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Do You Want to Start a Business Incubator? Here’s What You Should Know

If you have a passion for helping entrepreneurs, you may have considered starting your own business incubator.

Founding one of these organizations can be exciting. There’s certainly some appeal to the idea of spending your days among energetic founders, helping them realize their visions.

Business incubators are just as tricky to run as any other startup — maybe even more so — and they have their own unique needs. And the industry segment may not be growing as quickly as it used to. However, there are still plenty of ways for incubators and accelerators to distinguish themselves and succeed.

Here are a few things to consider if you’re thinking of starting a business incubator.

Incubators vs. Accelerators

Business incubators and business accelerators share many similarities, because they have a similar goal: helping businesses grow by giving them the resources they need.

However, business incubators typically help brand new companies get started, while business accelerators work with companies that are further along. Accelerators are more focused on funding companies so they can grow rapidly — in exchange for some ownership of the company, of course. The benefits of incubators may include some funding, but tend to focus more on mentoring and physical resources such as office space.

For more stats on incubators and accelerators and their growth, download our bonus resource:
Business Incubators By the Numbers.

The business model for some business incubators can resemble an exclusive club or school, collecting regular dues in exchange for great education and other resources. The role of the founder of an accelerator, on the other hand, will primarily be fundraising and managing investments.

How your potential incubator is labeled (the terms “incubator” and “accelerator” are often used interchangeably) matters less than a firm decision on specifically which stage of business you plan to help, and defining how important of a role funding will play in that help.

Understanding how this business landscape has changed for both models in recent years is a good place to start.

A Changing Market Landscape

Experts now think that the period of rapid growth for incubators and accelerators is over. As this TechCrunch article explains,

“Although there are now more accelerators and incubators than ever, the total size of their portfolios appears to have leveled off in 2013. We can speculate that the proliferation of accelerators has reached a tipping point where there are now not enough quality founders and startups to justify continuing to expand their portfolios.”

Although they might not be multiplying as rapidly as they once were, accelerators are starting to pivot and adapt in various ways as their industry matures.

Colin Tomkins-Bergh, writing for the Ewing Marion Kauffman Foundation, notes that some accelerators are becoming more like incubators, offering more resources like shared office space. Other accelerators are making sure that funding is available for businesses after the initial rounds run out of funding, which can ease the transition out of the initial startup phase for many of their members.

Meanwhile, incubators that have relied mostly on the appeal of a hip workspace full of like-minded entrepreneurs now have some serious competition.

Competing with Coworking

Another industry segment is also adapting and pivoting to appeal to various startup companies and investors: Coworking spaces. Coworking has seen rapid growth in recent years, as we wrote in our full post on the topic. And just like accelerators, they are starting to specialize and seek new clientele. (For more specific examples of this, read our related post: Check Out These New Coworking Spaces.)

Coworking spaces used to cater almost exclusively to remote workers, freelancers and digital solopreneurs, but they’re now marketing themselves to small businesses and startups. Many have started offering enterprise plans with private offices and other amenities that cater to these companies. These spaces offer lively atmospheres and networking opportunities, short-term leases and the ability to grow or shrink physical space quickly, and events geared toward the entrepreneurial set.

Tools like Turnkey Office Space are also making it super easy and affordable for new companies to find flexible offices for themselves, or share them with other companies independently.

Alternative, flexible office environments don’t have to be competitors of incubators, however.
There’s no reason you can’t leverage their strengths by locating your new incubator in one of them, if it fits with your business model.

Business Incubator Necessities

So, it might be more difficult than it was in the past to start a business incubator, especially one whose revenue centers on lease fees. But there are still ways to successfully found a business incubator and help your local business community.

For more on the the industry of incubators, download our bonus resource: Business Incubators By the Numbers.

Here are a few things you’ll need:

A Unique Value Proposition

Now that business incubators and accelerators have become more common, it’s even more important for each one to distinguish itself. Casey Allen, founder of multiple businesses and accelerators, advises would-be incubator founders to “Find an angle. Be niche. Be the best at whatever your current network seems to lend itself to.”

Focusing on a well-defined group of target customers is great advice for any business. If you try to help too many kinds of different companies with your incubator, it will be much more difficult to create services that meets their needs over years and changing market landscapes.

Incubators may choose to specialize by industry, by growth stage, by shared interests, shared cultures, shared business districts, or all of the above.

Credibility and Buy-In From Others

Credibility is probably the most important factor in whether businesses will want to join your incubator. And credibility takes time to build up.

Your personal experience is important, of course, but it’s not enough on its own. To build up credibility, companies often build advisory boards made up of investors, CEOs, and a few members of the local government or economic development organizations.

More advice from Allen: “Here’s the acid test: If you can’t get 20 successful tech CEOs (not consultants) and 10 active angels to commit to your face that they will spend 5 hours per month with the class then you’re too early. Spend another year laying the groundwork.”

Other data shows that incubators should still expect to go through some very slow first years. Consider this from My Local Economy:

“It takes time to embed a new incubator into a local environment. Credibility, reputation and understanding take time to build. A young incubator will face insufficient demand for its space and services – there will be challenges in achieving full occupancy rates and the take-up of services in the first few years of operation.”

Lots of Cash

Just like any other business, your incubator will need a solid business plan, and cash to keep you operating through slow times.

Incubators may start out with local grants or funds from the government or local universities, but these usually aren’t enough to sustain incubators in the long-term.

Allen suggests “at least a total cost of 75k per startup “fully loaded” which covers seed funding and all overhead” for a three month accelerator to cover the office space and the staff.

Terrence Yang, also writing in Quora, sums up the must-haves for starting an incubator this way:

  • You have a defensible differentiator, such as a unique distribution model, that matters to founders, and
  • You know you have to do this and nothing else for the next 20 years, and
  • You have founder-problem fit.

If that describes you and you’re ready to test the waters for a potential incubator location, you can start at Turnkey Office Space. We can arrange tours for you in a wide variety of office spaces, and it’s all free. Click here to start your search.