DEFINITION of 'Incubator Firm'

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

The 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 informational and research resources via relationships with local universities and government entities

BREAKING DOWN 'Incubator Firm'

An incubator firm that functions for profit will look to gain equity in the company in exchange for their services. Sometimes simple fees are charged at the time of service, but 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.

How Incubator Firms Function

Incubator firms often invite startups to apply for a “class,” which is a cohort of selected companies that will participate in the program. Most programs last several months, though their length and start dates can vary. Some incubator firms host classes on a seasonal basis each year while others follow a looser structure.

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 gather 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.

Many incubator firms will take a stake in the startups that complete their programs and, in turn, will give the companies seed capital. 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.

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