HOW TO OPEN AN INCUBATOR

The things you must know.

By Glenn Athey

Thinking about setting up a new business incubator or innovation center?

Then the purpose, focus, and local relevance of the incubator matters more than being situated in a large centre for tech-based/innovation businesses. Success is not necessarily dependent upon location or the host region’s capacity for innovation and enterprise, nor the age of the incubator or support program. And your incubator can’t stand still. The most successful incubators offer flexible support tailored to the needs of clients, and are constantly developing and changing their offer in response to client needs, and market developments. A wider range of services are made available in successful incubators. Many incubators offer virtual services and membership as well as physical space and tenancies.

Is the university involved? Successful incubators tend to be located in business districts, rather than on university campuses. Universities tend to support incubators rather than host them.

The incubator must be designed to give significant business and commercial credibility to its tenants. One way of achieving this is through advisory board membership. Most successful incubators have a member from the relevant economic development organisations or local government.

Finally – serious thought must be given to the specific focus of your incubator/innovation center – is it an accelerator for early stage ventures, an ideas development lab, or will it have an industrial focus?

Defining an incubator or innovation center

Business incubators
The generally accepted definition of an incubator is a facility that offers business space /accommodation, intends to accelerate the development of entrepreneurial companies, and also provides:
• Management guidance
• Technical assistance
• Consulting tailored to the needs of new enterprises
• Encourages peer-to-peer networking
• Address multiple needs of enterprises

Incubators tend to draw on the resources and expertise of their own staff, external consultants, existing entrepreneurs and peer-to-peer networks, and external enterprise support. They tend to operate using mixed revenue streams from rental income and fees or funds from other private and public source.

Businesses tend to locate within a business incubator for anything between 3 to 5 years. Target firms tend to be active in a broader range of activities, and are at an earlier stage of development than those firms which attract the interest of investors and venture capitalists.

There are an incredibly diverse range of incubators or innovation centers. There are approximately 300 business incubators supporting around 12,000 businesses in the UK (UKBI). Some are tailored towards fostering and encouraging innovation, some are focused on high growth businesses. Others deal solely with start-ups; whilst others deal with the pre-start-up phase. Over 60 per cent of UK incubators have outreach programs.

Accelerators
Accelerator programs and facilities are a subset of business incubators which have risen in prominence in recent years, stemming from the original accelerator program called the Y Combinator, established in the USA in 2005. Their rise in popularity is significantly associated with the changing economics of starting up in business, particularly in ICT and digital businesses (which typically can now start up with £10-50k investments). In the USA there have been over 180 business start-ups assisted by accelerator programs.

Accelerator programs typically offer high-quality, intensive support to early stage businesses and entrepreneurs and also have:

• An open, very competitive application process
• Provision of pre-seed investment, usually in exchange for equity
• Focus on small teams, not individual founders
• Time-limited support comprising programmed events and intensive coaching and monitoring
• Cohorts or ‘classes’ of start-ups rather than individual companies
• review of Evaluation evidence
• A review of evaluation evidence[1] suggests a number of key lessons and insights for prospective new business incubators.

Impacts and benefits
There is good evidence that business incubation positively influences entrepreneurial success. Evidence suggests that, on average, incubators support 25 to 40 businesses per year; and create 44 to 91 jobs per year. There are direct benefits such as new business creation, jobs, turnover and gross value added. There are also indirect benefits from the supply chain and spend in the local economy.
The business benefits include:

• Entrepreneurial learning: incubators develop more entrepreneurs in the long-term. It is argued by academics such as Elizabeth Garnsey that in the long term, this leads to significant new ventures, with her work citing the role of individuals who founded and worked in Cambridge firms such as Acorn Computers going on to found other significant ventures such as ARM, VIRATA, Ubisense, RealVNC, and Amadeus Capital Partners.
• Credibility: association with the incubator tends to lend credibility to a business in the eyes of customers, investors, and peers
• Access to professional facilities that are flexible
• Business support and coaching
• Access to additional resources such as finance, legal and specialist advice

Typical success factors and practices in incubators
Critical success factors include matching incubator services to each firm’s needs; and adapting provision as these needs change over time. The most successful incubators offer flexible and tailored support that, with a regular review of client needs and resultant changes in support offered.

Selectivity is a key success factor, and the most successful incubators tend to select clients based on:

• A sector focus, or particular group or type of businesses
• Cultural fit – an evaluation of whether the business would fit with the ethos, operation and benefits of the particular incubator.
• Typically tenants self-select or a chosen because they are actively innovating, or are in growth sectors such as digital or life sciences.

Successful incubators tend to be supported by, and involve anchor companies or corporations. They lend credibility, resources and networks to an incubator.

Successful incubators tend to have virtual tenants as well as physical ones.

Continuous review and understanding of client needs. Successful incubators review client needs on entry, and then subsequently. It is recognized that needs can and will change over time, and that these needs have to be met by the incubator facility.

Successful incubators exercise robust financial management and fees payments, but also tend to be not-for profit models. Goals of not-for-profit incubators tend to be job creation, fostering an entrepreneurial climate in the community, diversifying the local economy, building and accelerating new industries and businesses, and attracting and retaining businesses.

Success is not necessarily dependent upon location or the host region’s capacity for innovation and enterprise, nor the age of the incubator or support program. Experience from the USA suggests that business incubation practices matter more than any other factor – more so than program age or size, or the host region’s capacity for innovation and entrepreneurship.

Whether university involvement is beneficial is dependent on the sector concerned – for example, the success of a life sciences incubator, for example, can be enhanced with university involvement. The relevance and success of university links are also dependent on whether the university has an entrepreneurial culture or are surrounded by a supportive business environment. Not all universities have the appropriate culture or environment to be beneficial partners in a business incubator.

It is more beneficial for the university presence to be brought to the incubator rather than the incubator to be based at the university, in order to avoid being principally research-led, or too focused on the research rather than commercial development.

There is some argument that university involvement in enterprise and incubation should be ‘people-centric’ rather than through specific technologies. Behind this argument is the suggestion that growth businesses will tend to access individuals with technical or business expertise, rather than at the institutional level, and that any university approach should be directed towards providing its staff with sufficient freedom or incentives to engage with entrepreneurs and businesses.

Advisory boards
It has been noted, in the case of incubators in the USA, that the composition of advisory boards contributes to overall incubator success. There is evidence to suggest that incubator advisory boards need the following member skills or backgrounds: an incubator graduate firm; a technology transfer specialist; someone with relevant accounting or legal expertise; government and economic development agency representatives (who help to articulate the case for funding to government, and help to educate these funding sources).

Public sector support and budgets
Typically, 50 to 60 per cent of an incubator’s budget comes from client rental income and service fees. Incubators with larger budgets and more public sector support tend to outperform incubators with significant budget constraints, largely due to the ability to offer more services to assist business development and growth.

Lessons for starting up new business incubators

There are a number of points from a recent Nesta Report which provide a few helpful lessons for planned or new incubators:

• Successful incubators are adaptive and change as requirements change, such as for different sectors and life-cycle stages of business, or where the business growth opportunities lie in the local economy.
• It takes time to embed a new incubator into a local environment. Credibility, reputation and understanding take time to build. A young incubator will face insufficient demand for its space and services – there will be challenges in achieving full occupancy rates and the take-up of services in the first few years of operation.
• Setting up a successful new incubator is dependent upon multiple stakeholders.

IMPLICATIONS
Thinking about setting up a new business incubator or innovation center?

The purpose, focus, and local relevance of the incubator matters more than being situated in a large center for tech-based/innovation businesses. Success is not necessarily dependent upon location or the host region’s capacity for innovation and enterprise, nor the age of the incubator or support program.

Most successful incubators offer flexible support tailored to the needs of clients, and are constantly developing and changing their offer in response to client needs, and market developments.

Many incubators offer virtual services and membership as well as physical space and tenancies.

Successful incubators tend to be located in business districts, rather than on university campuses. Universities tend to support incubators rather than host them.

Of vital importance is the range of services on offer to potential occupants as part of the incubator experience. The incubator must be designed to give significant business and commercial credibility to its tenants. One way of achieving this is through advisory board membership. Most successful incubators have a member from the relevant economic development organisations or local government.
Serious thought must be given to the specific focus of your incubator/innovation center – is it an accelerator for early stage ventures, an ideas development lab, or will it have an industrial focus?

Establishing an incubator or innovation center will take time.

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