5 Questions Every Startup Should Ask Before Choosing an Incubator
Get the working capital your business needs from Entrepreneur Lending, powered by CAN Capital. Learn More »
When you're in the kitchen, you have a choice between cooking everything from scratch or using pre-mixed ingredients to make the process quicker and easier. Starting a business isn't all that different. The decision on which incubator, if any, you should join boils down to how much of your entrepreneurial sauce you can, want and should try to make on your own.
Entrepreneurs have limited time, knowledge and resources. Therefore they need to focus on what matters most to them and what they need to do better than their competitors. But the rest still needs to get done and that’s where incubators can be of great help. Bt because incubator services come at a price -- cash, equity or opportunity costs -- this is a serious business decision to be carefully evaluated.
Available evidence on the usefulness of incubators suggests the survival rate of incubated firms could be more than three times higher than non-incubated firms. In fact, survival rates could be as different as more than 80 percent for the incubated startups as opposed to the overall survival rate of about 20 percent for all startups. What's more, research also suggests that incubated firms grow faster than their non-incubated counterparts.
Some caveats are in order. First, these studies did not mention how long these startups survived after graduating from the incubators, which makes it difficult to read too much into the numbers. Secondly, this could be the result of self-selection since only the most promising firms are admitted into incubator programs. We don’t know if they might have succeeded even without incubation support. Thirdly, there has been a massive expansion in the incubation industry over last few decades from 12 incubators in 1980 to more than 1,250 in 2012 in the U.S. alone and an estimated 7,000 worldwide.
While this highlights the growing popularity of the incubation model, it also suggests the importance of choosing wisely. If you like these higher odds and choose to startup at an incubator, here are some questions you need to consider:
1. What can you do and what should others handle?
While some folks consider incubators to be places for cheap physical space and shared office services, most incubators now provide a variety of value-added services ranging from help with business infrastructure and regulatory compliance to assistance with loans and networking with potential advisors and mentors. Some incubators also facilitate angel and venture capital investments, as well as help set up technology transfers and strategic partnerships.
Therefore, the first question to ask is: What support services could your business use? Do you just want cheap workspace or do you also want tax breaks? What about mentoring and networking? Do you have enough management experience? Can you acquire these services cheaper through your network than through incubators? Carefully assess each of these factors along with your relocation limitations should considerably narrow down your choices.
2. Do you need the help of a specialist?
If you need significant knowledge transfer for advanced technology development, incubators at research universities are probably your best bet. These schools have human capital, a knowledge base, access to grants and resources and other enabling infrastructure to help you succeed. If speed to market and access to capital is your need, for-profit private incubators such as Y Combinator, Intend Change and Dreamit Ventures are the way to go. If your startup would make an existing big company even more competitive, then their in-house “intrapreneurship” incubators should top your list. Finally, if your venture helps local economy and employment you should also consider public business innovation centers for easier access to governmental subsidies such as rent and tax breaks.
3. Are their current startups on your wavelength?
In choosing an incubator, make sure to check out current and past startups in their programs. This is important for two reasons. First you need to make sure that the incubator is a good fit for you as research shows that firms that compete in markets or technologies that are closely related to their incubators’ specialization tend to do better than those that do not.
Secondly, research also indicates that previous success of the incubator and firms in its program is one of the best predictors of success for future firms in the same program. In fact, a greater proportion of high-growth firms tend to come from large and successful incubators: Nearly four times as many high-growth startups are incubated in publicly held incubators as in privately held ones.
4. How much are you willing to spend?
Participation in prestigious incubators that provide higher value-added services comes at a greater price. Hybrid venture capital-incubator programs, such as Intend Change, often involve giving up a greater proportion of equity. Such incubators both lower the risk as well as the upside potential, which is why you should consider post-investment valuation in evaluating them. In essence, would you prefer to give away 20 percent of your company to a VC for a post-valuation of $10 million or 40 percent to a VC-incubator for a post-valuation of $50 million?
5. What else are you looking for?
There are several other factors that need to be considered in evaluating the incubation programs, including their policy on graduation and exit, level of psychological support, ability to keep trade secrets and openness to double-loop learning and exchange of knowledge. Some incubators expect progress at set times and others go by milestones such as firm revenues. Some programs have managers who are too busy and other participants too competitive to provide any support. Others have a culture of assisting in and celebrating one another’s success. You need to be clear about your own expectations on such issues and make sure the program meets your needs.
Overall, my ongoing research suggests that firms in incubators have better access to resources. They also have a greater awareness of changes taking place in the marketplace, as well as a greater incentive to innovate. After all, it is hard not to notice innovations taking place down the hall and therefore incubators definitely deserve your serious consideration.