Startup Incubation

Startup incubation refers to the supportive structures established to help new businesses successfully launch and grow. Originating in the late 1960s, these incubators provide a range of essential services, including office space, administrative assistance, management training, and access to networking opportunities. Aimed at bridging the gap between academic learning and real-world business challenges, incubators often collaborate with university programs, allowing both entrepreneurs and students to benefit from shared resources.

The selection process for incubators is typically more stringent than for other business support initiatives, focusing on entrepreneurs with high potential for success. This exclusivity enables incubators to offer more tailored support, which can include financial assistance or seed money. Additionally, the coworking environment fostered by incubators promotes collaboration and motivation among startups, helping to alleviate the isolation often felt by new business owners.

With the rise of technology, the landscape of startup incubation has evolved, leading to the emergence of virtual incubators that deliver similar resources without the need for a physical space. Despite some skepticism regarding their effectiveness, startup incubators continue to be regarded as valuable resources for aspiring entrepreneurs, particularly in the tech sector, as they provide crucial mentorship and networking opportunities that can significantly enhance a startup's chances of success.

Published in: 2023

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Subject Terms

Startup Incubation

Abstract

Startup incubation is the practice of creating supportive environments for private businesses that are preparing to launch or have recently launched in order to improve such businesses' chances of surviving in the marketplace long enough to be able to develop their own resources and connections and operate independently. Since its inception in the late 1960s, startup incubation has taken on many different forms, offering services that range from management training to access to office space and administrative services.

Overview

Startup incubation sprang from the recognition that university business programs, no matter how rigorous their requirements or prestigious the institution, are not able to fully prepare students for what they will have to face when they enter the marketplace. To some extent, the gap between classroom learning and practical experience can be addressed by internships and similar opportunities, but these are often in short supply, and they are not available to entrepreneurs who are not part of the formal system of higher education. Startup incubators exist to fill this gap.

Startup incubators provide resources to people who are trying to start their own businesses or people who have recently started businesses only to quickly discover that they need help (Arteaga & Hyland, 2014). The startup incubator may assist in the form of office space, infrastructure, administrative support (such as access to computers and secretarial staff), legal advice, and perhaps most important of all, training and networking. Many startup incubators are connected to university business programs, so they are able to help new business owners fill in gaps in their skill sets in areas such as accounting, human resource management, marketing, and so forth. The universities benefit because their students get access to the incubator for their own projects and have the opportunity to collaborate with those who have experience trying to compete in the marketplace, and the entrepreneurs receive valuable assistance in return.

Other startup incubators are supported in whole or in part by public funds from city or state governments. These governments wish to encourage people to start their own businesses because each new business can mean greater opportunities for the region's economy, additional sales taxes, and greater quality of life for all through the availability of additional services. In most cases, the government agency will assist an incubator in getting started, and the incubator will then operate independently by relying on grants and fees charged to the businesses using its services (Conti, Thursby & Rothaermel, 2013). Some startup incubators accept payment in the form of an equity stake in the businesses that they admit, and a few even require this, but in general, the practice is not common because future profits tend to be rather speculative. However, the concept of an equity stake in start-up companies drastically increased with the revolution in technological businesses in the twenty-first century.

An element that sets startup incubators apart from other small business development initiatives is the selection process. Many of the programs operated by the federal government through the Small Business Administration (SBA) are required to assist anyone who qualifies, meaning that the level of services available through the SBA's programs is sometimes lacking. Startup incubators limit participation to those entrepreneurs who they believe have a significant chance of succeeding; this allows them to provide more comprehensive support since they wind up serving a smaller client base (Stagars, 2015). Some startup incubators even provide financial assistance, or seed money, to business owners struggling to cover initial expenses related to their business. Participants in startup incubators that do not have financial assistance available still have an advantage over others in obtaining financing, however. Because startup incubators exclude businesses they do not feel have a good chance of success, being admitted to an incubator can make it easier for entrepreneurs to obtain financing from banks or so-called angel investors. Financiers are likely to rely on the incubator's assessment of its participants as economically viable.

Startup incubators offer many advantages to their participants. One of these is coworking. Coworking is the use of an office environment that is shared by more than one company so that staff from each firm use the same resources when it comes to meeting rooms, computers, photocopiers, and so on. Coworking is helpful because it is usually less expensive than renting one's own space, but it also helps a company by changing the energy of the office (Gassmann & Becker, 2006). One factor that can hold back a company that is just starting out is uncertainty. In the early days of any venture, there are times when it is far from certain that traffic will increase, and keeping faith in the future of the firm can be both intimidating and isolating. In a coworking environment, there tends to be more going on simply because more people are present. This higher level of activity can have a subtle effect on the attitudes of everyone, causing them to develop a more positive outlook and to keep pursuing leads.

Another huge advantage along these same lines is the availability of administrative support for incubator participants. Having incubator staff available to take calls, organize files, and schedule meetings makes it much easier for entrepreneurs to focus on the kind of big-picture visioning that is crucial at the early stages of business development (Scillitoe & Chakrabarti, 2010).

Further Insights

There are many ways in which businesses participating in startup incubators are analogous to young people attending college, and this similarity is often pointed to as an indication of how helpful it can be to a new business to gain entry to an incubator. In fact, most startup incubators have a long list of applicants hoping to be admitted, not unlike top universities. Incubators provide those businesses fortunate enough to have been admitted with access to innovative training, cutting-edge information, and the benefit of being mentored by leaders in their fields—just as universities do for their students. Even the terminology used to describe businesses that have successfully emerged from their incubation phase is taken from the context of higher education; these firms are said to have graduated from the incubator (Arteaga & Hyland, 2014).

Startup incubators enjoyed a surge in popularity near the end of the twentieth century, as the dot-com boom resulted in a great deal of investment in and development by the technology sector. Hundreds of companies based on Internet access and services launched and just as quickly folded, but as they did so, they provided food for thought about what types of services startups could benefit from. As a result, a sort of cottage industry of startup incubators sprang up in response to the newfound need. This produced the ironic outcome that the proliferation of startup companies in need of support inspired the creation of new incubators so, in some cases, startup incubators launched with the help of other startup incubators.

Diversity in assembling a group of startups to share an incubator facility is an important aspect of incubator management. Careful attention must be paid by the leaders of startup incubators when they bring together entrepreneurs. Ideally, a facility should be shared by companies whose missions and services could potentially support one another but which are unlikely to compete with one another directly. This requires incubator managers to walk a fine line. On the one hand, there are some ways in which it might be beneficial for two similar firms to go through an incubator together because they would have shared experiences and similar perspectives and would be able to benefit from each other's wisdom.

On the other hand, having similar firms incubate could also be a recipe for disaster because each firm could conceivably try to sabotage or even eliminate the other to have more market share for itself (Stagars, 2015). This type of behavior would quickly sour the incubator atmosphere, causing program participants to turn against one another and build barriers rather than establish trust. To return to the similarities between startup incubators and higher education, it is not too fanciful to suggest that assembling a portfolio of incubatees is akin to building a cohort of students to go through a program of study together. Ideally, members should be similar enough to be able to relate to one another but different enough that each will have strengths and limitations that complement those possessed by other members of the group (Aernoudt, 2004).

As its name suggests, the virtual incubator provides many of the same services as its physical counterparts—training, mentorship, networking, financial and administrative support—but without using a shared, physical location. Instead, virtual incubators are online support systems for new businesses. This online model has a number of features that make it attractive. For example, because it does not occupy physical space, there are lower overhead costs for the incubator firm (Schwartz, 2011). Also, physical incubators attract candidate firms from all over the nation and world and require these firms to relocate to the incubator if they are accepted into the program. This can prove expensive or otherwise problematic, limiting the reach of physical incubators. Virtual incubators are location independent and thus immune to this concern. On the other hand, the lack of a physical meeting space can also be seen as a negative because this service is precisely what some startups are looking for—a place to work and learn from other like-minded business people; however, with the creation of virtual spaces and chats and the proliferation of programs like Zoom and Google Meet, this problem is becoming less of an obstacle.

Startup incubators operate according to different organizational models depending on the philosophy and goals of their management team. One model relies on so-called "high fences and wide fields." The high fences referred to are the criteria that must be met in order to gain admission. Startup incubators with high fences are highly selective and look for revolutionary ideas and a strong commitment to success. The wide field means that despite having standards that are difficult to meet, these incubators try to assemble a diverse array of businesses within their program so that even if most of the firms being incubated fail, there are bound to be spectacular successes here and there—successes to which the market will pay much more attention than to the failures (Davila, Epstein & Shelton, 2007).

Another popular approach to incubator administration is the "nimble genius" method. This approach looks not for up-and-coming firms but for highly gifted individuals who possess just the right combination of intelligence, creativity, and practicality. Although this approach frequently comes under fire by those who dismiss it as not so much a strategy as simply waiting to be rescued by a hero, it has seen some success. Defenders of the nimble genius method explain that it does not look for people who do not make mistakes. Instead, it looks for people who take risks, make mistakes, and who are able to recover from those mistakes gracefully, using them to learn and improve their practice (Haifeng, Haynes & Riggle, 2011).

According to the International Business Incubation Association (InBIA), various other types of business resources are often considered alongside startup incubators and may overlap substantially in terms of services or resources. These include the SBA's Small Business Development Centers (SBDCs), women's business centers, startup or general business accelerators, local economic development organizations, co-working spaces, and makerspaces. While such organizations generally provide different facets of aid to startups and may indeed be part of or contain incubators, they can, in some contexts, be seen as in competition with startup incubators or each other. An example of a co-working space that dominated news headlines in the 2020s for a brief time is WeWork which provides virtual and physical shared spaces to usually-new companies. Despite controversies, WeWork remained an innovator and leader in the shared workspace industry in the 2020s (Belloni, 2021).

Viewpoints

Whereas in the 1980s, there were only a dozen or so startup incubators in the United States, by 2022 there were over two thousand (Tracxn, 2022). Growth occurred worldwide as well, with the InBIA claiming over 1,200 members in over thirty nations in 2023 (InBIA.org, 2023). Because startup incubators saw such rapid growth in the last decades of the twentieth century and the first decades of the twenty-first, their services are sometimes viewed with skepticism (Arteaga & Hyland, 2014). A particularly controversial view related to incubators has been voiced by some in the business and technology community, to the effect that those interested in business as a career would be better off spending their time in a startup incubator than pursuing a college education. These remarks have come at a time when the rising costs of tuition have caused many people in business and other sectors of the economy to question whether higher education provides a satisfactory return on investment for most students (Stagars, 2015).

Educators respond that while it may be true that business students can learn a great deal in startups, it is irresponsible to suggest that startup incubators should take the place of the traditional business degree, especially when most companies that graduate from incubators, just like companies that do not use their services, will fail (an industry rule of thumb states that about nine out of ten startups will fail, whether or not they used an incubator). Startup incubators affiliated with universities appear to provide a partial resolution to this debate, as they represent the fusion of both academic and business spheres and allow students to experience the benefits of both environments without foreclosing any opportunities they might wish to pursue in the future. University incubator partnerships, however, must often contend with the challenge of high turnover rates, as many of their managers move back and forth between the business world and the relative job security of higher education, with the result that startup incubators under university administration tend to lack consistent leadership over time. Further, innovation may suffer due to the entrenchment of old guard staff members who have "retired in place."

Another criticism of startup incubators is that the age of the Internet has made them less useful than they once were. Much of the information that companies in incubators have access to is also available online, without the expense of applying to an incubator. This, however, ignores the value of the mentoring and impromptu networking that is possible in an incubator, particularly one that is physical rather than virtual. Data suggest that personal connections with clients, mentors, and coworkers have more to do with career advancement and business success than mere access to information and infrastructure. These findings lend support to the proposition that startup incubators, while perhaps not living up to all the hype surrounding them, nevertheless have much to offer qualified companies (Richards, 2002).

When considering whether to seek out the assistance of an incubator, there are many factors that remained relevant in the 2010s and into the 2020s, and start-up incubators remained a popular option for new companies, especially in the tech industry. Because of the proliferation of incubators, it is vital to explore all options and consider the positive and negative impacts an incubator might have on a company. Incubators remained beneficial to acquiring funding, comparing with other startup businesses, and networking (Sridharan, 2016).

Terms & Concepts

Angel investor: A private firm or individual who agrees to make an initial investment in a company that is just starting out or is just at the initial idea stage. Often, businesses at this stage find it extremely challenging to obtain financing from traditional sources such as venture capital firms and banks, so the arrival of a willing investor is greeted as a near miracle, hence the appellation "angel."

Coworking: A labor model in which a workspace is shared among several firms, an arrangement that allows cross-company staff to work together and make connections.

Makerspace: A community-accessible workspace that provides tools and other equipment for specific ventures, typically oriented toward manufacturing, handicrafts, or technology; various levels of training and mentorship may also be available.

International Business Incubation Association: A professional organization based that provides research, membership, and advocacy for startup incubators.

Seed money: Financial support provided to a company in its early stages of development, usually in exchange for an equity interest in the company. The investor injects a relatively small amount of money into a new company in the same way a gardener plants seeds in the hope of reaping a much larger return after a period of growth.

Bibliography

About. (2023). INBIA.org. Retrieved June 1, 2023, from https://inbia.org/about

Accelerators & incubators in United States. (2022, Dec. 23). Tracxn. Retrieved June 1, 2023, from https://tracxn.com/d/investor-lists/Accelerators-&-Incubators-in-United-States

Aernoudt, R. (2004). Incubators: Tool for entrepreneurship? Small Business Economics, 23, 127–135. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13825076&site=ehost-live

Arteaga, R., & Hyland, J. (2014). Pivot: How top entrepreneurs adapt and change course to find ultimate success. Hoboken, NJ : Wiley.

Belloni, C. (2021, Mar. 15). The WeWork business model explained. Corworking Resources. Retrieved June 1, 2023, from https://www.coworkingresources.org/blog/the-wework-business-model

Conti, A., Thursby, M., & Rothaermel, F. T. (2013). Show me the right stuff: Signals for high-tech startups. Journal of Economics & Management Strategy, 22, 341–364. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86659543&site=ehost-live

Davila, T., Epstein, M. J., & Shelton, R. D. (2007). The creative enterprise: Managing innovative organizations and people. Westport, CT: Praeger.

Gassmann, O., & Becker, B. (2006). Towards a resource-based view of corporate incubators. International Journal of Innovation Management, 10, 19–45. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19501143&site=ehost-live

Gura, T. (2015). Got a startup? Rent a bench. Science, 348(6240), 1196–1199. Retrieved December 7, 2016 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=103235993&site=eds-live

Haifeng, Q., Haynes, K. E., & Riggle, J. D. (2011). Incubation push or business pull? Investigating the geography of U.S. business incubators. Economic Development Quarterly, 25, 79–90. Retrieved March 22, 2015 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=57204759&site=ehost-live

Morgan, R. (2018). In the lab of luxury. Fortune, 178(3), 53–59. Retrieved October 22, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=131267820&site=ehost-live&scope=site

Richards, S. (2002). Inside business incubators & corporate ventures. New York, NY: Wiley.

Savvy startup guide. (2018). Home Business Magazine: The Home-Based Entrepreneur’s Magazine, 25(2), 24–26. Retrieved October 22, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=128790306&site=ehost-live&scope=site

Schwartz, M. (2011). Incubating an illusion? Long-term incubator firm performance after graduation. Growth & Change, 42, 491–516. Retrieved March 22, 2015 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=67460381&site=ehost-live

Scillitoe, J. L., & Chakrabarti, A. K. (2010). The role of incubator interactions in assisting new ventures. Technovation, 30, 155–167. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=47954418&site=ehost-live

Sridharan, K. (2016, Feb. 5). 6 Pros and cons of joining a startup accelerator. Wharton Magazine. Retrieved June 1, 2023, from https://magazine.wharton.upenn.edu/digital/6-pros-and-cons-of-joining-a-startup-accelerator

Stagars, M. (2015). University startups and spin-offs: Guide for entrepreneurs in academia. Berkeley, CA: Apress.

Startup Incubation

On this Page

Subject Terms

Startup Incubation

Abstract

Overview

Further Insights

Viewpoints

Terms & Concepts

Bibliography

Suggested Reading