Incubator Firm: Definition, Overview & Examples

KEY TAKEAWAYS

• An incubator film helps startup businesses to grow from early-stage development to free-standing companies.
• Services that are provided by incubators include administrative functions, office space, and education, among others. 
• Incubators either charge a fee for the services that they provide or they take a stake of equity in the receiving company.
• The incubation period can last anywhere from a few months to a number of years. 

What Is an Incubator Firm?

An incubator is an institution that is involved in helping out early-stage companies. They guide these companies through the many separate phases of development until they have enough physical, human, and financial resources to function independently. 

An incubator firm can either be a for-profit entity or a non-profit entity. It can provide assistance through access to the following things:

• Access to financial capital through close ties with financial partners.
• Access to experienced management-level executives and business consultants.
• Access to physical location space as well as business software and hardware.
• Access to vital information and research resources. This is through relationships with government entities and local universities.

It’s important to note that incubators are different from accelerators. Though they have similar characteristics and goals, they each function differently. Incubators place their focus on startup businesses that are at the beginning stages of developing their ideas into a business. While accelerators take startups with an already established business model and accelerate their development to market. 

Characteristics of an Incubator Firm

There are many different types of incubators and each one of them has its own individual profile. Incubators can take the form of research incubators, business incubators, or incubators focused on venture capitalism, among others.

They all go about their operations with the same main idea and goal – of helping small businesses to grow. However, they have different methods of how they raise capital and the length of the period of incubation. As well as what form of payment they receive for providing their services.

Incubators place their focus on startups that are in the early stages of development. These are businesses that don’t have a business model already securely in place. They help to nurture a startup by identifying and then developing a strong idea into a viable product. For this reason, they are regularly referred to as a school for startups. 

In terms of the fee, incubators tend to work on a fee-basis as opposed to taking a stake of equity in the start-up. Although this differs depending on the type of incubator firm. They tend to be fee-based if they are funded by an institution such as a university, or municipal organization. 

However, these for-profit incubators will often look to gain equity in the company in exchange for either seed capital or their services. Gaining equity in an early-stage company with a strong potential for growth is a strong goal for many firms. And not only that, but it can provide them with a financial windfall if the fledgling company ends up taking off. 

Although equity stakes in startups are more commonly associated with accelerators rather than incubator firms. 

Incubator firms often work on an open-ended time frame. This means that there is no period of time or set schedule in which they deem that a startup is ready to break off on its own. 

They often work by creating an environment in a co-working office space for an exchange of ideas. This is across a multitude of selected startup businesses that all share in the overhead costs. This helps to foster collaboration and the growth of relationships that could aid them in the future. 

Throughout the incubator process, startups will often be pushed to improve their initial ideas and further develop their business plans. This includes learning how to get their plans across to potential investors and customers. 

Once the incubator period has come to an end, the startups will often present their business plans to the institution. The incubator will often invite other entrepreneurs and potential investors to this event who may wish to either collaborate with or financially back the startup. 

Types of an Incubator Firm

When it comes to the types of incubator firms, there are two base categories:

• Non-profit corporations
• For-profit development institutions

Let’s take a closer look at both of these types. 

Non-Profit Corporations

Most incubators run as non-profit institutes. These are typically run by academic institutions, government agencies, NPOs, etc. They are run with the express aim of helping fledgling businesses to become economically viable and stable. 

For-Profit Development Institutions

Some firms will also develop incubator services in order to profit whilst helping startups. This creates an investment opportunity for themselves whilst still providing the help that a young entrepreneur needs. These institutions will often provide investments, funding, and advice in exchange for equity in the business. 

Industry Types of Incubator Firms

There are a number of different business incubators that focus on a particular industry classification. Or they put their focus on a particular type of business model. The focus of each incubator earns them their names. Some common types of incubator firms are as follows:

Virtual Business Incubator

This is an online business incubator. In the 1950s, the original incubator model required startups to set up at the site of the incubator. After the rise of the internet in the 1990s, the virtual model came into existence. 

This allowed companies to receive all of the help and advice that incubators provided. But they didn’t need to physically be with the incubator firm. This was a major step forward for entrepreneurs who wanted to stay on their own site whilst still receiving advice. 

Kitchen Incubator

A kitchen incubator is focused on the food industry. Specialty foods are typically very low production, but high value – starting a commercial kitchen from scratch is a huge investment. The average food industry entrepreneur needs a large amount of capital before they can even start making their product, so they typically won’t make a profit for a long time. 

Kitchen incubators can help give culinary entrepreneurs a leg up. Allowing them the opportunity to use low-cost kitchen equipment and space. They also help to encourage profits by aiding in marketing, packaging, and selling their products. 

Public Incubator

This is an incubator that is focused on the public. They provide social entrepreneurs with the tools that they need to expand their businesses. Typical public businesses would include charities, which need help as many of them don’t run for profit. They, therefore, need more business savvy in order to survive. 

Medical Incubator

A medical incubator is a business incubator that is focused on biomaterials and medical devices. This type of incubator will hone in on start-ups that have branched into the medical industry. As medicine is always evolving, growing, and improving, medical businesses always need to be at the forefront of innovation. Therefore this type of incubator is ideal for encouraging entrepreneurship and innovation within the medical field. 

Advantages of an Incubator Firm

There are a number of advantages that incubator firms can bring to startups. Here are some of the main ones:

1. Advisory Services and Mentorship

When you’re starting out in the business world, advice from experienced individuals who have “been there, done that” is invaluable. The mentorship and advice that incubators offer allows the startup’s team to reduce the knowledge gap or the experience needed to make smart decisions.

2. Money and Time-Saver

Startups typically need a large amount of capital to get up and running as well as a decent amount of time. Starting a business can be a time-consuming process, so having an incubator cover either some or all of the services can make a huge difference. 

As the saying goes, time is money, and when incubators can offer both – you are on to a winner. 

3. Access to Industry Mentors and Experts

The final main advantage that incubators bring to startups is the invaluable access to industry experts that would otherwise be near impossible to get access to. 

Incubators tend to specialize in a single particular industry. For example, one incubator may focus on the construction industry while another concentrates on the tech industry. Either way, some incubators will admit companies without any industry restrictions. 

During the incubator process, the company’s management can extensively work with these mentors and advisors to get the required experience to make their company a success. The advice and mentorship that can be gained by an incubator’s connections can be the difference between success and failure. 

Disadvantages of an Incubator Firm

Unfortunately, there are some downsides to incubator firms. Some firms will provide far more value than others. Let’s take a look at some of the more common issues: 

1. Competitive Field

Understandably, many startups apply to become part of an incubator firm’s program. This makes the application process extremely competitive and rigorous. For most incubator firms, an applicant must submit a detailed business plan as well as disclose all of their business activities.

2. Time Commitment

Most incubator programs will require a time commitment of at least one to two years. This is plus adherence to the schedule that is set by the incubator, which often has many workshops and training sessions. Of course, you will learn a lot from these sessions, but you’ll also have to dedicate a huge amount of time to it.

3. Lack of Autonomy

When you’re under an incubator program, you lose a part of the autonomy of your business. An incubator is a professional environment that is investing in your success. Therefore you can’t treat it with anything but the utmost respect and dedication. You’ll also be expected to answer to someone outside of your business in regards to your progress and processes. It is essentially like having a boss who is invested in your success. 

Summary

An incubator firm is a very common and essential part of the ecosystem of business startups. With new and small businesses being the backbone of the U.S. economy, incubators play a significantly large role in guiding and assisting these businesses through their challenging journey.