Business incubators serve a function that is sometimes overlooked in the birth of a startup, but for a fledgling company they can be the difference between success and failure. They can be defined as organizations that support the development of start-up companies in their very earliest stages—effectively, they turn an idea into a functioning business, transforming an embryonic startup into a confident and independent company.
A business incubator might provide a range of services or assistance, from management training to initial funding. But how does a business incubator help in practical terms—and how does it differ from other forms of early-stage business assistance?
What’s the difference? Incubators and Accelerators, Venture Builders and Venture Capital
The purpose of a business incubator is to stimulate innovation, and thereby create successful new enterprises. It’s a role they play at the most embryonic stage of a business, when it is at its most fragile but full of pure potential.
Business incubators are likely to collaborate with founders or entrepreneurs from a range of fields, with a variety of different business concepts. The incubator will assist the founder in developing their initial idea (or business offering), helping to fine tune or craft it so that it meets the demands and requirements of the market.
Assistance will be offered in the form of mentoring and other types of support but can also include more tangible resources, which might be physical space, staffing, or equipment, depending on requirements. It may involve an injection of capital. All assistance is likely to have a laser-like focus on the individual needs of the company.
Business accelerators, by contrast, assist companies which are further along their development journey than those aided by incubators. They are most likely to invest in companies with a proven business model and perhaps demonstrable market presence or customer base. Although there will be an element of coaching—and perhaps provision of infrastructure—the main purpose of an accelerator is to help startups grow by connecting them to investors and/or providing direct funding.
Business accelerators are most appropriate for a company from the stage of pre-seed to Series A funding and it is likely to be a short-term relationship lasting several months.
Venture capitalists (VCs) will invest in companies which show, above all, clear potential for rapid growth. Individual ‘angel’ investors or pooled investment funds will seek out private equity opportunities to invest with the hope of turning a profit.
To get any support (beyond funding) from angel investors or a VC fund, companies will need to have secured a very significant financial investment (so there is more at stake for the investor).
A venture builder has a far deeper and longer involvement with a company than any other organization mentioned here. It first ‘synthesizes’ concepts or ideas for new businesses, and then headhunts individuals to develop them. In a way, it combines incubation, acceleration and venture capital—but significantly, a venture builder takes on the role of co-founder. The relationship is likely to last a number of years and will only end when the startup is sold, with maximum ROI as the ultimate aim.
Although venture builders offer fascinating opportunities for business development from ground zero, if the wheels of a company are already in motion, an incubator is a more appropriate proposition.
The Importance of Business Incubators for Startups
The reasons why business incubators in particular are so important are myriad. The environment provided by an incubator will be hugely supportive, inspiring innovation within the firm and supplying insights and knowledge from without, to help companies evolve and generate solutions rapidly.
From a mentoring perspective, a business incubator can provide experience, as well as state-of-the-art technologies and equipment (as needed), new ideas and diverse skillsets. They are also instrumental in helping new startups navigate challenging markets—or perhaps enter new markets that they may not have considered relevant.
They also present opportunities beyond the purely commercial or business focused. In terms of involving staff in the process of development, a culture of innovation can be nurtured at the company. They might be able to encourage new directions for research and development. Overall, they can expand the vision of a company in ways that capital alone simply cannot.
As with any business relationship, the key to a successful incubation is setting goals, and defining a scope and focus for the process. The incubator and startup should be completely aligned and communication must be excellent. Ideally there will be a clear timeline for the relationship—and above all, there should be a long-term plan for the moment when the startup ‘hatches’ and takes flight on its own.
Incubation + Venture Capital: A Recipe for Success
Venture capitalists and business incubators are equally important to a startup and leveraging the benefits of both can maximize the chances of success.
Incubators are there to offer guidance to a new business in that delicate early ideation stage, helping to create business strategies, providing validation of those very first concepts and ideas. Following that, VC assists with the next stage of a startup’s development, with pooled investment funds offering a significant financial boost, propelling the startup to fulfil its potential.
By Jimmy Ahern
Keywords: Startups, Entrepreneurship, Business Strategy