The Importance of Business Incubators for Entrepreneurs

Mar 31, 2022
What is Business Incubators: Definition and How They Work

Business incubators were designed to speed up the development and support sustaining business or start ups from the early stage.

There are no easy rules or guidelines that can guarantee your success as an entrepreneur. Even super successful entrepreneurs like Elon Musk faced complex challenges, when his first two SpaceX rocket launches failed or when Tesla and SpaceX were on the brink of bankruptcy in 2008.

By starting a company, you are not only taking full ownership, but you are also challenging yourself to fail and grow in the process of accomplishing your business goals. 

The initiative to grow comes with a lot of consequences and pressures while telling the truth running a business is not easy. To support sustaining business or start ups from the early stage, Business Incubators come to help. 

Read also: Important Positions in Startup Organizational Structure

What is a business incubator?  

Business incubators were also designed to speed up the development and accomplishment of company and preliminary stage companies whilst also delivering the assistance and services which these young companies lack.

They typically offer workspace, mentorship, education, and access to investors to startups and sole entrepreneurs. These resources are critical for companies to keep operating during early stages of business. 

Read also: The Differences Between Unicorn, Decacorn, and Hectocorn

Who can be business incubators?

Business incubator illustration

Business incubator illustration (source: freepik)

Ever since the 1950s, Incubators have evolved into many forms. According to the National Business Incubation Association, there are approximately 900 business incubators located throughout the United States. These are types of incubators commonly found:

  • • Academic Institutions such as Universities, Academic Affiliations.
  • • Non-profit development corporations
  • • For profit property development ventures
  • Venture capital firms

What advantages can Incubators support?

  • • Mentorship and advisory boards and services
  • • Business Development Program (workshop, discussion and management training)
  • • Sources of capital are available (loans, grants, network of potential investors)
  • • Help with primary business operations (accounting, market research, marketing, legal compliance
  • • Business Essentials such as wifi, office spaces, equipment and administrative support
  • • Network with like minded strategic partners building business.
  • • Assistance in intellectual property management
  • • Links to higher education resources
  • • Assistance in business etiquette
  • •Assistance in regulatory compliance

Read also: Top 24 Venture Capitals & Angel Investors in Singapore

How is an incubator different from an accelerator?

Both incubator and accelerator offer the early stage of companies support and mentoring throughout the process, but there are three significant differences between incubators and accelerator:

  1. Stage of the venture 

    Accelerators and incubators focus on different stages of ventures. Incubators assist in early-stage startups who are still in the early project stages and do not seem to have a business strategy.

    Accelerators focus on speeding up the growth of existing companies that already have a working business model and product in the hands of early adopters with an established product-market fit. 

  2. Seed funding

    Usually incubators do not invest capital into venture but they ask for an equity stake in exchange for the valuable resources they provide. Accelerators provide ventures in the form of seed investment with the same equity stake in return from the company.

  3. Program timeline

    Incubators typically develop a slow timeline to ventures\ their goal is to incubate a business idea as long as needed to build a successful company, typically take one to two years.

    However accelerators work in a more tight timeframe jump starting a business like in a startup boot camp usually takes three to six months. 

How does a business incubator work?

Business incubator illustration

Business incubator illustration (source: freepik)

If you are joining an incubator or accelerator, make sure you have cear defined actionable goals and be honest whether or not you can achieve those goals without joining an incubator or accelerator.

The process for applying and joining these programs can be lengthy and arduous through different recruitment process:

  1. Comprehensive admission process

    The programs of business incubators are usually not open to all companies. Potential candidates must go through a competitive and comprehensive admission process which usually includes the completion of the application form, as well as in-person interview. 

  2. Creation of a new cohort

    Next steps, businesses for entrepreneurs that are already selected will be forming a new cohort in the incubator and receive access to all services and resources offered by the incubator.The program timeline usually takes several months to a couple of years in the incubator, however startups that stay longer than usual program are also common. 

  3. Mentorship and advisory service

    During the program, entrepreneurs will also work with a board of mentors and advisors to gain the required experience to convey the company’s ideas to potential customers and investors. Usually the incubator staff will work with the companies to set up their operating process. 

  4. Demo Day results of their works

    This process is usually at the end of the program where the companies present the results of their works/training and mentorship to their board of panels selected by the incubator.

Read also: 8 Venture Capital Firms in Indonesia and Southeast Asia

When does your business apply to an accelerator or an incubator?

If your team decides to join any business development program from accelerator or incubator, it’s important to assess your specific needs and identify whether you are an early or late phase startup. 

  • • Evaluate if your business has an established viable business model or is still in the developing product idea stage. Accelerators are ideal for early stage existing companies with minimum viable products.
  • • Evaluate your funding needs. If your business is not yet ready to receive capital investment, joining the incubator is the ideal choice. If your business is in the stage of moving to the next phase, accelerators could support seed investment to help scale up.
  • • Set a clear timeline of your business. Based on the working duration for the program support, incubators help to support a longer period of time compared to accelerators that work with business scale within a matter of months.

Encouragement ranges among new ventures, quite step is to understand what they provide and it’s the form of support you require. Maybe you might not want to dampen your shareholding in the firm. 

Or perhaps you chose a better form of financing (such as debt finance). It all depends on you, your company, and your growth strategy. You can take advantage of similar benefits if you have access to them through your own network without auctioning a shareholding in your company.