Real Small Business: Building Your Business

Incubator FAQs

From the Editors of Real Small Business

Business incubators -- organizations that help with the development and commercialization of startups -- have emerged as an important resource for fast-growth businesses seeking financing. Below are answers to some of the most common questions about incubation:

What is a business incubator?

Business incubation is a form of business enterprise development. As the name suggests, business incubators nurture young firms through their vulnerable startup phase. They do so by providing access to a range of services that include:

Management assistance Access to financing Marketing and branding assistance Financial/accounting services Legal counsel Business development assistance Recruiting services Links to strategic partners Networking Training

In many cases, a number of incubating companies will operate under the same roof, which lets them share office services, conference rooms, access to equipment, and other necessary services. Once a company is ready to stand on its own feet -- i.e. when it is financially viable -- it leaves the incubator and begins life on its own.

How do business incubators work in the Internet world?

Driven by companies such as Idealab and Divine Interventures, Internet startup incubation has become popular recently. These incubators are based on the concept that turning an idea into dot-com success requires rapid execution. A Web startup that joins an Internet incubator is given access to that group's network of strategic and financial support services. In many cases, the incubator assigns a management and creative team to the new business in order to get its site up and running in a matter of weeks. In addition, because these incubators focus only on Internet businesses, new startups are able to tap into the skills of more experienced members.

How do incubators choose the businesses they work with?

Like venture capitalists, incubators impose strict selection criteria on their prospects. While some accept a mix of industries, many focus on a single niche like the Internet, technology, or biomedicine. The process for applying to an incubator is similar to getting equity financing. While each incubator has different requirements, in general they will ask you to send a copy of your business plan's executive summary and a slide presentation (often in Microsoft® PowerPoint®). Once they review those materials, they will decide if they want to see your entire business plan. If that interests them, several rounds of interviews may begin.

What are the plusses and minuses to business incubators?

Incubators have a number of obvious benefits. They provide structure for many of a company's most basic needs, allowing entrepreneurs to remain focused on developing their ideas. In addition, incubators are often able to attract resources that members could not attract independently. Incubators also often have relationships with venture capital firms, providing a strong entrèe for later rounds of financing.

On the downside, because they provide more services than typical equity outlets, for-profit incubators often demand more in return. This means you may have to give up a greater share of ownership for less funding. In addition, many entrepreneurs -- particularly those with previous startup experience -- feel that the structure of an incubator takes away their freedom to choose their team and outside consultants.

Are incubators and venture capitalists (VCs) the same?

Technically, no. However, there is an increasing amount of overlap between services offered by incubators and VCs in the fast-growth startup arena. This is because VCs often see startups that need a significant amount of handholding and management assistance. Rather than pass on a potentially profitable venture, the VC may provide limited assistance and resources. Some VCs, in fact, have started specific funds that use an incubation model for seed and first-round financing.