What Are Business Incubators?

Definition & Examples of Business Incubators

Deducting Business Startup Coss
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Business incubators are organizations that offer a collaborative work environment for entrepreneurs to nurture and guide them from startup to independence. Some incubators provide funding, classes, and workshops, while others allow startups to use in-house services—such as their law and accounting departments, or their research and development division—that might be too costly for a young business.

The startup world can be tricky to navigate, and many emerging companies are prone to failure because they don't have the horsepower to bring their ideas and products to fruition. In order to succeed, startups need more than just a great idea. They need ongoing funding, business development, market research, and a viable business plan.

Business incubators help turn ideas into viable businesses. Here’s how they work and what you should consider if you are thinking about using an incubator.

What Are Business Incubators? 

Business incubators are establishments that specialize in helping startups get going. They use their considerable financial and industry powers to help new businesses with funding, provide networks, and coaching; some even offer their administrative, accounting, legal, or other departments to help newcomers grow their business.

Incubators offer several other services and amenities. These include physical working spaces, proof of concept, market testing, business setup, and manufactured products or software assistance.

For instance, if you had a new tech idea that required more than one programmer or multiple language and platform skills, an incubator could assist by providing a team to help bring the new technology or software to life much faster and more efficiently than a single coder and maker could do on their own.

Most business incubators are nonprofit organizations set up to give startups a head start. State governments, universities, business people, venture capitalists, and others come together to help launch successful businesses. 

How Do Business Incubators Work?

Incubators are often funded by investors, foundational or government grants, donations, or the rent or membership fees they collect from participants. Similar paid services are called business accelerators. Any business can contract a business accelerator to help develop new products or start a new business. 

Business incubators offer access to resources that you are unlikely to get anywhere else. Venture capitalists may be connected to the organization, and skills development programs can help you learn new techniques or practices. Mentors can serve as a sounding board and help you stay on track. Furthermore, being surrounded by like-minded and experienced individuals can spark new ideas and help you develop your relationships and network. 

There is one drawback that comes along with all of these benefits: oversight. Meetings, mentorship, and collaboration can break your focus or send you down rabbit holes of side suggestions.

Before you look for a business incubator, make sure your idea is well-developed. Input from different sources may help you refine your idea and make it better, or it may muddy the waters until your original plan is lost in the murk. 

Types of Business Incubators

There are many different types of incubators available. Generally, they offer assistance to those in the industries they specialize in, or in the area they are attempting to make a difference in.

Incubators can specialize in these areas:

  • Social issues
  • Aging and quality of life enhancements
  • Education
  • Energy
  • Health
  • Artists and makers
  • Fashion
  • Technology

For example, Global Development Incubator (GDI) works to develop ventures in social development issues by providing inside and outside experts to help entrepreneurs build their organizations from the ground up.

The U.S. Small Business Administration (SBA) has set up resources from governmental agencies for entrepreneurs looking for research assistance. The SBA offers programs through eleven government agencies called the Small Business Innovation Research (SIBR) and the Small Business Technology Transfer Research (SBTTR). These agencies are required to set aside part of their research and development (R&D) funding to help startups that cannot afford the costs of R&D. The SBA also provides information for you to find assistance in your local area.

There are several other state organizations to check out, including:

Business Incubator Selection

Incubators are not created equal. Some offer far more than others, and some cost a lot more. Consider these criteria to help you narrow down your selection.

Considerations For Incubators
Consideration Description
Location You may need to be local to receive assistance, or be willing to relocate temporarily.
Amenities and Perks Before you commit, make sure you know what they have to offer.
Specialized Equipment Make sure they have what you need—modeling software, 3D printers, prototyping equipment, or software development labs to help you develop and test your concepts. 
Mentorship The mentors and advisors should have the skills and expertise to match your needs. 
Curriculum Make sure the development programs are in line with your needs. 
Track Record Most incubators list companies they helped launch. Look to see if they remained successful.
Cost

Incubators may offer low-cost or free membership, and some even pay you seed money up front.

Popular Business Incubators

At Y Combinator, you submit your business idea and the venture fund chooses a group of companies for an intensive three-month program. You don’t pay anything upfront. In fact, the organization invests in your idea, offering seed money for you to live on while you get your business up and running. In exchange, the fund retains a small stake in your company.

Founders are expected to move to the Bay Area for the duration of the program to participate in person. Y Combinator has an impressive track record—past participants include Airbnb, DropBox, Instacart, Zapier, and DoorDash.

Meanwhile, 500 Startups charges $37,500 per company to participate, but you won’t have to pay it upfront. The venture fund and accelerator offer each business a seed investment of $150,000, and the fee can be deducted from the seed money, leaving you $112,500 in funding.

Key Takeaways

Business incubators can help your business grow through funding, mentorship, network establishment, and training. There are many incubators to choose from, so you should understand:

  • Incubators specialize in different industries or methods.
  • Incubators provide industry knowledge and expertise for growing businesses.
  • Some incubators might expect some returns from your business, such as shares or profits.

Article Sources

  1. U.S, Small Business Administration. "Innovation Accelerators: Defining Characteristics Among Startup Assistance Organizations." Accessed June 26, 2020.

  2. Global Development Incubator. "GDI Was Born to Build." Accessed June 26, 2020.

  3. U.S. Small Business Administration. "Office of Capital Access: Resources." Accessed June 26, 2020.

  4. Y Combinator. "Y Combinator Top Companies List - 2019." Accessed June 26, 2020.

  5. 500 Startups. "500 Seed Program Frequently Asked Questions." Accessed June 26, 2020.