What is a Business Incubator?
A business incubator is a company that fosters the development of early-stage companies and startups by providing various services and resources to such companies. Business incubators are commonly established as partnerships or collaborations between several organizations such as investment-related ventures, government entities, economic development organizations, as well as educational institutions such as universities.
Services Offered by Business Incubators
Although the range of the provided services and resources differ, in most cases, business incubators ensure the delivery of essential services and resources to the participating companies. Some of the services include the following:
- Management training
- Advisory services
- Access to capital sources (loans, grants, network of potential investors)
- Assistance with core business operations (accounting, market research, marketing, legal compliance)
- Access to office space and other operating resources (necessary software, hardware, etc.)
Advantages of Business Incubators
Business incubators can bring substantial benefits to startups, including:
1. Mentorship and advisory services
The mentorship and advisory services offered by incubators allow the startup’s management team to reduce the gap in their knowledge or experience needed to make better decisions.
2. Time- and money-saver
Startups save time and money spent on day-to-day operating activities (e.g. accounting, marketing, human resources) as incubators cover either some or all of the services.
3. Access to industry experts and mentors
Finally, incubators guarantee invaluable access to industry experts and mentors that otherwise would be inaccessible.
Generally, the incubators specialize in a particular industry. For example, one incubator focuses on the food industry while another concentrates on the fintech industry. Nevertheless, some incubators admit companies without industry restrictions.
The incubators deliver their services to a startup in exchange for a stake in the company. The shareholding can vary from 2% to 10%. In addition, some incubators ask for a flat fee. Note that, in most cases, the services are provided at a below-average rate.
Although the terms “incubator” and “accelerator” refer to close but still different concepts, they are frequently used interchangeably.
How Does a Business Incubator Work?
1. Comprehensive admission process
The programs of business incubators are not open to all companies. Potential candidates must go through a competitive and comprehensive admission process. Although each incubator formulates its own admission requirements and process, the admission process usually includes the completion of the application form, as well as in-person interviews. The ultimate goal of the process is to determine the viability of a startup’s idea and the ability of the company’s management team to realize the idea.
2. Creation of a new cohort
Companies that are selected form a new cohort in the incubator and receive access to all services and resources offered by the incubator. They usually spend several months to a couple of years in the incubator. However, startups that stay longer than usual within the incubator are more common.
3. Mentorship and advisory services
During the program, the company’s management extensively works with mentors and advisors to gain the required experience to convey the company’s ideas to potential customers and investors. At the same time, the incubator’s staff work with the companies to set up the operating processes.
The incubator’s program usually ends with the Demo Day. During the Demo Day, companies from a cohort present the results of their work to an audience selected by the incubator.
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