Incubators
Donald O. Neubaum and Zhe Zhang
Incubators refer to economic development tools and programs designed to promote and accelerate the growth of entrepreneurial companies through the provision of a variety of services and resources (Barrow, 2001). Incubators help new ventures overcome the liabilities of newness by offering start up firms many benefits not available to the typical new venture. These bene fits include flexible, low cost office or lab rental space, access to sources of capital, and a number of business and support services, such as a secretarial pool or administrative staff, shipping, receiving, and copying services, and human resource, finance, legal, information technology, and accounting services. Members of incubators can also benefit from the flow of skills and resources across multiple members within the incubator’s network or ventures. Business expertise, however, is perhaps the most valuable resource incubators provide, as they can offer consulting services and help incubatees develop business and marketing strategies. Given that nearly 60 percent of all new businesses fail within four years of start up, mostly due to insufficient financing and a lack of managerial expertise, incubators can assist new ventures through their infancy with the intent of nurturing them to the point they can become self sustaining (Sherman, 1999).
Through their collective arrangement, incubator firms can gain access to higher quality and lower cost business and professional services than they would be able to garner on their own. During start up, new venture managers can invest half of their time on administrative chores which can be more quickly and efficiently man aged within the incubator (Hansen et al., 2000). To help fund their operations and offset the costs of the services and space provided, incubators may charge reduced fees, take a portion of the venture’s revenues, or even acquire an equity stake (usually 20–40 percent) in their incubatees, although the latter practice is far more prevalent among for profit incubators.
The first incubator was created in 1959 out side Buffalo, NY, by Joseph Manusco, who bought a dilapidated 850,000 square foot Massey Ferguson factory (Barrow, 2001). Within a year, Manusco was renting space to approximately 20 small companies, one of which was a company that incubated chickens, which is how the name ‘‘incubator’’ was created. By 1980, 12 incubators existed within the United States; that number rose to over 950 by 2003 (with about a third of these being for profit) with another 3,000 worldwide (only about one tenth being for profit).
According to the National Business Incubation Association (NBIA, 2003), incubators can be broadly classified into three categories. The first, technology incubators (also called technology innovation centers and/or science parks), include incubators which are established with the primary purpose of commercializing new technologies or creating new innovation opportunities. These facilities are often affiliated with research universities that wish to transfer technologies developed in academic labs into commercial uses, or with major corporations that feel the need to create an external venture to ‘‘spin in’’ or ‘‘spin off’’ businesses which might not be completely compatible with the parent firm’s existing businesses or technologies. Technology incubators also help corporations provide incentives to their more entrepreneurially oriented employees. About 40 percent of incubators are technology focused.
The second type of incubators are empowerment or microenterprise incubators, which ac count for less than 5 percent of incubators. These incubators are typically created by state and local governments to address socioeconomic issues, like creating jobs, growing or diversifying the economic base of a community, or revitalizing neighborhoods.
The third type, mixed use incubators, which account for nearly half of all incubators, are mostly concerned with fostering new businesses of all kinds. Some of these mixed use incubators might focus on specific industries or niches, like biotechnology, information technology, or Internet start ups.
Despite their differing goals and objectives, evidence suggests that incubators can be effective. Typically, incubator ventures graduate to self sustaining, stand alone status after two and a half years, with the vast majority of these graduates (87 percent) remaining in business. The NBIA reports that their member incubators generate $45 in local revenue taxes for every $1 of public subsidy they receive and that North American incubators have created over half a million jobs since 1980. In 2001, approximately 35,000 North American incubator companies existed.
Early incubators were typically not for profit and emphasized economic development goals. In recent years, that trend has changed, as the prevalence of for profits incubators, or ‘‘busi ness accelerators,’’ has increased, many designed based on the experience of venture capitalists. The explosion and wealth creation of many ‘‘dot.coms’’ fueled the rapid expansion of these accelerators, which have the goal of fast tracking a new venture toward an IPO or developing the new venture into an attractive acquisition target which allows the investing accelerator to reap substantial profits. Accelerators are generally highly involved in the planning and operations of the ventures under their control. During the 1980s, other for profit models, labeled ‘‘EcoNets,’’ ‘‘MetaCompanies,’’ or ‘‘Internet keiretsus,’’ flourished. EcoNets are aggressive incubators which retain control of the ventures after start up and orchestrate their network of hatchlings while trying to capitalize on the synergistic benefits of a diversified portfolio of businesses. Meta Companies combine the characteristics of an incubator, a venture capitalist firm, and a diversified operating company, but tend to focus on a more narrow line of business than their EcoNet counterparts. Many for profit incubators and accelerators have struggled, and even failed, due to the infrequency of liquidity events (i.e., IPOs or acquisitions) that leads to financial difficulties, as well as their over reliance on information technology ventures which failed when the dot.com bubble burst (Johnsrud, Theis, and Bezerra, 2003). Many of those accelerators that survived have been forced to diversify their portfolios and develop more traditional revenue streams, such as collecting fees for service, to remain solvent.
Several studies have examined the best practices of incubators. For example, one study found that in addition to offering a wide variety of services, high performing incubators either had a strong relationship with a research university, or a medical or research laboratory, or was located in a metropolitan area with ample access to technology based companies and high quality business service firms (Tornatzky, Sherman, and Adkins, 2003). Hansen and his colleagues (2000) suggest that ‘‘networked incubators,’’ which deliberately foster partnerships among the start ups and facilitate rather than control the entrepreneurial spirit of the incuba tees, provide the model for incubator effective ness. According to the NBIA (2003), model business incubators should not only be concerned with contributing to the economic community by maximizing the launch of successful companies, but should also consider themselves ‘‘a dynamic model of a sustainable, efficient business operation.’’ The latter is achieved by developing a realistic and financially solid plan, recruiting skilled talent to manage the incubator, developing a committed board of directors, building the collective resources, offerings, and capabilities of the incubator, weaving the incubator firms into the local economic community, fostering mutually beneficial relationships between the ventures within the incubator, and practicing continuous improvement to provide better services to future prospective businesses.
Bibliography
Barrow, C. (2001). Incubators: A Realist’s Guide to the World’s New Business Accelerators. New York: Wiley. 150 incubators
Hansen, M. T., Chesbrough, H. W., Nohria, N., and Sull, D. N. (2000). Network incubators: Hothouses of the new economy. Harvard Business Review, September October: 74 84.
Johnsrud, C. S., Theis, R. P., and Bezerra, M. (2003). Business incubation: Emerging trends for profitability and economic development in the US, Central Asia, and the Middle East. Washington, DC: US Department of Commerce Technology Administration.
National Business Incubation Association (2003). http:// www.nbia.org.
Sherman, H. D. (1999). Assessing the intervention effectiveness of business incubation programs on new business start-up. Journal of Developmental Entrepreneurship, 4: 117 13.
Tornatzky, L., Sherman, H., and Adkins, D. (2003). A national benchmarking analysis of technology business incubator performance and practices. Washington, DC: US Department of Commerce Technology Administration.