Startup incubation is a booming industry, with new ones popping up every few weeks. “Startup incubators”, also labeled as “startup accelerators”, have become the ultimate way to nurture and grow start-ups in this internet economy. They offer fledgling companies a number of benefits – office space, funding, and basic services such as recruiting, accounting, and legal – usually in exchange for an equity stake.
But are incubators a fleeting phenomenon, born out of an over exuberant stock market, or are they truly a valuable and enduring way of bringing start-ups to fruition?
Hopefully by the end of this article each of us can draw our own conclusion.
Traditionally, the process of starting a business always begins by formulating an idea for the business, writing a business plan, securing funding and scouting for locations. After taking these steps a business can be considered well under way. In all likelihood, there is very little to no guidance by a professional to getting started; contacts and networking are happenstance. A start-up that is supported by an incubator has the same processes to go through. The advantage, however, is having someone to continuously guide you through the ever-present “next steps.”
Business incubators embody a systematic approach to new enterprise development. The package of services offered by a business incubator is designed to enhance the success and growth rates of new start-ups. They afford start-ups with developmental work, networking, entrepreneurial synergy, flexible and affordable working space and shared office services just to name a few. Some of the high profile incubator exits in the past have been – Reddit, Heroku, AirBnB, Dropbox, DailyBurn, SocialThing and GridBlaze, while there are many more young startups continuing to perfect their products and services and seeking additional funds under the guidance of an incubator.
Choosing the Right Incubator?
Having made the decision to be a part of the ‘Incubator Culture’, a new start-up has to work towards the most important step of ‘choosing the right incubator’. It is imperative that research is done on an incubator to ascertain the advantages it can provide for the industry the new start-up is setting-up business in. The key questions to answer at this point are; ‘what does the business need at this point’ and ‘which aspects of it are negotiable’ is critical in deciding which incubator is right. It would definitely not be beneficial to the success of the start-up to locate a business in an incubator that cannot provide the necessary space and guidance, for the business type.
There many benefits of using an incubator. For one, being nurtured during the growing phase of a start-up’s life cycle helps build a strong foundation. The formative, first three-years of a start-up are crucial to the ongoing success of the company. An incubator provides the necessary “hand holding,” backed by concrete guidance and business expertise to see a new start-up through those years.
Successful incubators provide numerous benefits some of them are listed below:
Incubators enable start-ups to:
- Save on operating costs
- Share the same facilities and overhead expenses (utilities, office equipment rentals, etc)
- Take advantage of lower lease rates
- By referring them to angel investors and venture capitalists
From a start-ups perspective, incubators cut down the time, cost, and hassles of getting up and running.
In addition to financial help, start-ups also need guidance on how to compete successfully with established industry players. Incubators can tap into their network of experienced entrepreneurs and retired executives who could provide the start-ups with:
- Management guidance and operational assistance
- Their services as board members or scientific advisory panel
Another important role played by an incubator is that of a ‘Networking Facilitator’. Through ‘Networking’ an incubator:
- Creates a synergism with the regions start-ups, companies and industries and in turn impacts the region’s economic growth
- Boosts the bottom line through business partnership, for its tenants
The incubator is a place where tenants are constantly encouraged to forge relationships between each other where there are natural fits and will lead to potential working partnerships.
Coaching & Counseling:
Incubators provide host seminars and workshops, as a means of encouraging professional development. These seminars could be on a variety of topics relative to matters that may concern a small start-up.
The close working relationship between an incubators’ start-ups create synergies. The connections and networks established through these relationships enable start-up entrepreneurs to;
- Share ideas on new approaches to old problems
- Plan joint marketing campaigns
- Cooperate on product development initiatives
A well-designed incubator maintains a spirit of entrepreneurship. They ensure that incubatees are free from the strategic, bureaucratic, and organizational impediments that often prevent established enterprises from pursuing risky opportunities.
From an investor’s perspective, working with an incubator can lend the start-up some credibility. They will have better luck securing finance if they have the stamp of approval of the incubator program. Engaging in an incubator’s service demonstrates a start-ups commitment. Working with a reputable incubator can also give a potential investor some idea as to the type of resources and assistance the start-up has received. This increases their confidence and willingness to invest.
As far as incubators are concerned they need to overcome two pitfalls to live up to their full economic potential – One, they need to provide real value, not just office space. Only those incubators are considered “real” that help entrepreneurs achieve, a validated market opportunity with customers willing to pay for a product or a service; and a product or service that addresses such an opportunity; Two, incubators need to measure success by ways other than outside funding. Most incubators use funding as a success metric, which is a somewhat flawed criterion.
In reality, majority of the new start-ups should operate as organically grown, self-sustaining businesses – bootstrapped, without external financing. For them the goal should be to achieve customer validation, not financing. Yet if the incubator uses financing as its success metric, it will try to force inexperienced entrepreneurs into an unnecessary financing round. And more often than not, they will fail. If the incubators can stir past these two follies they will certainly be in good standing to be a success story.
As an entrepreneur or a future start-up it is essential to understand that the chosen incubators or accelerators should also have a success story in taking new ventures public. As I had mentioned earlier it is not just enough to give space to set-up shop as such organizations will hardly be able to deliver superior value to the start-ups or investors. Incubators which have mechanisms in place which help tenants to validate businesses, gain reference customers, assist in completing at least a minimum viable product and foster partnerships among start-up teams and other successful firms are the ones here to stay for a very long time.
[quote_right]Don’t move in to the first one you come across![/quote_right]
My advice to all new start-ups would be think hard about whether your business is at a stage where it could benefit from an incubator. And don’t move in to the first one you come across. Shop around and find the one with the services that are the best fit to your new business. Having said that, I would definitely feel comfortable in recommending an incubator to someone who is interested in starting a business. It takes more than an idea, but a true sense of entrepreneurship to start a business. An incubator can help shape that idea into a plan that is viable and profitable.
Looking for startup incubators & accelerators in India? Here’s a comprehensive list for you – 50 Amazing Startup Incubators and Accelerators in India
About The Author – Divya Sampath
Entrepreneurship is the last refuge of a trouble making individual. I consider myself a neophyte at entrepreneurship, someone who has had her tryst with the financial world and now is learning the ropes of business & management all in this lifetime.