Whether you are in the start-up phase or struggling with growth issues, a business incubator could be just what your small business needs. In this article, we'll look at business incubators and what they can do for you.
What are Business Incubators?
Business incubators are buildings or campuses that early-stage businesses can apply to enter. Depending on the type of business it caters to, a business incubator will usually rent office space, manufacturing equipment and other technology to its clients. An incubator will often have many businesses housed under its roof at once. The purpose of an incubator is to provide an environment where early-stage businesses can get the support they need to "graduate" and move out on their own.
Business incubators may be private or government run, and most are not-for-profit - but that doesn't necessarily mean that they do not charge. Many business incubators have entry criteria as well as ongoing fees that increase over time to encourage their clients to move on. In addition to space and access to equipment, some business incubators offer professional services such as accounting and marketing, as well as having successful entrepreneurs network with their clients and serve as mentors. Some business incubators even network on behalf of clients to find investors who may be able to help with the seed capital needed to take a business to the next level.
The entry requirements for business incubators can vary widely depending on their industry. There are many unofficial business incubators run on a smaller scale by associations and even communities to support local growth, and these often have informal criteria that are much easier to meet. Larger, professionally-managed business incubators usually have a selection process that may require a capital commitment from the business owner as well as other criteria such as a proven level of revenue.
Once in, a business owner will likely be charged a monthly rent - albeit much lower than the market rate for the space, services and equipment he or she now has access to - and may need to pay additional fees if the space will need to be customized. Depending on the specific business area, a business owner may qualify for government grants or funding to get into a business incubator.
Business incubators can give entrepreneurs a laundry list of advantages, including:
Affordable Rent and Scalability
The most obvious advantage is having an affordable space that will allow a business to grow without incurring huge rental or building costs. Many incubators also have the equipment and technology that a young company needs to be able to scale up production, but may not necessarily be able to purchase yet.
Shared Business Services at a Lower Cost
As part of a group of tenants, business owners can share the cost of business essentials such as legal services, accounting and marketing research.
Greater Success in Accessing Commercial and Specialized Non-Commercial Loans
Many incubators will get professional staff to help their tenants work on their financing pitches and organize their business's balance sheet to appeal to banks. Moreover, if the incubator has a good reputation and previous clients have done well by the banks, then banks will be much more willing to work with business owners from that incubator to craft non-commercial loans to fit their business needs.
New Avenues to Investor Financing
Just like banks, venture capitalists and angel investors consider time in business incubators as being a positive factor that influences the long-term viability of a new company. Prestigious incubators often have connections to large pools of venture capital that a business owner can pitch to.
Networking and Mentoring
Being part of a business incubator creates opportunities to meet successful entrepreneurs, financial professionals and retail buyers. Incubators may host events to promote networking and sometimes even arrange for tenants to be mentored by people who have graduated in previous years.
Synergy with Other Tenants
Working alongside people who are also trying to build a business can be a huge advantage to incubator tenants. This gives them a group of peers who understand the challenges and can share good and bad. In the incubator environment, opportunities exist for beneficial exchanges of ideas and concepts. Such opportunities may not be available to entrepreneurs struggling solo with the day-to-day minutiae of running a business.
The Bottom Line
Getting into a business incubator is considered validation for many small to medium-sized businesses. It also opens doors that many small business owners don't otherwise learn about until it is too late. Aside from financing and access to top-of-the-line equipment and technology, the true value of business incubators is the people support they invest in their tenants. Whether that is introducing business owners to a great accountant, a mentor or another tenant struggling with the same growing pains, the networking done within business incubators is consistently listed as their strongest selling point. There are, of course, many businesses that have succeeded without going through an incubator, but if the opportunity is there, it is well worth considering.