity.

Entrepreneurs who are considering membership in an Internet incubator should study the benefits and drawbacks closely before making a final decision. Potential other sources of funding and assistance should be explored, as well as the level of autonomy that is present in the program. In addition, entrepreneurs should examine whether their e-business is prepared to take advantage of the incubator's ability to accelerate the launch process. Analysts note that speed-to-market is of little benefit if you do not have a complete, focused business plan in place. Finally, entrepreneurs need to objectively weigh whether increased speed-to-market is worth giving up a piece of the company.

Internalized Business Incubators

Another recent wrinkle in incubator creation has emerged in the corporate world in recent years. Weary of mass defections of valuable employees who decide to launch entrepreneurial ventures of their own, some companies have established business incubators within their own corporate structures. In these programs, employees can use the company's resources (including their already established name and reputation) to build and promote their own new business ideas. "The company will provide the management guidance, infrastructure, and financial support to 'incubate' these ventures," explained David Cutbill in Los Angeles Business Journal. "The outcome is a clear win-win. Existing companies stem the hemorrhaging of top talent to Internet start-ups, while profiting from the high multiples investors are willing to pay for a share in Internet ventures…. And entrepreneurial employees get the challenge—and the profits—of creating their own 'companies' with little of the risk they would face on their own."

BIBLIOGRAPHY

Brandt, Jerry. "To Incubate or Not to Incubate, That is the Question." Los Angeles Business Journal. 27 March 2000.

Cutbill, David. "Incubators: The Blueprint for New Economy Companies." Los Angeles Business Journal. 27 March 2000.

"Due Diligence Advised in Picking Biz Incubator." Business First-Columbus. 1 September 2000.

"How to Benefit from a Business Incubator." Northern Ontario Business. January 2005.

Krizner, Ken. "Incubators: help startup companies get off the ground." Expansion Management. July 2005.

Singer, Thea. "When It's Time to Market that Matters Most, the Extra Heat of an Incubator can be a Lifesaver." Inc. July 2000.

Temes, Judy. "Incubators Enter Intensive Care." Crain's New York. 6 September 2004.

Totterman, Henrik and Jan Sten. "Start-Ups: Business Incubation and Social Capital." International Small Business Journal. October 2005.

Trask, Mike, "Business Incubators Form Association to Increase Awareness." Daily Record. 19 November 2005.

Watson, Stuart. "Organic Growth." Property Week. 17 June 2005.

Hillstrom, Northern Lights

updated by Magee, ECDI