Starting a new business can be daunting, and for early-stage companies. Getting beyond the embryonic phase can be especially challenging. That’s where business incubators come in.
These programs provide support, coaching, and resources to new businesses with promising ideas or entrepreneurs still in the idea stage.
If you’re considering starting a new business, a business incubator might just be the support system you need to turn your idea into a successful venture.
‘To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
Business incubators are programs or organizations designed to help early-stage companies and entrepreneurs launch and grow their businesses and achieve success.
This type of program aims to help early innovators achieve a minimum viable product and create an achievable plan to take that product to market. While the length of the program can vary from several months to a few years, the ultimate goal is always to give start-ups the tools and knowledge they need to stand on their own two feet.
Business incubators offer support to entrepreneurs and early start-ups, and that support may vary. In many instances, startup programs provide logistical and technical services and resources, shared office space and even seed funding in exchange for an equity stake in the company.
In those instances, startup companies will continue to enjoy the benefits of the incubation program long after it ends (although it may impact future valuations). An entrepreneur in residence, for example, will help a company in the incubator program towards their MVP (minimum viable product) or launch, pointing out pitfalls along the way and providing mentorship to the company leaders.
The term incubator and accelerator is sometimes used interchangeably, but their goals and duration are very different.
Most incubators focus on young companies in the very early idea stage of their business and help them develop their business and marketing plans. Accelerators tend to focus on businesses that already have customers or products and services that are ready to scale up. Companies in an accelerator program may also already have received pre-seed investment opportunities in the past and do not require the same level of support and professional services as a company that’s looking for the support of a business incubator.
Business incubation programs tend to last around 1-2 years and have a maximum time period, whereas accelerators offer short, fast and highly structured programs that last for three to four months at most.
There are different types of business incubators that companies can participate in, including:
Universities and colleges often have their own incubators to support student and faculty start-ups.
For example, the Startup Incubator at the University of Oxford is a free program designed to provide tailored support to members and ex-members of the University of Oxford who are looking to start or grow entrepreneur-driven ventures https://innovation.ox.ac.uk/startupincubator/. Established in 2011, the incubator has successfully supported over 80 startup ventures ranging from the medical domain to social media data analysis, helping them with product development and initial commercial traction. The program has been instrumental in helping ventures secure over $70 million in funding from a range of public and private sources.
Not for profit incubators often focus on supporting under-served communities, such as women, minorities, and low-income individuals. Bethnal Green Ventures, for example, is a startup program that focuses on supporting tech for good ventures in sectors such as social, healthcare, education, worker tech, and green tech. To qualify for their program, startups must have innovative ideas and an ambitious team that wants to make a big impact. In exchange for an investment of £20,000 in cash for the equity of 6%, the incubator provides startups with a workspace, mentorship, workshops, access to industry experts and investor networks, and other resources to help them grow and succeed.
For-profit incubators are typically private companies that invest in and support early-stage startups in exchange for equity or other forms of ownership. One such example is Activate Capital https://activatecap.com/, a start-up accelerator that focuses on digital platforms. Their mission is to seek out entrepreneurs with outstanding digital ideas and use their business and technology expertise to guide them to further investment and lasting success. To qualify for the program, entrepreneurs must have an outstanding digital idea that has the potential for significant growth and impact.
The time-frame for incubation can vary and is usually tailored to the business needs. Most companies stay in an incubator for as it takes to grow the business to a sustainable level, usually 1 to 2 years. However, some mentors and in-resident advisors receive equity in the companies they support and remain with the business long after the program ends.
The application process for a business incubator usually follows three simple steps:
1. Learning
These programs typically offer mentorship, training, and other educational resources to help start-ups develop their skills and knowledge. This can be particularly valuable for first-time founders who are new to the startup world.
2. Funding
Many of these programs provide seed funding or access to investors, which can help startups secure the capital they need to get their businesses off the ground.
3. Networking with other founders
Incubators often bring together startups from a variety of industries and backgrounds, creating opportunities for founders to connect and collaborate with others in the ecosystem. This can lead to valuable partnerships, feedback, and support.
1. Limited access
While incubators can offer valuable resources to startup companies, access to those resources may be limited by the program’s structure and focus. Startups may find that their needs don’t align with the program’s offerings at all or may not have the support they require over time.
2. Strict scheduling
These programs may require startups to participate in specific activities or follow a strict schedule, which can be challenging for some founders who prefer more flexibility in their work. Startup companies may also find that they need to devote significant time and energy to the program, which can be difficult to balance with other commitments.
Startup businesses that do not have an MVP or a business model and aren’t sure when their MVP will be ready will benefit greatly from an incubation program. If you have a great idea but need some guidance bringing it to life, a business incubator can provide the assistance you need to take it to market. Startup incubators are designed to help businesses launch their products and ideas.
An incubator can help start-up businesses find their feet by providing the guidance, resources, and valuable connections they may not have access to otherwise. Look for one that has the knowledge and level of support that aligns with your goals and make sure that you understand exactly what will be required of you before making a decision.
An operating agreement is a legal document used by companies to define their organizational structure, roles and duties of owners and other key parties involved in the business, and methods for handling all transactions that occur within the company.
Stock options in startups work as a form of equity payment that allows an employee to purchase a certain number of shares of company stock at a specified price.
An over-allotment option allows companies to issue extra shares of their stocks beyond those that they initially planned or announced when they go public (or offer other securities). It’s also known as a “greenshoe option”.
Participating preferred stock is a type of preferred stock that gives the holder the option to receive dividends equal to or greater than the customarily defined rate at which preferred dividends will be paid to preferred shareholders.
