Not all tech incubators are doing what they do only for the growth of the ecosystem, some are there for profit, and yet we can’t ignore the impact they have all collectively had on the survival of startups.
Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
With this data in mind, there is no doubt that the importance of tech incubators cannot be overemphasized. But are tech incubators? How do tech incubators work and how can you join one to start benefiting from the numerous offers it offers members?
All these will be answered in this article. We will also look at the different types of tech incubators and what they all offer.
Meanwhile, below is our table of contents.
Table of contents
What are Tech incubators?
Tech incubators are organizations or programs designed to support the growth and development of startup companies in the technology sector. These initiatives provide a nurturing environment for early-stage tech entrepreneurs, offering them various resources, mentorship, and support to help transform innovative ideas into viable and sustainable businesses. The primary goal of tech incubators is to accelerate the success of startups by providing a range of services that can include:
- Office space
- Mentorship
- Access to Funding
- Networking Opportunities
- Educational Programs
- Business Support Services
- Technology Infrastructure
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A Brief History Of Tech Incubators
Innovation Depot used to be a 1940s-era Sears department store. Fully renovated in 2007, the modern, 140,000-square-foot (13,006-square-meter) glass and concrete facility in downtown Birmingham, Alabama, is now home to 99 technology companies specializing in everything from mobile software development to microbial testing kits [sources: Innovation Depot, Strauss].
But it isn’t a corporation or even a for-profit business, and it’s not just a cool office building in Birmingham’s hip “Entrepreneurial District.” Innovation Depot is what’s known as a tech incubator, an organization that supports the development of new business ideas by providing mentorship, business services, and funding connections to young tech companies.
There are more than 1,250 business incubators in the United States (up from 12 in 1980), and about 37 percent focus specifically on developing technology companies [source: NBIA]. Tech incubators come in all shapes and sizes and business models.
Innovation Depot, for example, is a nonprofit organization created by a partnership between the University of Alabama at Birmingham (UAB) and the greater Birmingham business community to promote the local tech economy [source: Innovation Depot]. Thirty-two percent of American incubators are sponsored by colleges and universities and 25 percent by economic development organizations. Just 4 percent are sponsored by for-profit entities [source: NBIA].
The idea of an incubator sounds like something forged in the dot-com boom of the late 1990s, but the business incubator concept dates all the way back to 1959, when the Batavia Industrial Center was created in upstate New York [source: NBIA].
In 2015, more than 7,000 business incubators operated worldwide, some in shiny Silicon Valley industrial parks, some on college campuses, and others in developing countries [source: NBIA].
So how does a business join an incubator and what services do they offer?
The Tech Incubator Process
Let’s take a closer look at the tech incubator process using Innovation Depot in Birmingham, Alabama, as an illustrative example. The initial step to becoming a part of a tech incubator like Innovation Depot involves submitting an online application.
In 2014, this prominent incubator accommodated 99 different companies, with 23 new additions selected from 122 applicants, reflecting the competitive nature of the process.
Admission to successful incubators like Innovation Depot is contingent upon the strength of the applicant’s business plan and a face-to-face interview.
Once accepted, companies establish their offices within Innovation Depot’s premises, leased every month. In 2014, the building hosted nearly 700 employees.
Beyond conventional office amenities, Innovation Depot provides cutting-edge “wet labs” for biotech research and development. Members pay rent for their office spaces, constituting a significant portion of Innovation Depot’s revenue.
Within the incubator, Innovation Depot extends a suite of tailored services for growing companies, often delivered by fellow incubator businesses.
More About The Tech Incubator Process
Whether it’s marketing planning, accounting, public relations, intellectual property protection, payroll management, distribution logistics, or custom software development, these services are conveniently accessible within the close-knit Innovation Depot community.
The incubator also offers on-site business coaches for strategic guidance and planning.
To strengthen community ties and enhance the incubator experience, Innovation Depot organizes regular community-wide events, including mixers, happy hours, “hackathons,” and bi-monthly seminars on startup development and management topics.
Weekly “Depot Connect” mixers are specifically designed for member startup companies, fostering a culture of collaboration among entrepreneurs.
Crucially, funding is a vital aspect for tech companies, and incubators like Innovation Depot play a key role in facilitating access to capital.
The board of directors at Innovation Depot comprises regional business leaders representing banks, investment funds, economic development agencies, and other potential sources of venture capital.
In 2014, companies within Innovation Depot collectively secured $20 million in funding, with 87 percent sourced from venture capital firms and angel investors. [source: Innovation Depot].
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How Do Tech Incubators Work?
The key distinction between government or state-sponsored business assistance programs and incubators lies in the selective nature of the latter. Unlike broad-spectrum assistance programs, incubators don’t cater to all companies indiscriminately. Instead, they limit participation based on industry or community criteria, requiring interested parties to actively seek admission.
The admission process is competitive and varies among incubators. Only those presenting the most viable business ideas and feasible plans are accepted, with additional eligibility criteria depending on the specific program focus.
For instance, a tech incubator specializing in areas such as food technology, mobility solutions, or A.I. will exclusively consider applicants with business ideas aligning with these sectors.
Upon admission, the support provided to startups within an incubation program encompasses various aspects, including but not limited to office space, administrative and legal assistance, business planning, product development, and prototyping.
The duration of participation in an incubation program ranges from 1 to 3 years, contingent upon factors such as business type, participant expertise, and efforts invested. Industries with extensive research and product development, such as health tech and life sciences, often opt for longer stays in incubation programs.
Graduation from the program typically occurs once pre-defined milestones, such as achieving growth metrics like revenue targets and staffing levels, are successfully met by incubation participants.
What Are The Attributes Of a Tech Incubator?
- typically charge monthly program fees or membership dues in exchange for office/desk space and access to program offerings.
- Offer programs to member companies that typically include mentoring, education/training, and informal learning opportunities.
- Host events to provide networking and learning opportunities for both member companies and the local community.
- Member companies are usually required to apply to ensure they meet the incubator’s criteria or mission (industry, stage of company, founder demographics, etc..).
- Usually have graduation policies that are typically based on the achievement of agreed-upon milestones, growth metrics, or time-based stipulations.
- Typically, companies join incubators on a rolling basis (non-cohort) and can reside in the incubator for 1-3 years.
Types of Tech Incubators
The fact that Innovation Depot is situated just one block from the UAB campus is no coincidence. Some of the most passionate supporters of emerging technologies are colleges and institutions.
Large research colleges enjoy the advantages of having easy access to bright young people, an abundance of faculty members who are committed to research, and an abundance of expensive tools like supercomputers and engineering labs to test the finest ideas. They also have enough money to invest in concepts that have promise because of their enormous endowments.
University-based incubators not only organize immensely popular company competitions but also organize conventional startup residences on campus. Every year, the Rice Alliance for Technology and Entrepreneurship at Rice University in Texas holds a Business Plan Competition that awards graduate-level entrepreneurs with approximately $1.5 million in starting capital, with over $500,000 going to the winning team. [source: Rice Alliance].
Well-known corporations and IT firms have a stake in encouraging high-tech innovation and entrepreneurship. Bigger tech firms frequently acquire smaller, more agile startups that have created a revolutionary new process or product.
These businesses may make investments in the establishment of new incubators, such as Matter in Chicago, to guarantee a consistent flow of fresh concepts. 2014 saw 20 Chicago-area businesses provide $4.4 million in private funding to the nonprofit health technology incubator, including some sizable pharmaceutical corporations. [source: Carpenter].
Idealab’s Type Of Tech Incubator
The most well-known tech incubator, Idealab, operates on a very different business plan. Bill Gross, a serial entrepreneur, launched the private, for-profit incubator in California in 1996. Idealab develops its company concepts and then assembles internal teams to turn them into successful startups, in contrast to most incubators that take applications from already-established startups.[source: Idealab].
You may discover that certain tech incubators are referred to as accelerators and vice versa when you conduct web research. Although some incubators have evolved into accelerators or now provide those services, the two organizations are very distinct from one another.
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Incubators Everywhere
Tech businesses have found such success with the business incubator model that many other industries are following suit. There are incubators for fashion, food, and design in shared commercial kitchens across the United States, as well as incubators for farming [source: Bortolot].
Tech Incubators vs. Tech Accelerators
Tech incubators provide an excellent avenue for emerging tech firms to refine their business plans and establish connections with investors. However, there’s another concept known as a tech accelerator. In both tech incubators and tech accelerators, small founder teams receive mentorship from seasoned tech entrepreneurs and access crucial services.
Despite the interchangeable use of the terms “incubator” and “accelerator,” these two models differ significantly. Tech incubators, such as Innovation Depot, cater to a diverse range of clients at various stages of growth – from early-stage concepts to established companies seeking rebranding or new product development.
A notable success story from Innovation Depot is Atlas RFID Solutions, an established company that, with the support of the incubator’s resources and investor connections, rebounded from the Great Recession, witnessing a substantial revenue increase from $200,000 in 2007 to $7.2 million in 2012 [source: NBIA].
Tech Accelerators
In contrast, tech accelerators have a distinct focus on the earliest-stage companies, often consisting of no more than a pair of innovative individuals in their twenties with a promising concept. Y Combinator, a highly successful tech accelerator, places greater emphasis on the founders’ talent rather than the initial idea, anticipating significant changes throughout the acceleration process. Remarkably, a formal business plan is not a prerequisite for applying to Y Combinator.
Another significant difference lies in the duration of the development process. In incubators, member companies typically anticipate spending several years, treating the space as a permanent office. Conversely, most tech accelerator programs involve a competitive selection process for limited residencies lasting only three to five months.
The ultimate and pivotal disparity between tech incubators and tech accelerators is their organizational mission. Incubators, primarily nonprofit ventures, aim to catalyze innovation in the regional economy. They seldom provide upfront seed funding to member companies and refrain from claiming a percentage of the profits generated by the companies they assist in launching.
In contrast, accelerators are frequently for-profit entities established by teams of venture capitalists and angel investors. These entities offer substantial upfront amounts, often exceeding $100,000, to founders in exchange for an equity stake ranging from 6 to 10 percent in their companies.
Notably, examples of hybrid models exist, including three-month accelerator programs operated by nonprofit universities and certain incubators that provide upfront funding. The evolving landscape even witnesses companies transitioning from incubator to accelerator models, adding a layer of complexity.
For instance, Innovation Depot is initiating an in-house accelerator program aimed at offering funding to participants in key sectors, illustrating the ongoing innovation within the incubator-accelerator spectrum.
What are the benefits of a startup incubator?
Incubators for companies can offer several beneficial resources, such as offices, seed money, and more.
Here’s a brief overview of some of the resources a startup incubator can offer and how they can benefit your company:
- Office space can help small companies save on rent and create unique networking opportunities with other enterprises.
- Seed funding can assist startups in tackling bigger goals and taking their businesses to the next level.
- Mentors can guide owners and managers to become more confident and efficient leaders.
- Equipment and software vouchers can provide some extra financial relief for tech startups in particular.
What are the downsides of a startup incubator?
Although there are many advantages to startup incubators, there are also certain drawbacks to take into account before enrolling.
Reputable startup incubators have a strict selection process. Ensuring that the investments made by incubators will provide financial gains is of utmost importance.
Up to 305 million businesses are thought to be founded each year, yet there are only 7,000 incubators. This implies that there will be fierce competition for you.
A commitment of up to two years, or even until your product is ready for market, may be required by certain incubators.
Joining a startup incubator means committing to a culture and method of doing business that your company will value more than just the benefits.
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Conclusion
The realm of technology incubators stands as a beacon for aspiring entrepreneurs, offering a fertile ground where innovative ideas can flourish into impactful businesses. Through shared spaces, mentorship, funding access, and a collaborative community, tech incubators provide a nurturing environment that accelerates the growth of startups.
The support from major players like Google, Amazon, and various independent incubators underscores the significance of these programs in fostering the next generation of technological advancements. The strategic alliances formed within the incubator ecosystem create a synergistic force, propelling startups toward success.
As the tech landscape continues to evolve, tech incubators remain pivotal in shaping the trajectory of emerging ventures, embodying the spirit of innovation, collaboration, and resilience that defines the entrepreneurial journey in the digital age.
References
- https://money.howstuffworks.com – How Tech Incubators Work
- https://www.hubspot.com -What Is an Incubator? A Complete Guide for Startups
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