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Entrepreneurship Education: Incubator Business Models

Posted on Thursday, Mar 18th 2010

You have read my last Forbes Column, An Underused Tool For Job Recovery. With unemployment soaring, I discussed how incubators can help people move into self-employment–and create jobs.

We’ve also discussed the topic of why incubators fail at length here. One of the issues that came up in the incubator discussion as a cause for failure is: What is the right business model for an incubator?

This is what I invite you to discuss in this thread.

[Please note that since this discussion took place here on the blog, we have launched the One Million by One Million global initiative, and for incubators looking for a viable business model, you are very welcome to reach out to me to become a reseller of our premium program priced at $1000 annual membership fee.]

This segment is a part in the series : Entrepreneurship Education

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The beauty of business incubation is that there is no hard and fast rule as to how it must be formed. There is no "cookie cutter" plan. There is no "franchise". Each community can develop their own program to reflect and meet their specific needs. So, while some may have a robust technology emphasis, others may be multi use, or still others may capitalize on the great cooks in their area and develop a kitchen incubator. How much input and direction the clients need depends upon the focus of their business enterprise. Those in the biotech industry need a lot more "information" and "capital" than does the new accountant in a multi-use center. That is why it all works so well. The incubator can be in a small, rural community with five offices or it can be in a robust, metropolitan area and have sixty-five offices. It may be a stand alone or it could be university affiliated. It can be for profit or non-profit. It may be grant funded or state funded. Incubators are not "one of a kind"….they are "one in a million". That is what makes it work so well!

DeAnna Adams Thursday, March 18, 2010 at 6:10 AM PT

yes, but this discussion is about business models that are working well, not the kind of fruit salad answer you provided.

Sramana Mitra Thursday, March 18, 2010 at 1:13 PM PT

The incubation model that works the best is the one that treats the incubator as a company itself. Just like the clients it serves, the incubator must be based upon a solid customer need and provide a strong value proposition. It must be led by a talented management team that is properly compensated. The incubator must have a solid financial plan and fiscal discipline. It must utilize an effective marketing plan to ensure a constant supply of quality customers. There are successful for-profit as well as non-profit models, private sector based, university based, and community based models. The common thread among all the successful incubators is that they are run as businesses with the customer being the companies they serve and the product being the myriad support services those customers need. At the end of the day, the only valid incubator model is that which provides services the customer needs at a price the customer is willing and able to pay and whose revenue structure insures that income at least equals expenses.

Sandra Cochrane Thursday, March 18, 2010 at 1:37 PM PT

Sandra, This is still too high level. I think most of us are past this level. We need to double click down and discuss the specifics of business models that are working. Debt? Equity? Fees for Services? Revenue Sharing?

What is the financial relationship between an incubator and the startups it incubates?

Sramana Mitra Thursday, March 18, 2010 at 1:43 PM PT

Ahhhh….you want to know how clients pay and how incubators make money? Most successful incubators rely on a variety of funding sources. Most revenue usually comes from client rents and fees (50%-75%). The remaining operating funds are usually obtained from training and consulting income as well as subsidy from a sponsoring entity. Some incubators do require a small equity stake (usually less than 5% of founders equity) or a revenue agreement from companies entering the program, but this equity/revenue is not relied upon to provide operating income. Rather, the equity/revenue is a way to share in the upside should a company be successful. It’s usually viewed like a lotto ticket–nice if it comes up a winner and you get something, but don’t count on it to pay the mortgage.

Sandra Cochrane Thursday, March 18, 2010 at 2:45 PM PT

I am looking for feedback from people running incubators with specific metrics and strategies of what’s working and not working.

I am not looking for generic responses. I know very well what the high level ideas are. I request that you don’t underestimate the level of experience or intelligence of this author or the audience.

Sramana Mitra Thursday, March 18, 2010 at 4:14 PM PT

A particularly interesting model is that of a venture-backed incubator. Having several early-stage VCs invest together in a small fund can be very effective (so long as they can agree on structure and the investments). It can be applied to virtual company start-ups or within brick-and-mortar environments. The model can also be applied to any technological area and, thus, tailored to particular VCs portfolio interests. An additional component that I have observed to be very successful is to have a pooled management structure within the venture-backed incubator that manage the companies within – thus the entrepreneur can utilize their skills to reduce the technology risk and have help with operations, business development and other back office needs. This sort of environment can be very stimulating to work within but the VCs usually have a very high bar for investment (and therefore increasing potential return on their investment). Sometimes the entrepreneur can have difficulty with this format, however, as the milestone-driven environment can be challenging for them to accept – but the drive is for company success and ROI. It takes a special mentor to help the entrepreneurs manage change – or accept the change in their position with the company.

Mary Thursday, March 18, 2010 at 5:52 PM PT

Sramana,

You asked to hear from people running incubators with business models that work. I run what I believe is among the top 2-3 largest facilities for startups in the world. We may be the largest, but I don't have the data to be sure. We house ~250 companies in an MIT-owned building in Cambridge, MA. We are private, for-profit, profitable, and are not subsidized by any outside source. Eight years ago we ditched the incubator word, which we found implied to investors that the startups here were of the type that 'needed help'–a counterproductive signal. So far we've seen $1.1B of venture capital invested in companies based here. The New England Venture Capital Association has its members hold their office hours here. Google's Android project moved in here when it was 1 guy, and grew the office here to 200 before getting regular offices. A couple of months ago one of the startups here was acquired for $640M. I'd be happy to talk further, but I'd first like to get a better sense for you and your plans for this piece. Feel free to email.

Best,

Tim Rowe

Founder/CEO

Cambridge Innovation Center

Tim Rowe Thursday, March 18, 2010 at 11:30 PM PT

Incubators need to focus on the needs of the business community, not on those of the people who would like to go into business. This simple shift in emphasis will allow incubators to find the funding they need within the existing business community to fill the gaps that exist.

Many smaller companies don’t, on their own, have the time, energy, resources or expertise needed to develop a capability that’s essential to their future growth. By pooling the resources, financial and human capital, into an incubator program designed to meet their specific needs, the incubator can provide the guidance in creating these new capabilities. Because there are specific goals established in defining the needs of the current business community, it’s easy to establish action plans, timelines and deadlines for achieving each phase of the incubator project. The metrics are defined by the action plans. These metrics form the basis for feedback systems to allow all involved to monitor the success of the project. As immediate needs are met, new needs will surface and the process begins again.

Most colleges and universities have programs, many of them extensive, to help people who want to go into business for themselves. There’s no need for incubators if they’re simply going to mimic, or merely extend, what’s already available to the public through our colleges and universities.

Dale Furtwengler Friday, March 19, 2010 at 5:23 AM PT

Taking a piece of revenue from incubator tenants is a non-starter for us. We will look at founder equity (~5%) or convertible debt where appropriate, provided it doesn’t cloud up the balance sheet, and it’s in-line with the value of services that are being offered. Other revenue streams we capture are rent (which is nominal but helps us cover overhead), city and state grant money, corporate sponsorship, and foundation support. Business incubators are the best infrastructure investment that a government can make (both in terms of job creation, increasing a tax base, and wealth generation, see nbia.org for figures). If we’re doing our job correctly we don’t have time to be consulting, so this is not income we look to. We try to keep expenses low, and run lean like our tenants.

Micah Kotch Friday, March 19, 2010 at 8:24 AM PT

Tim, I’d like to keep the discussion on the blog, not on private email exchanges, so if you wish to contribute, please comment here. You can get a “feel” for me and my pieces by looking at this blog and my Forbes columns. There’s a large body of work that should be quite self-explanatory.

Sramana Mitra Friday, March 19, 2010 at 8:31 AM PT

Sramana,

Not sure what you were trying to link my comment to, as my discussion was not meant to be focused on microfinance but efficient use of start-up financial ($1-5M) and operational activities in an incubator. Is your interest in this blog directly related to only microfinance aspects for modeling?

Mary Friday, March 19, 2010 at 10:47 AM PT

what?? I have no idea what you are talking about …

Sramana Mitra Friday, March 19, 2010 at 10:50 AM PT

We at Innovacorp (Halifax, Canada) believe the “right business model for an Incubator” is a tightly integrated combination of Incubation Infrastructure, business Mentoring, and early stage Investment.

The High Performance Incubation (HPi)™ business model represents InNOVAcorp’s core business offering. The model comprises three interwoven resources – incubation infrastructure, business mentoring and seed/venture capital investment – to help entrepreneurs overcome traditional hurdles to business growth.

Incubation: Specialized start-up infrastructure, state-of-the-art IT, advanced business services

Mentoring: Advanced hands on highly relevant business consulting, go-to-market strategies, marketing and communications, access to capital guidance

Venture Capital: Nova Scotia First Fund (NSFF), active early stage investor syndicating investments with regional, national and international investors governed by a board appointed Investment Committee following a sound investment policy and valuation methodology. Innovacorp invests between $100K and $3M in venture grade companies.

The team behind the HPi business model delivers highly customizable value added services to our clients.

We measure our success through monitoring the following metrics generated by the client companies who have materially benefited from Innovacorp’s HPi Business Model.

Annual export revenue:
$275M in fiscal year 2009

Annual direct employment :
1447 in fiscal year 2009

The cumulative amount of leveraged investment capital:
$101.3M March 31, 2009

Client Satisfaction measured through a third party survey:
96% in fiscal year 2009

Leading indicators such as: Number of prospective clients engaged, number of new active clients, and number of active clients.

Bottom line being that the “ideal business model” of an incubator needs to be all about business.
– Moving at the speed of business
– High level of credibility with the business community
– Attracting new clients from and interacting with the business community.

For a full description of Innovacorp’s HPi Business Model:

http://innovacorp.ca/files/imce/Innovacorp_2009-2010_Business_Plan_u100709_1.pdf

Dan MacDonald, Innovacorp
http://www.innovacorp.ca
info@innovacorp.ca

Dan MacDonald Friday, March 19, 2010 at 1:45 PM PT

Dan, this is very helpful. What percentage of your portfolio companies take investment versus grow organically? Can you throw some light on your business model vis-a-vis companies that do not seek investment, but desire to preserve 100% ownership?

I am trying to gauge whether an incubator needs to be an investor as well for the model to really flow.

Sramana Mitra Friday, March 19, 2010 at 1:50 PM PT

Hi Sramana,

We function as the tech transfer office of Northern Arizona University and when relevant take warrants as a means of equity in certain companies. Usually, this is when we provide services we believe are above and beyond what we would normally do. In this arrangement, a seperate LLC (we are a 501c3) holds the warrants until a successful exit event. This preserves our tax free status and does not impose tax consequences for holding stock. We also exist outside of the university so it frees us from some of the issues related to being within. Additionally, we are in the final process of the University’s foundation creating their own LLC to hold equity stakes as it is illegal in the state of Arizona for universities to do so directly.

At my last post, we negotiated profit sharing deals based on a yearly lump sum or shared percentated. Our last agreement prior to my leaving with a private firm was for $250k per year for 5 years if they hit their earning estimations.

Both programs require open book accounting, monthly tenant meetings, quarterly benchmark reviewing and other items that are included in the lease when they enter. For an incubation program to be successful I believe they must have the full participation of their clients!

Best Regards,

Russ

Russ Yelton Friday, March 19, 2010 at 3:59 PM PT

Sramana
The incubator turns out to be the gas chamber for start-ups becasue they are inherently “anti-entrepreneurial” as entites. When an entrepreneur starts a company, h\she must declare leadership in their market, set the new standards and innovate and dictate in their category. The last thing they need or want is to be coddled and counseled by outside\inside influences. Entrepreneur who create a brand in fact like to do whatever body else says cannot be done. The entrepreneur who is receptive to incubation is a sure fire market loser 99.5times out of 100. Incubation is truly a fish out of water when it comes to entrepreneurship.

W Cliff Oxford Saturday, March 20, 2010 at 10:03 AM PT

Hi,

I have no metrics since we are just beginning this type of endeavor, but I am starting to see part of my business as a “technology incubator” for several startups. We’re a web development shop that’s trying to re-invent the way business is done. We have several startup clients with smart ideas and not much cash. For those who are doing their homework, with proper market validation and a well-planned strategy, we’ve made a couple deals exchanging our services developing the platform and technology in exchange for some founder’s shares.

So instead of providing cash or regular investment, we provide services to help them actually reach market, and our incentives are very much aligned.

This works for us because we have a team of developers always hungry for a new challenge, and a growing bread-and-butter business of monthly maintenance/support contracts from our existing clients.

John Locke Saturday, March 20, 2010 at 1:14 PM PT

What percentage of your portfolio companies take investment versus grow organically?

We invest in aproximately 10% of our client companies. Some do not need investment and favor bootstrapping, others are not venture grade ie: we are unable to attract syndicate partners to co invest.

Can you throw some light on your business model vis-a-vis companies that do not seek investment, but desire to preserve 100% ownership?

Those companies who need capital but who insist on 100% ownership often fail.

I am trying to gauge whether an incubator needs to be an investor as well for the model to really flow.

An incubator needs to have the ability to help client companies attract risk capital. It is easier (but still a challenge) for an incubator to attract risk capital when you are able to invest your self.

Dan MacDonald Saturday, March 20, 2010 at 7:16 PM PT

Dan,

You still haven’t answered my question. I am interested in your business model – the incubator’s compensation structure vis-a-vis the companies that bootstrap. MOST businesses do not fit the venture capital model and should NOT be raising money. They need to be built organically. My question is: do you incubate such companies? If you do, then what is your business model wrt them? Or are you trying to fit ALL your companies into an equity financing model, which, in my view, is a fallacy in the system that I am trying to address.

Sramana Mitra Sunday, March 21, 2010 at 8:14 AM PT

Do check out Ernesto Sirolli’s book “Ripples from the Zambezi” and his Sirolli Institute for Enterprise Facilitation at http://www.sirolli.com.

Sirolli spent years observing failure after failure in the development field before developing this method that has proven itself around the world.

becky Sunday, March 21, 2010 at 12:46 PM PT

Sramana Mitra:
You still haven’t answered my question. I am interested in your business model – the incubator’s compensation structure vis-a-vis the companies that bootstrap. MOST businesses do not fit the venture capital model and should NOT be raising money. They need to be built organically. My question is: do you incubate such companies?

Innovacorp:
Yes we do incubate high potential such companies.

Sramana Mitra:
If you do, then what is your business model wrt them?

Innovacorp:
As a provincial government (ie: State) sponsored (approx 60% of Innovacorp revenues come from the province) organization, our mandate is to proactively identify and support the highest potential companies whether we invest in them or not.

Our business model/revenues come from two sources

1. Incubation space and related business services which is basically a breakeven business line.

2. Investment fund returns including the in-kind/sweat equity we take in clients where we go beyond the call of duty.

Sramana Mitra:
Or are you trying to fit ALL your companies into an equity financing model, which, in my view, is a fallacy in the system that I am trying to address.

Innovacorp:
We are not trying to fit ALL companies into an equity model. I agree, that this would be detrimental to a large percentage of companies.

Dan MacDonald Sunday, March 21, 2010 at 4:08 PM PT

To DanMacDonald, Innovacorp:

I commend you on your work and note that you are the first incubator from which I have seen performance metrics. That in itself deserves recognition.

You have provided metrics for 2009 only. However, to really assess the economic impact of the companies you incubate, it would be helpful to see how the companies are performing over a period of 3-5 years after engaging with you. In particular, how many are growing steadily, and what is that growth rate? Also, it would be helpful to see the real-time development of the employment number — to see how important the bursts (i.e., after financing) are vs. overall baseline growth.

PS I am assuming that by direct employment, you mean employment at the client companies, and not at Innovacorp itself.

AgentG2 Monday, March 22, 2010 at 8:09 AM PT

As the executive director of the Louisiana Business & Technology Center at LSU for the last 22 years (we were founded in 1988), I believe that the correct business model for business incubation programs entails several basic principals for success:
1. Run the incubator like a business. Have a business plan and operate the incubator as you would advise all tenant companies in the incubator to run their companies. Develop a model for self-sustainability. Planned subsides are ok, but unplanned subsidies are not. The LBTC has been self sufficient since its second year (1990) and has done that by developing programs that can generate revenue to cover costs while offering high quality assistance and business support services to its client firms.
2. The model MUST include university involvement. Our incubator is owned by LSU, but in any case, for an incubator to be successful and offer valuable services to its client companies, it must have a strong relationship with institutions of higher learning. The LBTC has complete access to the Colleges of Business, Engineering, Basic Sciences, Agriculture and Vet. Med. These resources are available to all incubator clients. This includes access to faculty, researchers, specialized equipment and labs, graduate and undergraduate students. The LBTC has 10 MBA Graduate Students as grad assistants that can assist incubator clients in doing research and in providing assistance in business planning, marketing, financial modeling and competition analysis. The university connection is critical to the success of the companies which leads to the success of the business incubator.
3. Business incubators should adopt the “best practices”developed by the National Business Incubation Association so that the incubator offers services and operates its facility to the highest standard possible and by utilitzing best practices, the incubator can be the economic engine that it was designed to be.
4. Finally, the LBTC has adopted a mind set to do whatever it takes to assist client companies be successful. This includes assisting companies raise capital, find qualified managemnt, and utilize the LBTC’s network to open doors for incubator tenants. So it is our thought that incubators should provide services and value-added resources and not merely be a real estate entity. We charge market plus rents but we add value to our clients.
This is the business incubation model that we adhere to at the LBTC. Charlie D’Agostino, executive director.

Charles D'Agostino, LSU Louisiana Business & Technology Center Monday, March 22, 2010 at 8:52 AM PT

Based on what I am hearing above, let me put a question to all the incubator leaders out there:

For an incubator to be successful, it needs to be attached to a funding source. Is that what you are saying? And please note, by funding, I mean Equity AND Debt – not just VC, but also, at least theoretically, banks. For instance, if Silicon Valley Bank or American Express Bank decided they were going to do incubation, they could also do that through debt financing.

In other words, the most successful incubation business model is one where the incubator is also a financeer to a degree.

Thoughts?

Sramana Mitra Monday, March 22, 2010 at 8:02 AM PT

Very generic response, Charles. As I said, I am looking for specific feedback, not such 30,000 feet responses. I am specifically asking a question about incubator business models. Pls see above.

Sramana Mitra Monday, March 22, 2010 at 9:13 AM PT

AgentG2:

To Innovacorp:
I commend you on your work and note that you are the first incubator from which I have seen performance metrics. That in itself deserves recognition.

Innovacorp: Thank you

AgentG2:
You have provided metrics for 2009 only. However, to really assess the economic impact of the companies you incubate, it would be helpful to see how the companies are performing over a period of 3-5 years after engaging with you. In particular, how many are growing steadily, and what is that growth rate? Also, it would be helpful to see the real-time development of the employment number — to see how important the bursts (i.e., after financing) are vs. overall baseline growth.

Innovacorp:
Re metrics for 2009 only. Good point, did not want to clog the blog ;). We baselined our metrics in 2005, so we do have metrics for 4 going on 5 years.

See multiple year metrics on page 25 of our business plan:

http://innovacorp.ca/files/imce/Innovacorp_2009-2010_Business_Plan_u100709_1.pdf

AgentG2:
PS I am assuming that by direct employment, you mean employment at the client companies, and not at Innovacorp itself.

Innovacorp:
Direct Employment = number of people employed directly by the client company.

Dan MacDonald Monday, March 22, 2010 at 9:38 AM PT

Sramana,
Entrepreneur Commons is a virtual incubator. The beauty of the model is that it is not mixed up with real estate, and it is not mixed up with consultants providing services to entrepreneurs, so there is no dollar cost to learning or getting help. The only cost is the cost of attending the meeting on a regular basis, which is also an investment to build the trust with other entrepreneurs, as the only way you will get value from the network: the information I share with you after one meeting is not the same as what I will share after we have met on a regular basis for several month.
With this model, you are also flexible in who you can cater to, and the discussions naturally adapt to the local needs and local culture of entrepreneurs, while keeping all involved connected through a global network so that knowledge can be shared beyond the local group as well.
There is a need for a small staff to manage the network. Revenue will come from 2 sources: sponsoring from partners within the entrepreneurial ecosystem and management fees from a fund that will finance the entrepreneurs within the network through debt.

Marc Dangeard Monday, March 22, 2010 at 2:50 PM PT

Is there any example of a business model for incubation such as :
A peer to peer incubation where a group of startups with complementary skills and resources including financing, networking and sharing, bootstrapping together.

Gunasekar Monday, March 22, 2010 at 7:28 PM PT

BoomStartup of Utah (www.BoomStartup.com) is a mentorship-driven investment program. We avoid the terms incubator, accelerator, etc. as they have a negative connotation with the overall venture community (“Do you know how to make a small fortune with an incubator? Start with a large fortune.”) Similar to our favorite such program in the country, TechStars (www.TechStars.org), I will not re-trace what TechStars is and its features and benefits. We feel we have improved on the TechStars model in several important ways: a drive to revenue and early exits, exclusive focus on our region (only companies that will remain in Utah), broader investment participation and support from the local venture community, and inclusion of infrastructure services on top of the capital, mentoring, and office space. We have just launched this year, so we have no historical record, but the buzz has been fantastic and everything seems to be lining up well. We are grateful for the pioneers in other parts of the country who have established mentorship-driven investment programs — we have certainly benefited from their multi-year refinement and their openness. We would be happy to report back when we are underway for this season and at the conclusion of the year.

John Richards
Founder & Co-Managing Partner
BoomStartup (Utah)

John Richards Tuesday, March 23, 2010 at 2:02 AM PT

Sramana ,

Seedfund incubators have the best and most successful incubator business models . There have been some amazing startup success stories that have come out of http://www.techstars.org / http://www.seedcamp.com

Also,

No Money [in cash / kind or resource] + No marketing support = 0 % incubation

I can say this by experience having been through 2 rounds of successful incubation. Both of our incubating institutions invested resources in us and that has helped us achieve. The Technium Challenge http://www.technium.co.uk & IB Wales http://www.ibwales.com/accesswales consortium did not give us any money in hand but spent on us & our biz dev activity that got us places + partnerships & clients – it was a very successful stint

Incubators that simply rent our space are definitely a no-no however I am most impressed with the Dogpatch Labs model. Operation space + No Rent + Coffee & Lunch + Co-working and if you see their portfolio companies success is evident

I have done some detailed research on Seedfund incubators across the world and have the most comprehensive list , if it value adds to this blog who be a pleasure to share the same

Ashwin Tuesday, March 23, 2010 at 5:39 AM PT

Link to Dogpatch Labs http://dogpatchlabs.com/ this is a really WOW incubator model the best thing is they create a co-working environment and a common resource pool

Ashwin Tuesday, March 23, 2010 at 5:41 AM PT

Sramana,

I know you are looking for specifics from incubator managers, but there are currently two widely different types of incubators/accelerators operating in the U.S. and they have very different business models. There are successful examples of both types.

Many new accelerators that offer “boot camps” to entrepreneurs and work primarily with entrepreneurs developing Web-related applications provide funding — but the size of investments varies considerably — in return for equity. A primary offering they have is direct investment; they are for-profit companies owned by investors. A prominent example is Y Combinator. The relationship they have with their companies is investor/investee, though they offer some (sometimes substantial) mentoring, opportunities to network, and access to expert advice.

Most traditional incubators (for example those at universities or fostered by economic development organizations) are not based on this model; their goals are more like your 1M/1M effort. You are undoubtedly already aware of this, but I’m not sure all your readers are, so with the idea that the blog should be informative to ALL participants, I repeat that information here.

Most of those programs do not have their OWN equity sources; they concentrate on helping companies bootstrap, or if the companies are genuinely in need of investment, research funding or debt financing, they will help them get SBIR funds, regional seed fund monies, angel financing, conventional VC financing or debt financing And there are incubators that work with companies that will ALL grow organically via bootstrapping. In this case the incubator may help them gain access to small revolving loan funds, SBA guaranteed loans, and conventional commercial bank financing. For these types of incubators, their primary relationship with their clients is providing mentoring and expert advice, access to laboratories, equipment, space in which to do business, and networking opportunities. For most of these incubators the primary relationship is not an investor/investee relationship.

Most of these incubators do not have direct access to their own investment funds. They work with others who have debt or equity funding. However, having some access to funds obviously offers value Thus, the business model of most of these traditional programs isn’t based on return on equity, though a few do get some equity and this provides a revenue stream that helps them diversify their funding sources (additionally, a VERY small percentage of programs may take small royalty streams over a short period of time).

I do think the problem here has to do with the juxtaposition of two very different models, one of which is for-profit and the other of which is not-for-profit that have inherently different goals, different business models and target (in many cases) different customers). Though both are helping companies grow and succeed, the latter group has a public interest as part of what they do. They do not “flip” companies.

BTW, there is a terrific business incubator in Norcross, GA, called Gwinnett Innovation Park that is owned by Intelligent Systems, a publicly traded holding company. These are the people who grew and sold off Peachtree Software many years ago and they’ve been doing business incubation since 1987. They love to grow companies; they have an investment portfolio and an incubator. I believe the investment portfolio provides overall return for Intelligent Systems; the incubator just pays for itself. Only one-third of companies in the incubator are ultimately investees, but Intelligent Systems works with all the companies they accept either as investees or as incubator clients. As enlightened community members they are interested in creating wealth in their community as well as personal wealth.

Another example is the Business Incubator Center of Grand Junction, CO. The incubator’s business model is based on rents and service fees, income from loan funds they manage, some small local subsidies and a contract to manage Dept. of Energy property in which the incubator is housed. They primarily work with companies that bootstrap and grow organically. They do not take equity.

These incubators and Y Combinator-type models work in different communities, and with different types of companies (I do not believe any Y Combinator type accelerators work with biotechnology companies, for example), and they have different goals.

Dinah Adkins
President Emerita
National Business Incubation Association

Dinah Adkins Tuesday, March 23, 2010 at 5:05 PM PT

Very useful overview, Dinah. Thank you!

Sramana Mitra Tuesday, March 23, 2010 at 5:34 PM PT

Sramana,
To follow up on your analysis of the info provided in comments, I would like to add one additional option: what it takes for an incubator to be successful is that it either requires a fund next to it, or it requires government funding so that you can have a platform that will not burden entrepreneurs with services but rather will support them.

Marc Dangeard Tuesday, March 23, 2010 at 5:37 PM PT

Yes, I agree with that, Marc. It requires some kind of funding. Doesn’t have to be government. Can be foundation, can be regular sponsors like the service companies. Venture capital is a service catering to entrepreneurs. So are lawyers, banks, etc.

Sramana Mitra Tuesday, March 23, 2010 at 5:41 PM PT

I am an entrepreneur but I have a business model proposal for an incubator that I think may be a win-win for the entire ecosystem including VCs, service provders and entrepreneurs like me.

Incubators should be incubated themselves by VC firms in the area like an incubated company. They need to support themselves fully in say 5 or 7 years with their own exits funding their future survival and have enough left to do their own angel investing. Say the leading VC firms in the Bay Area incubate an incubator with say $50 M between all of them. This should be for a period of say 5 to 7 years by which time, the incubators corpus should be replenished with their own exits. In return VC firms get their deal flow as well as some carries from successful exits paid back to them in proportion to their contributions.

This way incubators can get out of the renting for space business and will have money left for angel investments in their incubated companies. They will have a vested interest in making sure all of them succeed and VCs will have good deal flow.

The Incubator should have a Director but the selection can draw upon a committee for selection of companies.

Currently I see a big hole between Ideas and VC fundable companies no matter which country you go to. The last few years have dried up early stage investing like anything while VCs have too much money to invest in large funds and hence only so many companies with unreal expectations because of the size of the money they will have to put in in each company.

Is this naive of me to think? Am I not seeing certain angles that will not work?

What do you think?

Nari

Nari Kannan Wednesday, March 24, 2010 at 4:15 PM PT

I agree that there is a huge gap in early stage financing and I have written about this endlessly.

In an ideal world, every VC fund should have an incubator attached to itself.

Unfortunately, we’re not in an ideal world, as you can see from the nightmare on Wall Street.

The finance industry has shown very little interest of late in doing the right thing.

And yes, $50-$70 million is the right fund-size for incubator funds with a 5-7 year life. The management fee versus carry structure needs to be worked out across a couple of partners with heavy operating knowledge who can really do the heavy-lifting with 5-7 high potential companies.

This would be assuming that these are not the types of companies that can be bootstrapped with minimal investment, because those, by definition, SHOULD be bootstrapped.

Sramana

Sramana Mitra Wednesday, March 24, 2010 at 5:17 PM PT

At the BioCenter, we have a next-generation incubation model that provides a combination of infrastructure and commercialization support services to cleantech and life science companies. The model allows the emerging companies to maintain the flexibility of a start-up but leverage resources that would normally be found in a big company environment. Given the specialized nature of the industries we serve, providing an environment where emerging companies can share access to millions of dollars in facilities, equipment and services, whilst maintaining their independence is critical.

Regarding direct funding to companies, the BioCenter does not provide investment dollars directly to the companies, nor do we take an equity stake. We do however provide access to capital through programs, partnerships and our extensive network. This model has proven successful and since inception, the life science and clean technology companies of the BioCenter have raised more than $1B in capital. Although, it’s not just about funding but also creating an ecosystem of support for emerging companies, including but not limited to investors, accountants, lawyers, insurance providers, and more. The BioCenter has created a robust network and extensive resources for the companies to leverage and is a new, time and cost efficient model to commercialize innovation.

For more information on the BioCenter, please visit http://www.sjbiocenter.com

Chelsea Hewitt

Chelsea Hewitt Wednesday, March 24, 2010 at 5:41 PM PT

Thanks, Chelsea. Interesting feedback, because your sectors are capital intensive and it is essential almost to have a strong venture capital tie-in.

How do you make money / support the incubator itself?

Sramana Mitra Wednesday, March 24, 2010 at 5:45 PM PT

The incubator supports itself through a combination of the following: fee for service, rent, sponsors, grants, programs and events revenue, etc.

Chelsea Hewitt Wednesday, March 24, 2010 at 6:20 PM PT

The Business Incubator Center in Grand Junction, CO has a highly successful and enduring model for financial stability based on a collaborative effort of several programs: an Incubator Program, an SBDC office, a Business Loan Fund, and a state tax incentive program.

Founded in 1987, the Incubator Center is housed in a 60,000 sq.foot multi-use facility which includes a Video Lab and Commercial Kitchen. The Incubator Program charges rent and program fees to clients, thus generating earned income.

The Incubator Center is the host institution for the Colorado Small Business Development Center (SBDC) for the region which provides free one-on-one business assistance and low-cost workshops. Revenue for this program comes from the SBA (with a dollar for dollar private match) as well as from the small fee charged to workshop participants.

The Incubator Center manages a +$4 million loan portfolio, providing access to debt capital to Incubator clients as well as the local community. The Business Loan Fund generates earned income in loan fees, interest paid by clients as well as interest earned on available funds.

The Incubator Center also administers the Mesa County chapter of the Colorado Enterprise Zone. Administration fees are earned by the Incubator Center staff in support of this program (paid for by businesses who participate in the program).

Significant economies of scale are accomplished by supporting all four programs with one organization. As a result the Incubator Center is 75% self-financed, a figure that has helped the center to endure through the boom and bust economy of Western Colorado.

Chris Reddin Thursday, March 25, 2010 at 8:25 AM PT

I think tying the SBDC loan programs to incubators is an excellent business model.

Sramana Mitra Thursday, March 25, 2010 at 9:49 AM PT

Ben Franklin Technology Partners of Northeast PA owns and operates a technology incubator known as TechVentures, on the campus of Lehigh University in Bethlehem, PA. We’ve done so since 1983.

Ben Franklin is a Pennsylvania funded program that provides 1) seed stage capital (up to $100,000 per year, 6% interest, 8-year interest only loan, PLUS detachable warrants for the investment amount priced when we enter the deal; 2) selective connections to an extremely wide and deep and network of advisors, potential management team members, research faculty and investors (we are very active and looked to as a leader in the early stage company investment community in the greater Philadelphia region); and when needed 3) space in our incubator where we have about 35,000 square feet of wet lab and office spaces.

We have only been home to 98 companies since 1983 (betw/ 1983 and 2007, we only had ~10,000 square feet of space). 27+ years is a long time to track companies, but our information says we have helped to create a current 4,000 jobs (in an MSA with ~750,000 people). Unfortunately, I do not have accurate numbers, historically, for investment levels or revenues. Last year, clients in our incubator raised about $12 million from outside investors…and that was about average for us despite the down year. Last year one of our clients was acquired by Texas Instruments after launching, raising $24 million and growing to 55 employees in ~4 years (they are an anchor tenant for us in about 15,000 sq.ft. of our 35,000 sq.ft. rentable facility). We’ve had 2 clients go public, at least 9 companies sold for “great” exits, numerous other reasonable exits, and one company has grown to more than $100 million in revenue (although, only about 600 of their jobs are still here in our MSA).

We view this as having been an extremely high impact program. Numerous studies have been conducted that indicated that every $1 invested in our program since 1989, has yielded $3.50 in state wage tax revenue alone. I’m not catching any multiplier effects, or any of the numerous technology ecosystem-building effects of having a technology incubator program in our region (like the founder of one of our companies that went public who retired a few years ago and launched a small, $60 million venture fund, Originate Ventures, about 4 minutes from our incubator).

Seed money, direct mentoring, accessing networks of talented people, an incubator facility with active engaged management, and introductions to other capital can change the nature of a region in quantitative and qualitative ways.

I’m sorry for rambling…what was your question? :)

Wayne Barz Friday, March 26, 2010 at 1:16 PM PT

You have answered it, Wayne :-)

Sramana Mitra Friday, March 26, 2010 at 2:43 PM PT

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Venture Capital 101 | Capital For Growth Thursday, April 15, 2010 at 11:42 AM PT

Incubators/accelerators often have the wrong metrics in place to determine success. If operated by government or pseudo-government entities, such as universities, the goals may not parallel those of the start-up companies. Some of these incubators also have legal & policy restrictions that may even limit the growth of individual start-ups prior to reaching a point where they might survive on their own.

With a view toward open innovation, we are trying to encourage entrepreneurship by getting inventors and innovators to license technologies and IP so they may be truly accelerate their product commercialization. DoverTech is addressing the need for IP exchange through business relationships, not just posting innovations on a web site. Incubators should be looking hard at cash flow, that may come from licensing opportunities not just filling up brick and mortar space in a facility.

Lynn Garcia Friday, May 7, 2010 at 7:50 AM PT

Hi – This is in reference to a private educational institute setting up its own incubator.

In India, the private educational institutes are invariably established as not-for-profit institutions. Further, nearly all them seek and obtain the recognition as a charitable institution under the Income Tax Act. This imposes a number of compliance requirements on the institution, including restrictive covenants that prohibit the institution from investing or depositing funds in any form or mode. As a result, the charitable institution cannot take equity in a firm which it is incubating.

I would like to know if there is any such equivalent law in the US for private educational institutes? if yes, how do they surpass this? Please point me to any good reference for the same around how US private educational institutes may be able to take equity on firms they incubate?

Thanks
Debananda

Debananda Sunday, May 16, 2010 at 11:52 PM PT

Tim,
I am in the stages of creating a business plan for a high tech incubator ,
Would greatly appreciate it if your could provide me with a detailed organiztion structure for a technological incubator or a business incubator for tht matter.
Thanks

Khadija I.

Khadija Wednesday, October 13, 2010 at 5:16 AM PT

techubators is a similar initiative in the Frisco area. Can we get in touch?

techubators@Frisco Wednesday, October 13, 2010 at 11:14 AM PT

Sure, please contact Maureen Kelly [maureen@sramanamitra.com]

sramana Wednesday, October 13, 2010 at 11:55 AM PT

Tim

Hi! Just want to know you ditched the incubator word 8 years ago. What is a suitable replacement word since then?

Royston Friday, January 7, 2011 at 1:58 AM PT

I have been involved in a lot of tech m&a for the past 15 years. In Canada incubators were really hot back in the 90's, not so much now. I agree with the comments, the incubator needs a strong source of capital to foster the start-up's growth but debt is not the solution.

Start-Up's don't have the cash flows to service debt, not if its in the traditional format. Patient capital is required – issue is in today's financial melt-down environment there isn't much patient capital out there… Just my two thoughts.

startaneasybusiness Sunday, January 9, 2011 at 2:43 PM PT

People need to ask theirself what the incubator is going to do? Are they providing cheap space? Or are they growing businesses?

It's the same key question that a startup should ask itself. Is the startup creating a business? Or is it, for example, starting a software project?

Rich Saturday, November 19, 2011 at 8:35 AM PT

Yes, thats the real answer!
For any Incubator, its success is not simply to run the centre profitably/socially responsive; But the reality is the actual success of the incubatees . No incubatee comes with its money and idea, talent together to get incubated. and its mostly always the MONEY link thats missing .
Its the EQuity Fund or a Deferred Debt fund need to get associated with the Incubator (and its own )would lead to incubatee's success and leads to the Incubator's sucess.

Suresh Friday, November 25, 2011 at 11:11 PM PT

Hi Can you please help me in preparing a business model for a educational institution which is in its incubation stage. We want to introduce it in next academic year. We want to provide education to the undergraduate students with B.Sc BBM and B.Com courses.

Vijayalakshmi Wednesday, January 4, 2012 at 2:37 AM PT

You are welcome to join 1M/1M, and I will be happy to help.

Sramana Mitra Wednesday, January 4, 2012 at 5:18 PM PT

My University in Ghana wants to start an incubator to help small firms in my locality, how do we go about it?

Afua Aboagyewa Monday, April 9, 2012 at 2:08 PM PT

Hi Afua,

You could partner with 1M/1M: http://1m1m.sramanamitra.com.

Sramana

Sramana Mitra Monday, April 9, 2012 at 2:42 PM PT

Hi, am trying to create proposals suggesting to universities in Nigeria to partner with us in establishing incubators for their host communities. I really need help in creating a workable business plan and a convincing proposal. Thanks

Smart Uma Friday, May 4, 2012 at 7:02 AM PT

Please contact irina AT sramanamitra.com.

Sramana Mitra Friday, May 4, 2012 at 2:45 PM PT

Very succintly put. Loved the prose, almost poetry :-)

Vijay Simha Wednesday, October 3, 2012 at 5:33 AM PT
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