Business Incubation – Meaning, Importance And More

Business Incubation is the name given to the process wherein an individual or an organization supports the establishment and growth of a start-up. Those supporting the start-up or new companies are called business incubators. These business incubators see the growth potential and weigh the opportunity before supporting or funneling funds into any start-up. The selection of a start-up involves a high level of research before any decision is taken to support or fund a start-up. In a nutshell, we can say the goal of incubation is to increase the success chances of a business.

Over the years, experts have defined Business Incubation in their own way. The underlying concept, however, remains the same. According to Sherman and Chappel, a business incubator is an “economic development tool primarily designed to help create and new businesses in a community.” Further, Sherman and Chappel note that the business incubator support emerging businesses with several services, such as assistance in building management teams, developing business and marketing plans, funds, professional services, shared equipment, and more.

The number of incubators has grown considerably in recent years. This rise is due to several factors, such as corporate downsizing, increased entrepreneurship, new technologies, economic globalization, and the transfer of technology.

Importance of Business Incubation

There is no dearth of start-ups that work on a brilliant idea with a huge scope of scaling. However, these companies have little knowledge about management and, therefore, burn cash rapidly. Business incubators help start-ups manage finances and ensure proper utilization of the money. Managing a business locally plays a significant role in making the foundation strong and scale it. Business incubators essentially perform the same function.

There are various business incubators that target businesses that want to establish themselves formally in the market. Such businesses with great growth potential might require various types of support such as planning, training, development, research support, etc.

Stages of Business Incubation

The whole process of business incubation is broadly divided into three categories:

Physical Facility Support

This refers to the incubation service provided within the physical facility.

Networking Facilities

After the physical facility, business incubators help the start-up with networking facilities so as to grow the business.

Support Services

Once the business is up and running, the incubators offer various support services to the businesses in order to run the business smoothly.

Incubators – Who are They?

Incubators are usually a partnership or collaboration between one more pro-business organization. These organizations can be:

  • Economic development organizations
  • Government entities
  • Local colleges and universities
  • For-profit ventures
  • Trade associations

Services Offered by Business Incubators

Start-ups usually have a rich idea but lack the resources to execute it. Thus, they require business incubators to perform significant roles or fill gaps. Following are the most common services offered by the business incubators:

  • Help a start-up to start basic operations and financial management.
  • They offer marketing and PR assistance to new companies to set up a brand name.
  • Business incubators have a strong network of influential people, and therefore, they can connect the business with the same to grow.
  • Incubators also provide assistance and resources for conducting market research.
  • They also help the start-ups in sorting their accounting books.
  • Incubators bring credibility to the company. This helps the company to get loans and credit facilities from financial institutions.
  • Often the start-ups do not know how to create an effective presentation to impress angel investors, venture capital, and other investors. Business incubators, with plenty of experience behind them, also help these companies with the presentations.
  • Business incubators also act as mentors and advisors and assist start-ups in all sorts of business-related issues.
Business Incubation

Types of Business Incubators

Majorly there are four types of incubators prevailing in the market today. These are:

Corporate Incubators

Objective – To enhance the entrepreneurial spirit and help the start-up to keep up with others in the industry.

Targets – usually target internal and external projects related to the activity of the company.

Challenges – conflicts between the management regarding the objectives and management-related decisions.

Private Investors’ Incubators

Objective – assist the potential business model and then reap benefits by selling the shares.

Targets – technology-intensive start-ups.

Challenges – quality and durability of the project.

Academic Incubators

Objective – offering new sources of finance to startups, supporting the entrepreneurial spirit and civic responsibility.

Targets – external projects and the projects internal to the institution before creating a company.

Local Economic Development Incubators

Objective – economic development, supporting SMEs and specific groups for the overall upliftment of the society.

Targets – small, handicraft, locally sourced business companies.

Challenges – conflicts, governance risk, management quality, red-tapism, long hours of negotiation.

There are other types of incubators as well, including Seed Accelerator (focusing on early startups), Public/Social Incubator (focusing on the public good), Kitchen Incubator (focusing on the food industry), Medical Incubator (focusing on medical devices & biomaterials) and Virtual Business Incubators (online business incubators).

Incubators vs. Accelerators

The two terms are often used interchangeably, but in reality, both the programs have different timeframes and goals. Incubators, as discussed above, help a company to grow. They usually assist the company in the long term as well. Some incubators even take an equity stake in the company they are assisting.

On the other hand, accelerators are usually short-term programs that last a few months. Companies expect the accelerator to put them on an aggressive growth trajectory by infusion of funds. Since accelerators are for a short period, it puts pressure on the company to grow quickly. With incubators, there is no such pressure to perform quickly, and companies can grow at their own pace.

However, there are a few drawbacks of incubators compared to accelerators.

  • As most incubators are non-profit organizations, they may not be able to offer access to funds in the same way as an accelerator or an angel investor.
  • Incubators are not as extensive as accelerators. The support from the former may often be ad hoc and spaced out. Thus, if you want instant results, then incubators may not be for you.

To know more about the differences between business accelerators and incubators, refer to our article: Business Accelerator and Incubator.

Final Words

In conclusion, despite the drawbacks, incubators are an invaluable safe haven for start-ups. All the start-ups may not need an incubator, but it is always beneficial to take the help of one. Also, before you approach an incubator, you must do extensive research on the incubators. Remember, no two incubators are alike, and an incubator good for one may not be good for you.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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