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How to Shop for a Business Incubator

April 23, 2012
URL: http://www.entrepreneur.com/article/223335

How to Shop for a Business Incubator

The Kauffman Foundation says that at any given time, over 10 million Americans are actively researching a startup idea. These ambitious individuals represent an active consumer marketplace in which they will spend hundreds or thousands of dollars in order to pursue their entrepreneurial dreams.

Because startup activity has proven in recent years to be recession-resistant, more professional service providers and opportunistic landlords are crafting services and office spaces as "incubators" to capture startup entrepreneur spending.

What can an incubator do for you?
Today, the types of organizations that call themselves "incubators" are quite diverse. Some incubators are managed by nonprofit community service organizations that seek to help startups progress quickly in order to boost local economic activity and job growth.

Other incubators specialize in supporting entrepreneurs in a particular field, such as biotechnology, the arts, clean technology or agriculture. Here, startup entrepreneurs can gain access to equipment-rich laboratories and receive time-saving product development guidance from industry experts.

Incubators that are housed in large university facilities often help local businesses, students and professors commercialize emerging technologies and patents in partnership with venture capital funds and sponsoring corporations.

As you would expect, the chance of being accepted into an incubator varies and is dependent upon its reputation and space availability, as well as the service model of the startup. Elite technology-oriented incubators may require entrepreneurs to submit compelling executive summaries and letters of recommendation. Less selective incubators may be content to admit entrepreneurs as long as their monthly checks don't bounce.

Unfortunately, not all incubators live up to their business-building promises. Some incubators are nothing more than clever marketing gimmicks to help lease office space or sell legal or other professional services that entrepreneurs may not really need.

Should you shop for an incubator?
So how do you know if an incubator is right for your startup? Consider the following:

Know your needs and work habits. Many real-estate-oriented incubators offer cubicles or office space, plus some extra administrative resources, to entrepreneurs for a fixed monthly fee. This type of arrangement can work well for startup entrepreneurs who can't work from home or want some social interaction. Some facilities are open 24/7, while others only allow entrepreneurs to work during fixed business hours.

If you're going to pay any compensation to an incubator in exchange for one-on-one coaching sessions and class work, make sure the value of strategic guidance far exceeds the scope of educational services and support that you can find for free or low cost through local Small Business Administration offices and university business development centers. Ask if the principal educators have ever run a prosperous business other than the incubator. If the answers are vague, don't pull out your checkbook.

Read the fine print. Startup entrepreneurs should be cautious about giving away an up-front equity stake in a startup business to an incubator organization without a clear understanding of what meaningful value the incubator will deliver. Entrepreneurs should also read all agreements for any language that might give intellectual property rights to the incubator. Nothing about signing up with an incubator should involve an unwelcome surprise.

Favor real-estate-oriented incubators that allow for termination with 30 days' notice. Startups benefit when they have maximum flexibility to move on as needed.

Question incubator fundraising promises. Entrepreneurs who are attracted to an incubator only to secure equity investors may be disappointed if the incubator's leadership does not have the expertise, financial resources or contacts with regional angels or venture capitalists to help position a startup company for fundraising success. Entrepreneurs have to ask for references and evidence of recent transaction activity in the startup sector.

After all, there are a lot of unemployed stock brokers and investment bankers who may have an impressive background in megamillion-dollar transactions, but don't know how to market a startup to prospective investors.

Compare pricing. Be wary of incubators that have a financial interest in too many business support services such as legal assistance, accounting, Web design and hosting, advertising, etc., or that contractually require you to use their preferred service vendors. As CEO of your company, it's your job to "pick your team" and choose service providers that offer exactly what you need at the right price.

At one time or another, all startup entrepreneurs learn that no one, including many incubators, will ever watch over a new business better than its founder. What's good for the incubator may not be worthwhile for every startup entrepreneur.