So you’ve heard about Y Combinator, LaunchBox, and TechStars. And you’re excited about the possibility of founding a famous incubation program. Before you go about starting one, check out these tips from Sandra Cochrane, an expert in the incubation industry.
Cochrane is on the board of directors of both National Business Incubator Association (NBIA) and Michigan Business Incubator Association (MBIA). She’s also a technology business consultant at MI Small Business & Technology Development Center (MI-SBTDC). Check out Part 1 of the interview to tap her insights in commercialization strategies for tech startups.
* Edited interview
VH: Are all incubation programs non-profit? How do they generate revenues?
SC: No, not all incubation programs are non-profit. There are several for-profit incubators in the United States and around the world. Typically, a for-profit incubator will take an equity stake in the client companies it accepts. The equity is in exchange for the value of the incubator’s subsidized real estate and mentoring/coaching services. In some cases, however, the incubator is actually charging market rates for its physical space and services, and companies are willing to pay because they recognize the value of what they get for the price.
In the non-profit incubation world, most programs generate about 50%-75% of their revenues from rent and client fees (see stats in comment area below). The remaining revenue is usually subsidized by a partner entity, such as a university, an economic development group, or a local government/municipality. Some incubators actually run capital campaigns every few years to raise money for operations, and some sell sponsorships and naming rights to generate cash.
VH: What are the key elements in forming a successful business incubator program/facility?
SC: Many people think business incubation is all about providing cheap space to new businesses. However, business incubation is less about the facility and more about the services and programs established to support entrepreneurs.
One key element in forming a successful incubator involves knowing what kinds of clients the incubator will serve (and thus also knowing what clients it’ll refer to other community resources). Intake applications, quarterly meeting agendas, and graduation parameters are all developed based upon the profile of the intended clients.
Another key element is providing suitable entrepreneurial support in the form of business education, leadership training, and mentoring. Most entrepreneurs find tremendous value in surrounding themselves with other people who can teach them tips and methods for success.
Shared resources are also important to incubator programs. Office equipment, like photocopiers and fax machines, are typical, but expensive specialized equipment for life science companies, artists, food/kitchen enterprises, and/or manufacturing endeavors, are also common.
VH: You also help local leaders and entrepreneurs determine if a business incubator would be an economic asset for their communities. Under what circumstances are incubators not beneficial or not desirable to a community?
SC: There needs to be a sustainable pipeline of entrepreneurs in order for an incubator to thrive. Remember, the point of an incubator is to help companies leave and move into their own places of business via standard real estate models. If there’s no sustainable deal flow of companies, then the incubator will fail or it’ll simply become a real estate deal in which no companies ever leave.
Also, most successful incubators have a relationship with a college or university. Thus, communities without a college or university may not be able to generate enough new companies and/or enough entrepreneurial support in the form of faculty participation.
Probably the worst reason I often hear for a community to start an incubator is because they have a white elephant building in a blighted area of town and they think turning it into an incubator will utilize the building, generate revenue, and foster entrepreneurship. In my 8 years working in and with the business incubation process, I’ve never seen that happen successfully.
VH: How can angel investors get involved with incubation programs?
SC: Angel investors can easily get involved with incubation programs by volunteering to serve as mentors. Most incubator programs welcome the assistance of experienced investors who can help educate new company leaders about the ins and outs of the investment world. Helping companies prepare pitches and presentations and providing feedback on business plans are valuable services that investors can provide. And, obviously, they can invest in the incubator’s client companies!
VH: Would you rather hatch chicken eggs or duck eggs?
SC: I actually raise chickens and sell organic free-range eggs to my friends, so I’ll opt for hatching the chicken eggs!
* For series, references are published in the last installment of the series.