- An incubator is designed to help entrepreneurs form their business models from the ground up.
- Incubators are not ideal for all small businesses. Those that have already gained traction might be better suited for an accelerator program.
- Incubator programs vary, but all have the same end goal of launching a fully functioning small business.
- This article is for entrepreneurs who are launching a business and considering an incubator program to help them get started.
You might think of an incubator as a device that helps hatch a chick or keep a newborn baby warm. In the business world, they work in a similar way to keep a new business alive while it finds its niche.
Incubators provide startup companies with office space and a comprehensive menu of professional services and advice. Their intent is to give new businesses and startups a leg up on success. So, are incubators as good for businesses as they are for babies? The results speak for themselves.
“There is a significant increase in the rate of success for businesses if they start out in incubators,” said Tracy Kitts, former COO of the National Business Incubation Association – now the International Business Innovation Association (INBIA), a global nonprofit with 1,200 members in 30 countries. The association estimates there are currently 1,400 incubators operating in the United States.
After five years, businesses that were nurtured in a business incubator have a survival rate of 87%, Kitts said. By comparison, the survival rate for companies that go it alone without the benefits of incubator support is 44%.
Incubators aren’t the only option for nurturing your new business, but they are a great option – especially for entrepreneurs who haven’t quite nailed down their business model yet, but are starting to form some solid ideas.
The makings of an incubator
Several things distinguish business incubators from other economic development programs:
- They have a selection process that primarily focuses on new businesses.
- They offer a comprehensive list of business services and manage the delivery of those services onsite.
- There is a graduation process with metrics and benchmarks, because companies in these programs are expected to move up and on.
Good candidates, Kitts said, have success potential and the ability to scale up and grow. Significantly, he said, incubators only accept entrepreneurs who will accept help.
“We like to make sure they’re coachable,” said Megan Reichert, former director of the University of Toledo Clean and Alternative Energy Incubator. “We look at the robustness of their staff.” [Related article: Shared Leadership: How Modern Businesses Run Themselves]
Difference between incubators and accelerators
According to the INBIA, an incubator is “a business support process that accelerates the successful development of startup and fledgling companies by providing entrepreneurs with an array of targeted resources and services. These services are usually developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts.”
Accelerators are interested in achieving the same goal of improving the odds of success for startups, but these programs achieve that goal in very different ways. First, accelerators generally make an investment in the companies enrolled in their programs. Accelerators also differ from incubators in the time companies spend in the program. Accelerator programs are designed to be concise and generally take three to four months to complete. The Entrepreneurs Roundtable Accelerator (ERA), for example, is a four-month program.
Like incubators, accelerators exist for all different industries and interests.
FYI: Have you considered every cost that your startup might incur? Learn some of the most common costs in starting a business.
When to apply to an incubator
Incubators are generally not designed for growth and scale. Instead, they are designed to foster and support businesses that are developing. They are meant to nurture entrepreneurs and help them hone their business idea. Therefore, an incubator is better suited for those who are early in the entrepreneurial process – specifically smaller startups. If your growth plan is still not clear, opt for the incubator.
An incubator is not the best option for fast-growing startups and already well-established ones. Typically, if a business already has a minimum viable product and some traction in the market, they will not be accepted to an incubator program. Instead, an accelerator is going to provide more value. The typical applicant is in the early stages of business development and has either just launched or is getting ready to do so. However, there are numerous programs designed specifically for companies that have overcome the initial hurdles of starting up and want to take their business to the next level.
Tip: Test your new business idea before you launch to ensure the best chance for success.
Generally, the services offered to startups include a full range of shared office services such as communications, network infrastructure, furniture and other facilities. Even more important are the business advisory services, coaching and access to a network of other entrepreneurs.
Incubators typically work with a cluster of companies, generally around 23 or 24, Kitts said. They tend to be open to working with various types of businesses, but there is a degree of specialization. Ohio’s celebrated Youngstown Business Incubator (YBI), for example, focuses exclusively on tech-related companies.
YBI focused on information technology (IT) because it was seen as a core competency that could be easily developed in the Youngstown area. IT is characterized by being fast to market and fast to fail, with little in the way of physical requirements. IT, for example, doesn’t require the expensive labs needed to launch other technology industries such as life sciences. And it’s a platform technology – a technology building block that can be used across all industries.
“I’ve seen the incubation model applied to myriad business types and it can be adapted,” Kitts said. “Of course, certain incubation programs are more well equipped than others to handle particular types of businesses. Some businesses have very specific needs. For example, a food business moving into an incubator that has only office space might not be appropriate.”
One of the unsung but more significant services incubators provides, he said, is hand-holding. There is a lot of interpersonal coaching.
“When you start up a business, it affects every aspect of your life,” Kitts said. “Starting a business is a risky adventure.”
David Cotriss, David Mielach and Nicole Fallon contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.