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Business Incubators - Questions to Ask Before Using Them
What Is a Business Incubator?
Business incubators are designed to support new businesses just starting up or moving from someone’s home office into a full office, helping a business get past the concept stage where so many die because they aren't implemented properly. Business incubators may simply offer offices and basic business services or a full suite of support services and financing options to start-ups.
Various studies have found that start-ups that go through a business incubation period, sheltered and supported by the business incubator, are more likely to remain in business five years out.
A small business is considered hatched when it moves out of the business incubator and into a commercial, retail or industrial space. Universities, investment groups and developers have all set up business incubators with different goals in mind.
Business Incubators Run by Colleges and Universities
Colleges and universities often create business incubators for their students and alumni. These business incubators serve as a breeding ground for big businesses that will result in major donations to the school later on and as attractions for the best and brightest students today. The next Bill Gates may be attracted to a school that says we'll not only educate you but help you develop any business ideas you have.
Colleges and universities sometimes use the inventions from these business incubators as marketing tools to promote the school, while the practical research going on within the business incubator may yield more technical and scientific papers that improve the school's standing internationally.
Developers and Business Incubators
Business development firms can make money off of start-up firms in their business incubators. They rent space to the incubators and may make money off of shared services like secretarial services, security and copy centers. Business developers may make even more money charging for services like tech support and marketing.
Business developers are using a similar business model for business incubators as they use for executive suites which let consultants or business professionals focus on their area of expertise while paying a fee for all of the back office and front office help.
Investor Run Business Incubators
Investors create business incubators in return for an investment in the business. This investment may be loans to the small businesses to help them get started while the business works within a business incubator location the investors can supervise. The investors may simply offer the business incubator as a condition of a loan to the new business, ensuring that the money isn't blown on fancy offices or useless projects.
Some business investors make money off the business incubator both ways; they loan money to the startups and receive interest payment in addition to receive a portion of the rent the startup firm pays.
Business incubators that are paid in stock or equity stakes in the start-ups will not make money on all of the start ups but do this in the hope of making money when one of the businesses go prime time or when several of them are bought out by larger firms. Business incubators who trade stock in exchange for early support can shortchange their future ability to sell shares of stock and free decision making.
Considerations before Using a Business Incubator
- Are you overpaying for square footage or support services in the business incubator? The apparent convenience of all services provided by the incubator may cost more than outsourcing services at another location.
- Are you giving up intellectual property rights or equity shares in the business in return for convenience?
- Will you be relying on debt financing instead of self-financing? Should you consider slower growth as cash flow allows? Debt financing creates a future liability that can hamper future growth, while sudden cash infusions can result in bloat in a new business as it expands to meet its new funding instead of meeting its customers’ needs.
- Are you moving into the business incubator because it is close to school, instead of a location close to your customers?
- Are you signing up for the business incubator because it is in a trendy location or supposed hot spot, instead of the right type of facility for your business? For example, a 3D manufacturing startup would likely be better served in an industrial district, not trying to set up offices in an incubator near investors' offices and then finding additional manufacturing space at exorbitant rates in a retail district.
- Are you limiting your future growth by promising to remain in the business incubator for a set period of time? Does the business incubator require you to sign a long term contract for space or services, restricting your possible options later?
- Are you agreeing to hire the business incubator’s preferred service providers or consultants in return for business loans or cheaper business space? Are you agreeing to higher overhead rates in the future for lower up-front costs?
- Are you giving up critical control of the business by trading equity or shares in exchange for help?
- Does the business incubator require a complex business structure like an S-corp or C-corp when your business would be better served as a sole proprietorship in the beginning?
- Could you use crowd-funding or personal loans instead of selling equity or intellectual property, which business incubators may request?
- Does the expert advice provided by the incubator actually address issues your team needs help with? While legal and financial advisers are usually universally helpful, an engineer with experience in metallurgy and machining may only be tangentially useful for a 3D printing firm. A marketing firm with experience marketing consumer goods may not be as good at selling new tools and services to other businesses.