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Incubator Firms: What Startups Need to Know

Incubator firms are organizations engaged in the business of fostering early-stage companies through different developmental phases until the companies have sufficient financial, human and physical resources to function on its own.

Key Takeaways

  • Incubator firms help grow a start-up from an idea to a company that can stand on its own.
  • The services provided by the incubators to any start-ups include:
  • Office space
  • Administrative functions
  • Education
  • Mentorship
  • Access to investors
  • Capital
  • Idea generation
  • Incubators either charge a fee for their services or take equity from the start-up.
  • The period of incubation can span from a few months to several years.

Understanding an Incubator Firm

An Incubator firm can either be a non-profit or a for-profit entity. Incubators can provide assistance through any of the following methods:

  • Access to financial capital through relationships with their financial partners
  • Access to experienced business consultants and management-level executives.
  • Access to physical location space and business hardware or software.
  • Access to information and research through relationships with local universities and government entities.

Incubators are different than accelerators even though both of them have similar characteristics but functions in a different way with slightly different goals. Incubators focus on companies that are just starting to develop their idea into a business while accelerators take start-ups with that already has an established business model and accelerate their time to market.

Characteristics of an Incubator Firm

There are different types of incubators and each of them has its own profile. Incubators can be:

  • business incubators
  • research incubators
  • academic incubators
  • venture capitalist incubators.

All of these operate with the same principle idea of helping small firms grow. They function differently in the way they raise capital, the length of the incubation period, and the type of payments they receive for providing their incubation services.

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Fee Setup

Incubators focus on early-stage start-ups that don’t have a business model in place and help nurture start-ups by developing the idea into a viable product and are commonly referred to as a school start-up.

Incubators typically work on a fee-basis as opposed to taking equity in the start-up. This is when incubators get funded by institutions like universities or municipal organizations.

However, for-profit incubators look to gain equity in the company in exchange for their services or seed Capital. Gaining equity in an early-stage company with strong growth prospects is the ultimate goal.

Gaining equity is an early-stage company with strong growth prospects is the ultimate goal and one that can provide a financial windfall to the incubator firm if the early-stage company takes off but equity stakes in start-ups are more commonly associated with accelerators than incubators.

Also Read: Stages of Startups Fundings – Series A, B, and C Fundings & it’s Working

Time Frame and Services

Incubators work on an open-ended time frame with no set schedule or a timeframe in which they deem a start-up ready to launch. Incubators create an environment in a co-working space for an exchange of ideas with a multitude of selected companies that all share in the overhead costs to help foster collaborations and the growth of relationships with like-minded individuals.

The start-ups chosen for the incubator programs work with advisors and mentors who offers their experiences in the business world to help address questions and dilemmas they face.

Incubator firms put these start-ups through class-room style sessions and the team must perform tasks such as gathering feedback from potential customers about their product.

Throughout the incubator process, the start-ups are pushed to improve their ideas and learn how to convey their plans to customers and potential investors alike.

It is not uncommon for start-ups to pivot during the incubator program after talking it over with seasoned experts and testing their products or services with the public.

At the end of a cohort’s program, the start-ups present their business plans at a demo day session. Such an event brings potential investors and other entrepreneurs who may wish to collaborate with or back the development of the start-up.

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Incubation Firms Advantages

Incubator firms give the early-stage start-ups or businesses a wide range of financial capital options and also provides mentorship. Networking, expertise. In other words, there is a lot of back-ups and expert help.

Incubation Firms Disadvantages

The same benefits that incubator firms bring with them can also be disadvantages. Continuous mentorship and networking with other entrepreneurs may result in undermining the start-up owner’s focus during the critical early stages of the business.

So always think hard before joining an incubator firm don’t just move into the first one that comes across your way, shop around first and find the one with services that are the best fit.

Also, keep in mind whether your business is at a stage where it could benefit from an incubator firm or not.