Incubators are a great resource for small business owners to cultivate and grow their firms.
Also referred to as “innovation centers,” incubators are often affiliated with a university or county economic development office. They house groups of growth companies, usually technology-centric, that can learn from each other while sharing resources provided by the incubator staff.
They’re generally funded by money from universities and municipal governments. States and counties like them because companies that grow in an incubator ultimately set up shop in an area nearby, giving the municipality a good return on its investment by boosting the neighborhood’s economic base, according to the National Business Incubation Association.
“An incubator is a great economic development tool to seed companies in a certain economic sector into your economy,” says Sally Sternbach, executive director for Rockville Economic Development in Rockville, Md. About 85% of firms housed in an incubator survive five years or more, she says. In Sternbach's county (Montgomery), the rate is 92%.
She says small business owners who currently work out of their homes but are ready to make a move to a more professional setting are good candidates for an incubator.
But for those entrepreneurs who do better work in a garage, an incubator wouldn't be a good fit. “You need to know if you’re coachable,” says Tom O’Neal, director of the University of Central Florida’s Technology Incubator in Orlando. “You don’t need to go to an incubator if you’re just looking for an address because people there are going to try and tell you and teach you things.”
But if you’re ready to make the move because you’re having more meetings or the kids and dog are providing too many distractions, an incubator might be right for you. “You’re getting to a point when you’re making a lot of brand new decisions and want to be around other people, digesting their experiences,” says Sternbach.
Before you make the move, make sure you have enough revenue to cover six months of leasing incubator office space, advises Sternbach. Rent at an incubator is about on par with the square footage costs of traditional office space, but offers other amenities at no extra charge.
Incubators began getting popular about 10 years ago, says Elaine Amir, the executive director of Johns Hopkins University, which is also in Montgomery County, and houses an incubator. She prefers to call it an “innovation center.”
Incubators initially were largely groups of biotechnology firms, she says. However, they have expanded to include other industries because for many small business owners “it’s a very different thing to be a scientist or an innovator and discover that process than it is to take it to market,” says Amir.
But incubators still trend toward tech firms. Retail is hard to do in a incubator because you “can’t really run a retail space out of an incubator” points out O’Neal. There are often themed incubators for biotech firms, information technology firms or there’s even an art incubator in Kansas City, Mo. “Most lifestyle firms like dry cleaners, pool cleaners can get the kind of help they need from working with a Small Business Development Center,” he says.
Professional Look. An incubator offers conference space and provides a more professional environment for visits. “It also gives you an address that looks decent,” notes Sternbach.
Administrative Help. Incubators generally provide a receptionist and business basics like a copier, fax machine or dishwasher. “If you’re doing work and it’s timed and tedious the fact that you have to answer the telephone could knock out your experiment,” says Amir.
Get Through Startup Phase. Fledgling tech firms often take a while to get their services or product to reach the marketplace, says Amir. “When a business is not really operational and needs a support system, it’s probably a good fit for an incubator.”
Build an Existing Business. While most firms are fairly young when they enter an incubator, O’Neal says he’s seen 10-year-old firms join to jumpstart their businesses.
Business Planning. The University of Central Florida’s Technology Incubator requires any company applying for residency to complete a 21-hour course over 3 ½ weeks that includes making a business plan. There is an application process to enter any incubator and not just anyone is accepted.
Resource Center. Incubators often bring in experts by holding weekly or monthly seminars to educate tenants on legal issues like intellectual property concerns, marketing, fundraising, writing a business plan and other aspects of running a successful business.
Library Access. Most businesses housed in a university-affiliated incubator will have free access or for a nominal fee to the school’s library along with periodicals and other guides that can be expensive to subscribe to on your own. “We’ve also had innovation center companies work with the librarian to help them set up their own libraries when it’s time to move out,” says Amir.
Firms are encouraged to graduate from an incubator once they have a steady revenue stream and are ready to take the commercial office space plunge. In Rockville’s program, a business can leave at any time with two months’ notice.
“Usually a company’s rent is increased 5% every year as sort of a nudge to encourage firms to move out so that others can move in,” says Sternbach. The incubator experts have seen companies stick around for six months to five years or more, but most are out in about three years.
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