Incubators are where individuals or businesses receive assistance to develop and commercialize new products, new technologies, or services, with the aim being to increase the success rate of start up businesses. In some cases, incubators also help existing businesses to restructure in order to improve their chances of success.
Incubators provide various functions. The main incubator functions can be identified as: space and facilities; technology and human resources; business management support; access to finance; information and data support; diagnostic and crisis support; and shared services for administrative support (accounting, legal etc). Incubators can be not-for-profit, or profit based. Most (about 90%) of incubators are not-for-profit.
Benefits that can result from an incubator include: stimulation of local economy; job creation; wealth creation; intellectual property and technology commercialisation and smoother transition of research result of universities or research institutes to new companies; increased international competitiveness from new industries and so on. Since one of the main functions of incubators is to foster new technology and startups, they play a critical role in innovation and technological upgrades. Small entrepreneurial firms have been responsible for half of all innovation and 95 percent of all radical innovation in United States. Incubation is an economic development tool which can help create and grow entrepreneurial new business in a community. Incubators provide services for on the spot diagnosis and treatment of business problems, dramatically lowering the early stage failure rate.
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Two different orientations can be adopted by incubators and governments when they assist the establishment of incubators. One approach is to set up more technology-based incubation centers or programs with the expectation of higher profit returns. This expectation might well imply a tradeoff in job creation. The second approach is to focus on the development of the job-creation aspects of incubators, so that new firms might provide jobs for community and those with lower levels of education.
Conditions for a successful incubator
Incubators will vary between economies and regions depending on the local conditions, culture and the range of other business development service available. Although it is difficult to provide universal information on the title "What's successful business incubation," some key components can be identified.
Consensus exists among the governing body, sponsors and incubation program staff on a mission that reflects community need, and this mission drives incubator operation. All parties and incubator stakeholders recognize that the chief goal of the incubator is to develop successful companies.
Sound planning and mission statement
A good incubation program is based on sound planning, including feasibility, market and financial planning. A successful incubator has to have a clear mission shared within the incubator and client companies, governing bodies, and all stakeholders in the region in which it operates.
An experienced and good management team
A successful business incubator depends on the incubator management having the skills, experience and contacts required to help to grow start up companies. The incubator management team needs to be appropriately compensated (money is not the only aspect, challenge is often important), and to have access to training for upgrading their skills and to "best practice" and "best technology" standards and expertise.
Entrance and Exit Policies
A good incubator has explicit entrance and exit criteria for clients. The incubator selects high-quality clients, implements proactive and customized programs to serve them and graduates them into the community.
Linkage and networking
A good incubation program is an integral part of a community-wide network aimed at providing financing, services and cultural support for entrepreneurial companies. The incubator should pull stakeholders together and endeavor to build linkages to appropriate knowledge-bases, finance providers, and market channels. Good incubator management values networking and promotes a dynamic community of entrepreneurs, both within and outside its building.
Client-oriented Market Oriented services
A good incubator provides client-oriented service based on the client needs. The mission of business incubation is always the success of the client companies. It is focussed on the market and how its clients can achieve market success.
A good incubator engages in continuous evaluation, both to gauge its success in meeting its mission, and to ensure the program evolves to meet changing needs.
Access to venture capital finance
Always on Time
Marked to Standard
Incubator managers can provide assistance to clients in accessing to appropriate sources of finance. These include government finance programs, banks, angels, seed and venture capital, the second board stock market, and so on. Incubators can provide a vital role in helping clients be "investment ready" by assisting them to develop documentation, and present their case in the best possible light to finance providers. Incubators can play a key role in building relationships with financial providers, and conveying their need s and requirements to clients.
Most incubators target high growth firms with significant market potential, and although not all of these are always suited to VC, many will need VC at some stage. There is no one way that venture capitalists select investment targets, but some fundamentals are almost always considered. Market potential, management quality, and cash flow are keys in almost everyone's investment decision. How a VC selects investments is a function of: (1) whose money they are investing, (2) what other rates of returns are available to those who invest in the fund (LPs) from other investment vehicles, and (3) the stage of company they invest in.
Choosing the right VC firm as "partner" is important for incubator clients. The consideration when clients look for VC partners should extend beyond capital to industry expertise, good track record, and reputation for working well with entrepreneurs. Incubatees should also make sure the VC's expectations on growth strategy, future fundraising, and investment time horizon are the same as their own.
Commercialization and marketing
A number of stages are necessary for developing innovative products into a commercially successful business: idea; concept testing; feasibility assessment; property rights protection (eg patent); prototyping and production practice; product testing; start up. An important function of incubators is to help firms to go through the whole process of commercialisation in a systematic and fast track way. Generally, the process can be divided into the first part of technology or product development, and the second part of marketing.
To accomplish the first part, incubators should have strengths in the provision of technological facilities and specialist professional consultation.
On the second part, incubators need marketing professions to assist companies at an early stage. In this era, it is important to understand the global market, not just the local market. Incubators need to be able to provide international marketing and business training programs and advice.
In addition to training programs, the services considered the most important when it comes to sales and marketing are: marketing position statement, consumer feedback test, corporate identity package, advertising and placement, access to market information, public relations, and so on. In addition, incubators can hold promotional events for incubated enterprises, such as open house, entrepreneur week, enterprise picnic, cocktail nights etc.
Building Cooperative Networks between incubators
Incubator networks can help to accelerate growth of firms across borders.
By networking, incubators can "cluster" in virtual or physical space, and make better use of resources.
It is also possible to provide better services and opportunities for growth and expansion across borders, and to develop skills and knowledge at global best practice levels.
In some economies, because of their vast territories, networking the incubators is indeed a time-consuming and money-wasting job. Some "networking technologies" are thus required. These technologies include organizing events, using Internet-based communication and information channels, and working together with and through the "reference points" that are other small business support institutions.
To promote the networking and development of incubators, APEC can conduct following initiatives:
Support a list and contact points with specialist skills and resources. There are already international, national and local networks that can be utilized and made to work more effectively
Better Entrepreneurial environment: APEC can work with incubator mangers and networks to identify what changes need to be made to the business and policy environment to encourage high growth firm start up and growth.
APEC - OECD impediments monitoring: This initiative is already funded in APEC. It seeks to identify the factors that stop high growth SMEs achieving their full potential. The aim would be to draw on expertise and experience of incubator managers to identify and address impediments in emerging areas.
Creating a favorable policy environment for business incubation
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Business incubation is viewed as a key means to strengthen development of economies. Governments on different levels often fund and support business incubation as a way to increase the number of companies in a community, thereby increasing the number of better-paying jobs and broadening the tax base. A number of policies were identified to help the development of incubators:
Building partnerships for incubators
Government can help to build a favorable environment for partnership building, including partnerships with universities, research institutes, and finance providers. These partnerships help to provide consultancy services, access to research and library resources, and to build long-term relationships with financial providers.
Training and consultation
Governments can help to offer training courses, seminars, and forums by domestic and international specialists on technologies and management to improve the quality of managers of incubators. Consultants who are familiar with local conditions and technology can be identified and organized to form a strong sponsor group.
Constructing an evaluation system to examine the incubation results
There is an increasing demand from practitioners and stakeholders, as well as strategic bodies, to identity and establish good practice and to develop "benchmarks" against which incubation management teams can measure and monitor their own performance. It is of great importance to develop a "benchmarking" framework, with a view to establishing good practice indicators for the incubation industry and to explore the various applications.
Intellectual property rights
Intellectual property right protection provides incentives to individuals and firms to undertake innovative research. Governments should work to provide an adequate and functional intellectual property infrastructure to help incubators to commercialize intellectual property.
Business Incubation Program
Some economies have implemented comprehensive "business incubation programs," providing a suite of services to help clients grow and become successful. These programs include technical and management assistance, training and education, promotion, business matching, networking, aid packages and so on. Some programs are incorporated into a larger economy-wide plan, such as building incubators into the overall innovation system.
The development of academic incubators
In the drive to develop a knowledge-based economy, universities are being required not only to boost regional SME's competitiveness, but to facilitate the creation of new, technology-based businesses. In recent years, academic incubators have mushroomed in APEC economies such as the United States, Australia, Korea, Japan, and Chinese Taipei, etc.
1. The main functions of academic incubation:
(1) To reduce risks and expenses of investment and increase the successful rate of newly start-up business;
(2) To foster new products, new business and new technology;
(3) To provide guidance in commercializing R&D achievements;
(4) To provide a location for the cooperation of academics and industries;
(5) To provide testing services and speed up the development of products;
(6) To provide training courses, related information and consultation for incubated businesses;
(7) To control and harvest the intellectual property that the university has invested in.
2. The limitation on the development of university incubation include:
(1) Non-Profit Organizations are usually involved;
(2) Limitation on Resources and competition for physical resources such as laboratories;
(3) Lack of Seed Fund/Venture Capital experience and funds;
(4) Lack of relations and integration with Regional Industries.
Academic incubators can be designed to support and be part of a broader strategic framework. For example they may be territorially orientated, or on particular lead industries or technologies, or focused on particular policy priorities (e.g. development of clusters), or a combination of these factors. The quality of the management team, and adoption of a business-like approach to running incubators and monitoring clients, is crucial to performance of academic incubators.
Incubators for women and youths
Women and youth represent an underutilised resource in business start up and growth potential. In APEC economies, specialized incubators for women and youth entrepreneurs have already been built. Government should encourage establishing a support system and platform designed for women and youth entrepreneurs by integrating the collective strengths of various profit and non-profit organizations through strategic alliances.
The outlook of business incubation in the new century
Incubators and incubator management are evolving. The "industry" is only about 20 years old, and most incubators are less than 10 years old. The number of incubators is increasing steadily. Some key trends and observations can be identified on the development of business incubation:
Recognition of the importance of entrepreneurship to local wealth and competitiveness is growing. Start ups and growth oriented firms are a major source of economic growth, job creation and competitiveness. Incubators are seen as being integral to this process, and in correcting various market failures that impede the potential of entrepreneurial start ups;
An incubator is a NOT just a building; it is a comprehensive business assistance program targeted to startup and fledgling companies, and recognition of this is increasing;
The business incubation concept must be adapted to local needs, economies, cultures and industry segments. This means that the incubator industry is segmented and diversified into specialist areas, such as biotech and ICT;
Incubator management (and managers) are growing in professionalism (salaries and expertise have grown and managers are more entrepreneurial);
Programs that started small are expanding in size, services, and community impact;
"Stand-alone" incubators are less effective than those integrated into the community, and into a broader network of incubators, infrastructure providers, etc;
Incubators are becoming the "schools for entrepreneurs", and in a practical sense are complementing and extending the role of more traditional entrepreneurship education; and
The newest generation of incubators provides a comprehensive range of services, including in-house equity/debt finance for clients or channels to external providers. Virtual incubators have already begun to be created by using broadband to link clients and management and deliver service.