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What is a Startup Incubator?

Is startup incubation a new industry?

No. The term “startup 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 startup incubators are there?

As of October 2014, there were over 1,250 incubators in the United States, up from only 12 in 1980. There are probably about 7,000 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 startup incubators?

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

  • ∙ Most North American business incubators (about 93 percent) are non-profit organizations focused on economic development.
  • ∙ About 7 percent of North American incubators are for-profit entities, usually set up to obtain returns on shareholders investments.
  • ∙ 54 percent are “mixed-use,” assisting a range of early-stage companies.
  • ∙ 37 percent focus on technology businesses.
  • ∙ About 6 percent focus on service businesses, serve niche markets or assist other types of businesses.
  • ∙ 3 percent serve manufacturing firms.
  • ∙ About 47 percent of business incubators operate in urban areas, 28 percent operate in rural areas and about 25 percent operate in suburban areas.1

Who sponsors startup 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 32 percent of North American business incubators are sponsored by academic institutions.
  • ∙ 25 percent are sponsored by economic development organizations.
  • ∙ 16 percent are sponsored by government entities.
  • ∙ 4 percent are sponsored by other types of organizations.
  • ∙ 4 percent of business incubators are “hybrids” with more than one sponsor.
  • ∙ 4 percent are sponsored by for-profit entities.
  • ∙ 15 percent of incubators have no sponsor or host organization.2

What makes a startup 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 startup incubation programs commit to industry best practices such as structuring for financial sustainability, recruiting and appropriately compensating management with company-growing skills, building an effective board of directors, and placing 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 neighbourhoods and commercialize new technologies, thus strengthening local, regional and even national economies.

NBIA (National Business Incubation Association) estimates that in 2011 alone, North American incubators assisted about 49,000 start-up companies that provided full-time employment for nearly 200,000 workers and generated annual revenue of almost $15 billion.3

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.4

Why are startup incubators worthy of government subsidies?

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

Research has shown that for every $1 of estimated public operating subsidy provided the incubator, clients and graduates of NBIA member incubators generate approximately $30 in local tax revenue alone.5

NBIA members have reported that 84 percent of incubator graduates stay in their communities.6

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

No. Startup 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 non incubated 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 startup 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 startup incubators, often spanning many acres or miles. Research parks house everything from corporate, government, and university labs to big and small companies. Unlike startup 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 startup incubators differ from co-working spaces?

Coworking spaces offer a gathering point for independent contractors and freelancers who want to eliminate the isolation of working from home or wish to collaborate with other freelancers. Some may also offer networking opportunities and basic technical assistance. While the primary value of co-working is the interaction with other professionals, the primary value of an incubation program is its mix of business assistance services specifically targeted to emerging companies. Those services generally extend well beyond networking and basic technical assistance.

How do startup incubators differ from accelerators?

People sometimes use the term startup accelerator as another term for startup 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 startup incubation programmes. In the current market, many of these terms have fallen away, but accelerator remains a relatively popular term to describe startup incubation programmes.

  1. 2012 State of the Business Incubation Industry.
  2. 2012 State of the Business Incubation Industry.
  3. 2012 State of the Business Incubation Industry.
  4. Business Incubation Works.
  5. Extrapolated from data in Business Incubation Works.
  6. Business Incubation Works.
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