A business incubator is an organization that helps startup companies and individual entrepreneurs to develop their businesses by providing a fullscale range of services, starting with management training and office space, and ending with venture capital financing.[1] The National Business Incubation Association (NBIA) defines business incubators as a catalyst tool for either regional or national economic development. NBIA categorizes its members' incubators by the following five incubator types: academic institutions; non-profit development corporations; for-profit property development ventures; venture capital firms, and a combination of the above.[2]
Business incubators differ from research and technology parks in their dedication to startup and early-stage companies. Research and technology parks, on the other hand, tend to be large-scale projects that house everything from corporate, government, or university labs to very small companies. Most research and technology parks do not offer business assistance services, which are the hallmark of a business incubation program. However, many research and technology parks house incubation programs.[3]
Incubators also differ from the U.S. Small Business Administration's Small Business Development Centers (and similar business support programs) in that they serve only selected clients. Congress created the Small Business Administration in the Small Business Act of July 30, 1953. Its purpose is to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." In addition, the charter ensures that small businesses receive a "fair proportion" of any government contracts and sales of surplus property.[4] SBDCs work with any small businesses at any stage of development, and not only with startup companies. Many business incubation programs partner with their local SBDC to create a "one-stop shop" for entrepreneurial support.[5]
Within European Union countries, there are different EU and state funded programs that offer support in form of consulting, mentoring, prototype creation, and other services and co-funding for them.[6]
In India, the business incubators are promoted in a varied fashion: as technology business incubators (TBI) and as startup incubators—the first deals with technology business (mostly, consultancy and promoting technology related businesses) and the later deals with promoting startups (with more emphasis on establishing new companies, scaling the businesses, prototyping, patenting, and so forth).[7][8][9][10][11]
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The formal concept of business incubation began in the US in 1959 when Joseph L. Mancuso opened the Batavia Industrial Center in a Batavia, New York, warehouse.[12] Incubation expanded in the U.S. in the 1980s and spread to the UK and Europe through various related forms (e.g. innovation centres, pépinières d'entreprises, technopoles/science parks).
The U.S.-based International Business Innovation Association estimates that there are about 7,000 incubators worldwide. A study funded by the European Commission in 2002 identified around 900 incubation environments in Western Europe.[13] As of October 2006, there were more than 1,400 incubators in North America, up from only 12 in 1980. Her Majesty's Treasury identified around 25 incubation environments in the UK in 1997; by 2005, UKBI identified around 270 incubation environments across the country. In 2005 alone, North American incubation programs assisted more than 27,000 companies that provided employment for more than 100,000 workers and generated annual revenues of $17 billion.[14]
Incubation activity has not been limited to developed countries; incubation environments are now being implemented in developing countries and raising interest for financial support from organizations such as UNIDO and the World Bank.
The first high-tech incubator located in Silicon Valley was Catalyst Technologies started by Nolan Bushnell after he left Atari. "My idea was that I would fund [the businesses] with a key," says Bushnell. "And the key would fit a lock in a building. In the building would be a desk and chair, and down the hall would be a Xerox machine. They would sign their name 35 times and the company would be incorporated." All the details would be handled: "They'd have a health care plan, their payroll system would be in place, and the books would be set up. So in 15 minutes, they would be in business working on the project."[15]
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Since startup companies lack many resources, experience and networks, incubators provide services which helps them get through initial hurdles in starting up a business. These hurdles include space, funding, legal, accounting, computer services and other prerequisites to running the business.
According to the Small Business Administration's website, their mission provides small businesses with four main services. These services are:
Among the most common incubator services are:[14]
There are a number of business incubators that have focused on particular industries or on a particular business model, earning them their own name.
More than half of all business incubation programs are "mixed-use" projects, meaning they work with clients from a variety of industries. Technology incubators account for 39% of incubation programs.[14]
One example of a specialized type of incubator is a bio incubator. Bioincubators specialize in supporting life science-based startup companies. Entrepreneurs with feasible projects in life sciences are selected and admitted to these programs.
Unlike many business assistance programs, business incubators do not serve any and all companies. Entrepreneurs who wish to enter a business incubation program must apply for admission. Acceptance criteria vary from program to program, but in general only those with feasible business ideas and a workable business plan are admitted.[19] It is this factor that makes it difficult to compare the success rates of incubated companies against general business survival statistics.[20]
Although most incubators offer their clients office space and shared administrative services, the heart of a true business incubation program is the services it provides to startup companies. More than half of incubation programs surveyed by the National Business Incubation Association[21] in 2006 reported that they also served affiliate or virtual clients.[14] These companies do not reside in the incubator facility. Affiliate clients may be home-based businesses or early-stage companies that have their own premises but can benefit from incubator services. Virtual clients may be too remote from an incubation facility to participate on site, and so receive counseling and other assistance electronically.
The amount of time a company spends in an incubation program can vary widely depending on a number of factors, including the type of business and the entrepreneur's level of business expertise. Life science and other firms with long research and development cycles require more time in an incubation program than manufacturing or service companies that can immediately produce and bring a product or service to market. On average, incubator clients spend 33 months in a program.[14] Many incubation programs set graduation requirements by development benchmarks, such as company revenues or staffing levels, rather than time.
Business incubation has been identified as a means of meeting a variety of economic and socioeconomic policy needs, which may include job creation, fostering a community's entrepreneurial climate, technology commercialization, diversifying local economies, building or accelerating growth of local industry clusters, business creation and retention, encouraging minority entrepreneurship, identifying potential spin-in or spin-out business opportunities, or community revitalization.[14]
About one-third of business incubation programs are sponsored by economic development organizations. Government entities (such as cities or counties) account for 21% of program sponsors. Another 20% are sponsored by academic institutions, including two- and four-year colleges, universities, and technical colleges.[14] In many countries, incubation programs are funded by regional or national governments as part of an overall economic development strategy. In the United States, however, most incubation programs are independent, community-based and resourced projects. The U.S. Economic Development Administration is a frequent source of funds for developing incubation programs, but once a program is open and operational it typically receives no federal funding; few states offer centralized incubator funding. Rents and/or client fees account for 59% of incubator revenues, followed by service contracts or grants (18%) and cash operating subsidies (15%).[14]
As part of a major effort to address the ongoing economic crisis of the US, legislation was introduced to "reconstitute Project Socrates". The updated version of Socrates supports incubators by enabling users with technology-based facts about the marketplace, competitor maneuvers, potential partners, and technology paths to achieve competitive advantage. Michael Sekora, the original creator and director of Socrates says that a key purpose of Socrates is to assist government economic planners in addressing the economic and socioeconomic issues (see above) with unprecedented speed, efficiency and agility.[22]
Many for-profit or "private" incubation programs were launched in the late 1990s by investors and other for-profit operators seeking to hatch businesses quickly and bring in big payoffs. At the time, NBIA estimated that nearly 30% of all incubation programs were for-profit ventures. In the wake of the dot-com bust, however, many of those programs closed. In NBIA's 2002 State of the Business Incubation survey, only 16% of responding incubators were for-profit programs. By the 2006 SOI, just 6% of respondents were for-profit.[14]
Although some incubation programs (regardless of nonprofit or for-profit status) take equity in client companies, most do not. Only 25% of incubation programs report that they take equity in some or all of their clients.[14]
Incubators often aggregate themselves into networks which are used to share good practices and new methodologies. Europe's European Business and Innovation Centre Network ("EBN")[23] association federates more than 250 European Business and Innovation Centres (EU|BICs) throughout Europe. France has its own national network of technopoles, pre-incubators, and EU|BICs, called RETIS Innovation. This network focuses on internationalizing startups.[citation needed]
Of 1000 incubators across Europe, 500 are situated in Germany. Many of them are organized federally within the ADT (Arbeitsgemeinschaft Deutscher Innovations-, Technologie-, und Gründerzentren e.V.).[24]
San Francisco and Silicon Valley are home to 'founder houses.'[25] These involve a collective of founders sharing an apartment or house while working to get their companies off the ground. Similar to tech/hacker houses in the same area, the founders collaborate to promote one another's success while enjoying the financial benefits of co-living in one of the most expensive regions of the country.[26] These collectives are typically located in San Francisco or near to Stanford University's campus.[27] Many of the founders have dropped out of Stanford University to pursue their careers– in fact, there is a more than a 1 in 10 chance that billion-dollar startups have one or more founders who attended Stanford.[28] In addition to the financial incentives of co-living, founders share investor recommendations, funding strategies, VC contacts, and other elements critical to a startup company's success in its early days.[29] These set-ups allow for largely virtual work, eliminating the burden on new founders to find a physical space for their company.[29] Due to the collaborative nature of these spaces, residents who have failed companies often pivot to taking a high-ranking position at a roommate's company.[25] Collectives such as these build on a legacy set forth by Mark Zuckerberg and Facebook. The house featured in the film The Social Network was a hacker's den rented by Zuckerberg that ultimately gave rise to a tech supergiant.[30] This house and the fortune it gave rise to was well-documented in the 2010 film The Social Network.[31]
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