What Is an Incubator Firm?

An incubator firm is an organization engaged in the business of fostering early-stage companies through the different developmental phases until the companies have sufficient financial, human, and physical resources to function on their own.

Key Takeaways

  • An incubator firm helps grow a startup from an early-stage idea to a company that can stand on its own.
  • Services provided by incubators include office space, administrative functions, education and mentorship, access to investors and capital, and idea generation.
  • Incubators either charge a fee for their services or take an equity stake in the startup.
  • The period of incubation can last from a few months to several years.

Understanding an Incubator Firm

An incubator firm can be either a non-profit or a for-profit entity, and it can provide assistance via any or all of the following methods:

  • Access to financial capital through relationships with financial partners 
  • Access to experienced business consultants and management-level executives
  • Access to physical location space and business hardware or software
  • Access to information and research resources via relationships with local universities and government entities

It's important to note that incubators are different than accelerators. Though they both have similar characteristics, each functions in a different way with slightly different goals. Incubators focus on companies that are just starting to develop their idea into a business while accelerators take startups with an established business model and accelerate their time to market.

Characteristics of an Incubator Firm

There are many different types of incubators and each of them has its own profile. Incubators can take the form of business incubators, research incubators, academic incubators, or venture capitalist incubators. Though they all operate with the same principle idea, of helping small firms grow, they function differently in how they raise capital, the length of their incubation period, and the type of payment they receive for providing their incubation services.

Fee Setup

Incubators focus on early-stage startups that do not have a business model in place. They help nurture a startup by developing its strong idea into a viable product and are commonly referred to as a school for startups. Incubators typically work on a fee-basis as opposed to taking an equity stake in the startup. This is when incubators are funded by institutions, such as universities, or municipal organizations.

However, for-profit incubators will look to gain equity in the company in exchange for their services or seed capital. Gaining equity in an early-stage company with strong growth prospects is the ultimate goal – and one that can provide a financial windfall for the incubator firm if the early-stage company takes off. Equity stakes in startups, however, are more commonly associated with accelerators rather than incubators.

Time Frames and Services

Incubators work on an open-ended time frame. There is no set schedule or period in which they deem a startup is ready to launch. They create an environment in a co-working space for an exchange of ideas with a multitude of selected companies that all share in overhead costs, which helps foster collaboration and the growth of relationships with like-minded individuals.

The startups chosen for the incubator program can expect to work with advisors and mentors who will offer their experience in the business world to help address questions and dilemmas they face. Incubator firms might put these startups through classroom-style sessions, wherein the teams must perform tasks such as gathering feedback from potential customers about their product.

Throughout the incubator process, the startups will be pushed to improve their ideas and learn how to convey their plans to customers and potential investors alike. It is not uncommon for startups to pivot during an incubator program after conferring with seasoned experts and testing their product or service with the public.

At the end of a cohort’s program, the startups will often present their business plans at a demo day session. Such an event brings together potential investors and other entrepreneurs who may wish to collaborate with or back the development of the startup.