Business incubator – what is it and how does it work?

Business incubators are a key tool to support young companies in their early stages of development. They enable start-ups to benefit from knowledge, resources and networks that accelerate their path to success.

From this article you will learn:

• What is a business incubator?
• What is the relationship between an incubator and a business accelerator?
• What are the differences between a regular and an academic business incubator?
• How do business incubators work?
• Who stands to gain from business incubators?
• What affects the costs of business incubators?
• What are the disadvantages of business incubators?
• What can be gained from business incubators?

Business incubator – definition

A business incubator is an organisation or institution whose main purpose is to support new and growing businesses, helping them to get through the initial stages of development and take their first steps in the market.

A business incubator is an institution or programme that offers support to start-ups in their early stages by providing resources, mentoring and networking.

Definition of a business incubator

They are often associated with universities, government organisations, research institutions or private companies. Their main purpose is to stimulate the development of local entrepreneurship and innovation.

Incubator versus business accelerator

Both incubators and business accelerators aim to support startups and young companies. They offer young companies support at various stages of their development, provide access to a wide network of business contacts and allow them to use office space, equipment, technology and other resources.

It is important to note, however, that incubators mainly focus on the early stages of start-up development, helping to form an idea and create a prototype, while accelerators support companies in more advanced stages of development, helping them to scale and reach the market.

Accelerator programmes have a strict duration and often end with a presentation in front of investors, while incubators may offer support for a longer, indefinite period. Accelerators often invest in start-ups in return for an equity stake, while incubators may not offer direct funding.

Business incubator vs. academic business incubator

The differences between a ‘regular’ and an ‘academic’ business incubator are mainly due to the nature and location of the second type, as both are about creating an environment that fosters innovation and helps entrepreneurs bring their ideas to life.

Academic business incubators are usually associated with universities and focus on supporting businesses founded by students, graduates or academics of the respective university. This gives them access to knowledge, research and technology developed at the university, which may not be available to traditional incubators. They can also offer specialised support in areas that are key to the research conducted at the university in question.

The relationships between the two types of incubators can vary. Sometimes academic ones collaborate with traditional ones to provide their start-ups with access to a wider network of contacts and resources. In addition, a start-up that started in an academic incubator may later move to a traditional one.

Operation of business incubators

Business incubators play a key role in the start-up ecosystem, providing support to young companies in the crucial early stages of their development. Their operation focuses on:

• Many incubators offer office space to start-ups at preferential rates or even free of charge. This often includes coworking spaces, conference rooms or laboratories.
• Experienced entrepreneurs, industry experts or academics often work together with incubators. They help start-ups to understand the market, improve their product, business strategy or deal with operational challenges.
• Incubators often organise training, seminars and workshops on various topics such as marketing, finance, team management or technology.
• Being part of an incubator allows start-ups to network and connect with other entrepreneurs, potential investors, suppliers, customers or business partners.
• Incubators can help start-ups access funding sources such as venture capital funds, individual investors (so-called business angels) or grants.
• For technology companies, some incubators offer access to specialised equipment, software or laboratories.
• Incubators may offer assistance with accounting, legal, recruitment or other administrative aspects that are necessary to run a company.
• Participation in an incubator often gives young companies greater visibility in the media, which can help to increase brand awareness and attract their first customers.

Many incubators operate on a specific business model, which may involve them charging for their services, taking a share of the start-up’s capital or using funding from other sources such as government, universities or private organisations.

Beneficiaries of business incubators

The benefits of business incubators extend far beyond the start-ups themselves, positively impacting the entire economic and social ecosystem in a region. Here are the main groups of beneficiaries:

• Young businesses and start-ups are the direct recipients of the support offered by incubators. They get access to office space, networking, training, mentors, technological resources and support in terms of funding and administration.
• The founders and entrepreneurs, the people behind the start-ups, benefit directly from the knowledge, skills and experience offered by mentors and experts.
• Mentors and advisors, although only acting as advisors, also benefit – by working with incubators they gain access to new innovative ideas and can invest early in promising projects.
• For investors, incubators often act as a filter, selecting and preparing young companies to the stage where they are ready for investment. This gives them access to more mature and less risky projects.
• Universities and research institutions often collaborate with incubators, allowing them to commercialise research and technology and providing students and academics with the opportunity to put their ideas into practice.
• Local governments and governments, through support for incubators, invest in the economic development of the region by promoting innovation, creating jobs and attracting investment.
• The local community benefits when start-ups grow and succeed, as this translates into new jobs and a boost to the local economy.
• Start-ups using incubator services often need products and services such as software, hardware, legal, marketing or accounting services. Local companies providing these products and services can gain new customers.

Costs of business incubators

The scale and scope of these costs can vary depending on the size, location and specialisation of the incubator, as well as its funding model. The costs of a business incubator are related to the wide range of activities they carry out to support young companies. First and foremost, they are related to the maintenance of office space – the rental, purchase or maintenance of the property, as well as running costs such as utilities, internet and cleaning, can make up a significant part of an incubator’s budget.

Another important element is staff costs. Salaries for incubator managers, administrative staff, advisors or mentors, as well as costs related to recruitment, training and employee benefits, can account for a significant share of costs. Incubators also invest in the organisation of workshops, training and events, which includes room hire, speaker fees, catering or promotional materials.

Marketing and promotional costs, such as website maintenance, advertising campaigns, participation in trade fairs and conferences or the organisation of democratic days, are essential to attract both start-ups and potential investors to the incubator. Some incubators may also incur costs to invest in start-ups or offer them financial support in the form of grants, loans or other forms of support.

The costs for participants are derived from the above, but these can vary considerably depending on a number of factors. The most influential factors on the cost of participating in an incubator include the location, the reputation of the incubator, the range of support offered, the costs of maintaining and operating the incubator and the individual situation and needs of the start-up.

Most incubators charge a monthly fee for access to office space, resources and other facilities. The amount depends on the location of the incubator, the quality of the facilities offered and the extent of support. Some may require a share of the start-up’s capital in return for support. This means that the incubator becomes a co-owner of a percentage of the company. The share may be a few per cent, but may also include a majority of the company’s shares – it all depends on the value of the support and the risk assessment of the investment in the start-up.

While many incubators offer training as part of their standard support package, some may charge extra for specialised courses or workshops. Some also offer access to specialist services such as legal advice, accountancy or marketing, but these services may not be included in the standard fee and require additional funding.

In some cases, if a start-up decides to leave the incubator before a certain time, it may be required to pay a penalty or other fees. It is worthwhile to carefully analyse all the costs associated with participating in an incubator and weigh them against the potential benefits in order to make an informed decision about working together.

Disadvantages of business incubators

Business incubators have some disadvantages and limitations that are worth considering. Participation in an incubator can lead to a loss of some independence – they often require a share of the start-up’s capital, meaning that they have a say in the company’s strategic decisions. For some entrepreneurs, this may not be acceptable, especially if the visions of the incubator and the company founder are not fully aligned.

Participation in an incubator can also come at a cost, both financially and in terms of time. In addition to potential participation fees, start-ups have to spend time attending workshops, training courses or meetings with mentors, which can distract them from focusing on their business. It is also worth remembering that incubators are not equal in terms of the quality of support, so there is a risk that a start-up will end up in an incubator that does not offer, for example, mentors with the right skills or access to the resources needed.

Some incubators can also lead to isolation of start-ups from the real market. Being in an incubator’s ‘bubble’ can make it difficult for a company to understand the real needs of customers and market rivals, which can hinder its growth in the long term. It is also worth noting that participation in an incubator does not guarantee success. Access to support, resources and knowledge can help a company grow, but its ultimate success depends on factors such as the quality of the idea, the management skills of the team or the condition of the market.

Benefits of business incubators

Business incubators offer young companies support on many levels. First and foremost, participation in an incubator gives start-ups access to the office space and infrastructure necessary to run a business in its early stages. Often, it is a space tailored to the needs of young companies, with flexible contract terms and appropriate tools and technologies.

Incubators also provide support from experienced mentors who can share knowledge, experience and best practices. Such assistance can cover both technical and business aspects. Start-ups can also expand their networks in incubators and reach out to investors, other entrepreneurs, potential business partners or customers.

Incubators also often offer services such as legal advice, accounting or marketing, which can be difficult for start-ups in the early stages to obtain on their own. They also help to raise funding, both by providing access to a network of investors and by providing support in preparing for talks with potential investors.