Incubators can help hatch a chick or warm a newborn baby. In business, they’re just as useful for hatching business ideas and helping keep new businesses alive while they find their niche.
They provide startup companies with office space and a comprehensive menu of professional services and advice. Their intent is to give new businesses and startups a leg up on success. Are incubators as good for businesses as they are for babies? The results speak for themselves.
“There is a significant increase in the rate of success for businesses if they start out in incubators,” said Tracy Kitts, COO of the National Business Incubation Association (NBIA), a trade association with 1,900 members in 60 countries. The association estimates there are currently 1,400 incubators operating in the United States.
After five years, businesses that were nurtured in a business incubator have a survival rate of 87 percent, Kitts told BusinessNews Daily. By comparison, the survival rate for companies that go it alone without the benefits of incubator support is 44 percent.
Equally important, said Kitts, is that 84 percent of companies that graduate from an incubator stay in the communities where they were incubated. This is significant because most business incubators are supported by local economic development groups. Fewer than 10 percent of these incubators are for-profit organizations and those tend to be run by investor groups that take an equity stake in the companies they’re sponsoring.
“You want these companies to remain in your city and be successful,” Kitts said. “If you create a business from the ground up in your community, they tend to stay. This is supposed to be an economic development engine.”
Since its 1983 launch, Ben Franklin TechVentures, one of the nation’s first incubators, has graduated 47 successful companies that grossed more than $408 million in annual revenue last year, said Laura Eppler, the director of marketing for the Bethlehem, Pa., incubator.
“They have created more than 4,500 jobs and raised $293 million in outside investment capital,” she said.
TechColumbus, an incubator pioneer in Ohio, opened for business in 1984. It has produced a similar economic impact in central Ohio.
“Going back to 2004, we have invested $14 million in 84 companies that have generated $317 million in capital,” said Will Indest, vice president of venture development. “That has created 1,038 jobs with an average salary of $64,305.”
The makings of an incubator
There are several things that distinguish business incubators from other economic development programs.
- They have a selection process that primarily focuses on new businesses.
- They offer a comprehensive list of business services and manage the delivery of those services on site.
- There is a graduation process with metrics and benchmarks because companies in these programs are expected to move up and on.
The incubation tenure for IT companies at TechColumbus, for example, is usually under two years. Life science companies, on the other hand, stay an average of five years, Indest said.
Good candidates, Kitts said, have success potential and the ability to scale up and grow. Significantly, he said, incubators will only accept entrepreneurs who will accept help.
“We like to make sure they’re coachable,” said Megan Reichert, director of the University of Toledo Clean and Alternative Energy Incubator, a five-year-old operation in Toledo, Ohio. “We look at the robustness of their staff.”
Looking for those who can grow
Incubators also try to identify weaknesses or gaps in necessary skills. Sometimes people apply who have a great idea, Reichert told BusinessNewsDaily, but don’t have all the expertise needed to make it viable.
“Sometimes it’s a great technologist who needs some management assistance,” she said.
“They may know the market better than anyone else and they may know the product better than anyone else, but they don’t know how to run a company,” Kitts added.
The key ingredients are space and services. The space is not a handout; the companies are generally asked to pay for their space. There are some virtual programs out there, he said, but most do provide space.
“You don’t want to be the low-rent alternative,” Kitts said. “We recommend that people pay market rate or slightly above. We want it to be about the services.”
“We feel very strongly about market-rate rent,” Reichert said.
Like a university, Kitts said, business incubators are about more than bricks and mortar; they are a hub for entrepreneur support.
“Any damn thing they need,” he quipped.
Full-service incubators
Generally, the services offered to startups include a full range of shared office services such as communications and network infrastructure, furniture and other facilities. More important, though, are the business advisory services, coaching and access to a network of other entrepreneurs.
Incubators typically work with a cluster of companies, generally around 23 or 24, Kitts said. They tend to be agnostic when it comes to the type of businesses they work with, but there is a degree of specialization. Ohio’s celebrated Youngstown Business Incubator (YBI), for example, focuses exclusively on tech-related companies.
YBI focused on information technology (IT) because it was seen as a core competency that could be easily developed in the Youngstown area. IT is characterized by being fast to market/fast to fail with little in the way of physical requirements. IT, for example, doesn’t require the expensive labs needed to launch other technology industries such as life sciences. And it’s a platform technology — a technology building block that can be used across all industries.
What IT needs, said Julie Michael Smith, YBI’s chief development officer, is access to computers, wireless connectivity and human capital. And a good idea. YBI looks at prospective candidates for its incubator to see if they have scalable, proprietary technology. That technology doesn’t have to be revolutionary, though — evolutionary can work just as well.
“One of our biggest successes to date has been Turing Technologies, which develops audience-response hardware and software. The idea wasn’t new. They basically built a better mousetrap. We work with companies from the imagining stage to the growth and sustainability stage.”
“I’ve seen the incubation model applied to myriad business types and it can be adapted,” Kitts said. “Of course, certain incubation programs are more well-equipped than others to handle particular types of businesses. Some businesses have very specific needs. For example, a food business moving into an incubator that has only office space might not be appropriate.”
One of the unsung but more significant services incubators provides, he said, is hand-holding. There is a lot of interpersonal coaching.
“When you start up a business, it affects every aspect of your life,” Kitts said. “Starting a business is a risky adventure.”